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Is long-term earnings inequality growing? Evidence from German baby-boomers and their parents

9 January 2015
by Guest author
Neither cohort looks too happy

Neither cohort looks too happy

Today’s post is by Giacomo Corneo of the Free University of Berlin, following a talk given in the OECD Directorate for Employment, Labour and Social Affairs Seminar Series in October 2014.

Modern welfare economics suggests that lifetime income is a main determinant of how well individuals fare in economic terms. However, most analyses of income inequality are based on yearly data that might be poorly correlated with lifetime incomes. Typically, these analyses include individuals of different age and educational attainment, whose incomes in a given year may be little representative of their long-term incomes. As sample composition changes over time, it is unclear whether the increase of inequality that is often found in cross-sectional analyses corresponds to a similar evolution of long-term inequality or is simply due to sample changes.

In a recent study, we pinned down the evolution of intra-cohort lifetime earnings inequality in Germany. Starting with the cohort born in 1935, we computed the distribution of lifelong earnings among employees who were born in a same year. Our analysis exploits a rich dataset of the German social security system that includes monthly information about earnings, employment status, sickness and other variables of interest for some 240,000 individuals. Based on this, we built a sample that covers about 80 % of the West German labor force in a typical year.

For the cohorts born between 1935 and 1952, we can compute for each individual his or her lifetime earnings, defined as discounted earnings received between age 17 and age 60. For these cohorts we can thus compare lifetime inequality to annual inequality using the Gini coefficient. We find that the distribution of lifetime earnings for these cohorts is rather compressed, with a Gini coefficient that is less than two thirds of the average value of the Gini coefficients of the distributions of yearly earnings. In other words, yearly earnings show far greater inequality than lifetime earnings. This big difference is caused by the mobility of the individuals in the distribution of yearly earnings during their life cycle – the fact that the same individual may rank low in the distribution of annual earnings in some years and rank high in others. Over a lifetime, the ups and downs offset each other to some extent and make the income distribution less unequal.

But how is lifetime inequality evolving over time? Is it increasing, similarly to what is happening in terms of annual inequality?

It is instructive to compare the lifetime inequality experienced by the baby-boomers – who in Germany were born in the 1960s – with their parents. The parents correspond to the oldest cohorts in our sample, while the baby-boomers are now entering their fifties, so that their lifetime earnings cannot be measured yet. In order to gauge the evolution of long-term inequality up to the baby-boomers, we generalized the concept of lifetime earnings to one of up-to-age-X earnings (UAX). These are defined as the present value of earnings received until some age X and discounted to the year when the individual turned age 17. Lifetime earnings are thus a special case of UAX for X equal to 60.

The figure below shows the Gini-coefficient of representative UAX distributions for all cohorts in our sample, the youngest being born in 1972. It shows an upward trend of lifetime inequality, with a secular rise from the cohorts born in the mid-1930s to those born in the early 1970s. (The figure refers to men; our findings for women are qualitatively similar, albeit less strong.)

Gini coefficients of UAX for cohorts 1935-1972, men only

gini

Source: Research Data Centre of the German Pension Insurance System (FDZ-RV), own calculations using weighted data.

In quantitative terms, the intergenerational change that we have detected is considerable. Take for instance the cohort born in 1935 (fathers) and the cohort born in 1963 (sons). The Gini-coefficient of the UA-45 distribution for the fathers equals almost 0.13. The Gini-coefficient of the UA-45 distribution for the sons equals 0.23. This implies a rise of inequality by 85 % and substituting the 1963 cohort with the 1972 cohort yields a rise of inequality by about 100 %. This marks a deep difference between the baby-boom generation and its parents.

Our rich dataset allows us to detect further striking intergenerational change in terms of labor-market outcomes. An important dimension of it relates to pay uncertainty – i.e. the extent to which employees of different cohorts could count on the labor market in order to achieve stable living standards. Statistically, pay uncertainty can be measured by the transitory variance of wages measured when the cohort was 40-years-old. The earnings histories of the baby-boomers and their fathers reveal that pay uncertainty has doubled from one generation to the next.

