Chapter 13 — Key Takeaways
Measuring inequality
Lorenz curve: plots cumulative income share against cumulative population share, ranked poorest to richest. The further it bows below the diagonal (line of perfect equality), the more unequal the distribution.
Gini coefficient: the area between the diagonal and the Lorenz curve, divided by the total area below the diagonal. Ranges from 0 (perfect equality) to 1 (perfect inequality). U.S. income Gini: ~0.39. U.S. wealth Gini: ~0.85.
Income vs. wealth inequality: wealth inequality is much larger than income inequality because wealth accumulates over lifetimes and across generations, earns returns that compound, and passes through inheritance.
The four explanations for rising inequality since 1980
- Skill-biased technical change (SBTC): technology complements high-skill work and substitutes for low-skill work. The college wage premium has roughly doubled since 1980.
- Globalization: trade with low-wage countries reduced demand for manufacturing workers in rich countries (the China shock). Explains some of the widening at the bottom but not the top.
- Institutional change: weaker unions, lower minimum wages, less progressive