Another striking intergenerational mutation pertains to exclusion from the labor market. This can be captured by the fraction of a cohort that experienced more than twelve months of unemployment before reaching age 40. For those born in 1935, only 2.3 % of them experienced more than one year of unemployment before they turned 40. For the cohort born in 1963, 28.2 % had that experience. This means that in contrast to their fathers, a substantial fraction of the baby-boom cohort lacked a full integration in the labor market.

In sum, from one generation to the next, Germany has moved from having a rather homogeneous workforce to having a quite heterogeneous one. Compared to their parents, German baby-boomers are substantially more unequal in terms of long-term earnings, are subject to a much stronger pay uncertainty, and are considerably more likely to experience long spells of unemployment. Arguably, this intergenerational change has lowered the cohesion of the workforce and its members’ feeling of sharing a common fate – with potentially far-reaching social and political implications.

Useful links

Income inequality from a lifetime perspective, Giacomo Corneo, Freie Universität Berlin School of Business & Economics Discussion Paper, Economics, 2014/30

OECD work on income inequality and poverty

OECD Income distribution database

OECD Earnings database

Charlie Hebdo

7 January 2015
by Patrick Love

Je suis CharlieFollowing the terrorist attack on French satirical magazine Charlie Hebdo, the OECD Secretary-General has expressed his condolences and support, on his behalf and that of the Organisation’s staff, to President Hollande and the French authorities. He also indicated that the OECD deplores this action, which is fundamentally opposed to the values we hold dear.

I’m writing this after coming home from one of the many spontaneous demonstrations in France following the murder of the journalists and staff of Charlie Hebdo. I saw many people in tears. The magazine probably wasn’t well known outside the French-speaking world, but it was on Al-Qaeda’s death list after publishing cartoons mocking the Prophet Mohammed, and the journalists knew they were potential targets.

Provocation was Charlie Hebdo’s trademark, and with their satirical texts and illustrations, they managed to offend, outrage and insult most ideologies, institutions and belief systems at one time or another. They didn’t spare the OECD, defining it in this article as the intellectual framework that unites the technocrats who run things, a think tank at the origin of recommendations and a certain number of tools that claim to be neutral but that lead to the implementation of certain policies. On the other hand, Charlie Hebdo could also quote the OECD as an authority as they do here.

That’s what democracy is about. You don’t have to approve of the other, but you should be ready to recognise that they may have something interesting to say, even if you don’t agree with them. Or as the great Arab philosopher al-Kindi put it, “We should not be ashamed to acknowledge truth and discover it no matter what source it comes from”.

One of the victims was Bernard Maris, who taught economics at Paris-8 University and Iowa University. He had a wonderful talent for explaining complex notions in simple language, and pointing out what was wrong with conventional wisdom. In his newspaper, television and radio work, he argued for a world that was more just, where money didn’t rule everything, and we didn’t destroy the planet for some short-term benefit. Like his friends and colleagues, Bernard Maris’ fought against inequality, injustice and oppression.

The world is a sadder place without the mockery of brave, clever, funny people like them.

Can luxury lead us out of inequality?

7 January 2015

Real LuxuryToday’s post is by Misha Pinkhasov, co-author of Real Luxury: How Luxury Brands Can Create Value for the Long Term, published by Palgrave Macmillan in 2014. He worked in OECD communications for nine years before founding NAIR-SAFIR, strategy consultants helping companies integrate shared-value thinking into their corporate culture and communications.

Inequality will figure high on government and media agendas in 2015. Kicked into the spotlight by Thomas Picketty’s best-selling Capital in the 21st Century and buoyed by findings of the OECD, Pew Research and others, inequality has even been dubbed the defining word of 2014 by the Financial Times.

It is about time. The Great Recession put people out of house and job, but bailed out big business with public money in the name of protecting the market economy and bringing a quick return to growth. Austerity on the one hand and corporate tax breaks on the other have only deepened the dangerous rift between the winners and losers in this game.

This growth-obsessed model looks more and more like a pyramid scheme, in rich countries in particular, with an eroding middle class, downward wage pressures from developing countries, narrowing population pyramids and now the effects of austerity. The semantic trick of calling it green growth, or sustainable growth, or inclusive growth does less to address the issue than to give it a more palatable flavor.

We need a major change in focus from wealth to well-being. From quantity to quality. From production to innovation. From profit maximization to value creation. From competition to collaboration. From ownership to stewardship. This change is not just a model for economic stability and sustainable prosperity. It also addresses the economic roots of international conflicts, which will only intensify with competition for resources. Like the founding intentions behind the European Community, it is a model for peace and security that has served that continent well.

This change will not originate from the top because it requires political will from the voting public. To spark that change, we must recognize that citizenship has been replaced by consumerism. We have put so much of the political process into protecting the market that the market has become the political process. Building political will now means changing consumer behavior by redirecting its ambitions. And if citizens follow their leaders in aspiring to a better society, consumers look up to the rich in aspiring to luxury.

Which points to an unexpected partner in all of this: Luxury brands, having ridden out the financial crisis almost unscathed, are now facing a contraction of their own, ironically just as the world economy recovers. Received wisdom says that luxury is immune to economic crisis because the rich can continue to afford their pleasures. Less discussed is luxury’s vulnerability to social crisis, when conspicuous consumption begins to look like vulgarity, if not depraved indifference. Barbara Hutton fled New York to Europe after a too-lavish debutante ball held amidst the Great Depression.

Today, luxury customers from New York to Shanghai are pulling back from ostentatious displays of wealth. Perhaps not the cossetted jet and yacht set, but certainly the broad customer base of well-to-do urban professionals who define the values and ambitions of the middle class. The brands that were most popular and visible until now are the ones suffering most as a result. And they are scrambling for solutions, be it in more discreet, higher-end products or new tactics in electronic retail and mobile commerce. But having established luxury as excess rather than excellence, they are focusing on the “What” and the “How” of sales but not on the “Why” of luxury, which is ultimately about leadership in evolving both product quality and cultural values.

So policy reformers need an attractive platform for their ideas and luxury firms need deep, new thinking to reconnect with their leadership potential. It is time for a dialog between citizen and consumer leaders. What is often shunned as an unholy alliance between makers of policy and marketers of luxury can – with sufficient sincerity – yield the keys to unlocking the public’s will for change. There is precedent for this, such as the fundraising collaborations between UNICEF and Gucci, or the tradition of Hollywood stars like George Clooney and Angelina Jolie serving as Goodwill Ambassadors. There are even more in the NGO world with names like amfAR, Louis Vuitton, Sharon Stone, Oxfam, Matt Damon and Bono.

But it must go beyond the pat PR rituals of charity events and celebrity figureheads. Luxury has more to offer than glitz. Throughout its history, luxury has been a spearhead for technological and social innovation. Luxury’s handling of rare and precious resources give firms extensive experience with sustainability. Luxury’s obsession with quality has protected fair labor practices. Luxury’s preservation of traditional skills and its engagement of the arts have promoted education, training, entrepreneurship, creativity and cultural preservation. Luxury’s global appeal, from European aristocrats, to Indian Maharajas, to Chinese industrialists, to Russian oligarchs, to City bankers, to Silicon Valley innovators, positions it as bridge for international dialog. And the visibility and influence of luxury punch far above its weight as an economic activity, making it an ideal platform for public advocacy and shaping values.

Inequality and today’s other global challenges, like sustainability, climate change, economic stability and peace are linked in a vicious web by the conflicting values of our individual need for well-being and our institutional promotion of consumption and growth. Solving them will mean addressing the gap between citizenship and consumerism. Luxury – the most emotional of industries – bridges that gap. And its aspirational pull bridges the gap between leaders and their constituencies. Having ridden out a wave of success, luxury brands are now scrambling for a purpose in the changing world context. Policy makers can give them a mandate that re-establishes their role as agents of change.

Useful links

Key role of cultural and creative industries in the economy by Hendrik van der Pol, Director, UNESCO Institute for Statistics, Canada at the OECD 2nd World Forum, Istanbul, 2007

15 resolutions for 2015

5 January 2015
by Patrick Love

The best New Year’s toast I ever heard was proposed by some Poles, who claimed it’s traditional: “Here’s to the New Year, because even if it’s going to be worse than last year, it’s going to be better than next year”. But that’s an entirely personal view, and professionally, we’ll all be working to propose better policies for better lives again this year. So here with the help of Insights blog articles from 2014, is a list of 15 resolutions to make the world a better person in 2015.

  1. Get fit. To begin at the beginning. Every list of resolutions worth its salt starts with this because so many readers have a personal stake in the issue. Most adults in the developed world are now overweight and a fifth are obese. In the United States, Mexico and New Zealand, that proportion rises to a third. People who are severely obese cut eight to ten years off their lives, while every extra 15 kilograms of weight increases the risk of early death by about 30%.
  2. Fail. You may be doing this anyway, but for businesses trying to innovate, learning from experimentation also means learning from failures and mistakes – being allowed to fail and learn fast.
  3. Visit another country. There’s a joke about a holy man who’s allowed to visit hell for a few days, has a great time, and asks to stay. It then turns out to be, well, hellish, since, as God points out, there’s a big difference between being a tourist and being an immigrant. There’s also a big difference between where you’d expect expats to be happiest and the results of a survey of life satisfaction. The highest-ranking destination is Ecuador.
  4. Help other people. It’s nice to be nice. If you’re super rich, you probably know a lot about money, and a number of charities funded by wealthy individuals and institutions are working with the UN to help the financially challenged become financially included. By making it easier to get access to loans, insurance, savings accounts, etc., they hope to alleviate worries that economic integration and liberalisation of financial markets will lead to narrow, impervious corridors of spectacular growth surrounded by a hinterland of poverty.
  5. Learn to count. Kids today have never heard of balance of payment crises, but they used to be very popular in those bygone days when you had to turn a wheel to dial a phone number or change the TV channel (if there was another one). Now all the talk is about GDP, but what is GDP and how do you know it’s gone up or down?
  6. Be nice to mice. that’s the moral of one of Robert Henryson’s fables, but unfortunately the WWF reports a 52% decline in mammals, birds, reptiles, amphibians and fish overall from 1970 to 2010, while IUCN’s Red List indicates that a quarter of mammals, over a tenth of birds, and 41% of amphibians are at risk of extinction.
  7. Think more clearly. What does π times the radius squared calculate? What does multiplying current by resistance give you? You learned and forgot hundreds of things like this, but if you really want to learn how to learn, you have to think about thinking, and metacognition will help you do this, and make the world much more exciting and exhilarating too.
  8. Grow old gracefully. “You are old,” said the youth; one would hardly suppose/That your eye was as steady as ever/Yet you balanced an eel on the end of your nose/What made you so awfully clever?”. Better education and health. In Germany for instance, after 2050, at least a third of the population will have graduated from tertiary education and at least 80% of life will be spent in good health.
  9. Stop smoking. Air pollution has become the biggest environmental cause of premature death, overtaking poor sanitation and a lack of clean drinking water. Road transport is responsible for roughly half the air pollution in OECD countries, and up to 90% of that is from diesels.
  10. Change your mind. If today is your first day back at work after the holidays, you may be feeling a bit down. But for many people, this feeling isn’t temporary. Across the OECD an estimated 20% of the working-age population suffer from mental ill-health, and many of them may not even have a job: people with severe mental illness are 6 to 7 times more likely to be unemployed, while those with a mild-to-moderate illness are 2 to 3 times more likely to be unemployed.
  11. Get rich quick. It’s possible, especially if you’ve got money already. In the US, for example, the one percent’s share of pre-tax income more than doubled since 1980, hitting 20% in 2012. There were big rises in other (mostly) English-speaking countries, too, Australia, Canada, Ireland and the UK. More surprising, the 1% in traditionally egalitarian economies like Finland, Norway and Sweden also saw rises in their share of income, although at around 7% to 8% they were well behind US levels.
  12. Be happy. If you think that “happiness regression” is some politically correct way of saying miserable, you’re probably also unaware that the happiness revolution is in full swing. What it means is that national statistical offices are beginning to collect data on wellbeing; the OECD has prepared a manual on how best to do this; and politicians are promising to focus, not just on economic growth and better material living standards, but on the much wider range of things that are important to people.
  13. Be fair. If you think that the best way to pay less tax is to have less money, you’re wrong. Companies worth billions manage to avoid paying their fair share of tax through a number of schemes increasingly referred to as “BEPS” – base erosion and profit shifting. The mechanisms can be complicated, but the basic idea is to make income “stateless” by exploiting loopholes in tax systems created decades, or centuries ago. The OECD and G20 are going to put a stop to it though.
  14. Take stock. But leave some too, please. About 30% of world fisheries are currently overexploited, with many depleted or recovering from depletion. In part this is because governments encouraged the expansion of fishing through various subsidies, and now the people who benefitted don’t want to change. Fisheries managers can propose better alternatives to the current system, and the OECD has produced a handbook to help them do so.
  15. Stop making lists.

Useful links

OECD work

 

Equal pay for equal work

29 December 2014
by Guest author

1914 2014To mark the centenary of The First World War, we will be publishing a series of articles looking at what has changed over the last century in a number of domains. Today’s post is by Monika Queisser, head of the Social Policy Division in the OECD’s Employment, Labour and Social Affairs Directorate.

Imagine a world where women are the ones repairing cars, driving buses, building roads and houses, mining coal, fighting fires and ploughing fields, with men nowhere to be seen. It sounds like Utopia, dystopia or highly unlikely, depending on your point of view. Even if girls often do better in school than boys there is still a clear-cut gender divide in the fields of study young people chose and in the areas of work they pursue. Boys are more likely to go for science, engineering and maths while girls probably pick health and the humanities.

A 100 years ago, however, this scenario of a female-dominated world of work, including in traditionally male professions, was the reality in much of Europe. With men having been called to war, women were filling their jobs to keep the countries running. In the UK, women’s employment rates just about doubled from 23% to 47% during the war, and munitions factories became the biggest employers of women (called “canaries” because the poisonous chemicals used to make TNT turned their skin yellow).

But even though women were doing what was considered men’s work, they were still only being paid women’s rates. Not that women weren’t bothered by the pay gap or political issues. As early as 1909, a mostly female led famous strike, called the Uprising of the 20,000, shook the garment industry in New York and spread further as more and more workers joined the picketers. In Russia, women played a major role in the strikes and revolts that led up to the 1917 revolution and already during the 1905 revolution, there were more women in the Assembly of Russian Factory and Plant Workers than there were men in all the socialist organisations in St. Petersburg combined.

In London, women working on buses and streetcars went on strike in 1918 demanding better pay. As a result, the question of the gender pay gap was studied by a special Committee of the British War Cabinet which published a Report on Women in Industry in 1919. The report was widely disseminated and even received an excellent review in the American Economic Review in its June 1920 edition. While the report endorsed equal pay for equal work it also found that for many occupations women’s output was lower than that of men. This justified paying female workers lower wages, which would also be better overall for women since paying women higher wages might actually reduce their employment. In addition, it found that women didn’t need to be paid as much as men since they had no family responsibilities, automatically assuming that any woman who was working must be single, although by 1918 nearly 40% of all women workers were married.

But the report was actually split in two: a majority report and a minority report by Beatrice Webb, a social rights campaigner who was also one of the founders of the London School of Economics. She forcefully argued against this and several other assumptions about women’s output and productivity.

The gender wage gap got governments worried about what would happen when the men returned from the battlefields and found their jobs taken by the women. These concerns turned out to be unfounded. When the men came back, many women were either fired or retreated back to home and hearth, leaving the work responsibilities to the men. And if they continued to work in the same factories they did so at lower wages while the men got better pay.

So what’s changed over the past century? About half of the economic growth in OECD countries in the past 50 years is due to increased educational attainment, particularly among women, but women still earn on average 15.3% in OECD countries. At the top of the pay scale, the gender gap is even higher, 21%, suggesting the continued presence of a glass ceiling. The average pay gap between men and women widens to 22% in families with one or more children. For couples without children, the gap is 7%. Overall the wage penalty for having children is on average 14%, with Japan and Korea showing the greatest gap.

The impact of pay inequality is dramatic over a woman’s lifetime. Having worked less in formal employment, but having carried out much more unpaid work at home, many women will retire on lower pensions and see out their final years in poverty. Living an average of nearly 6 years longer than men, women over 65 are today more than one and a half times more likely to live in poverty than men in the same age bracket. Mrs Webb would be appalled.

Useful links

OECD work on gender

 

 

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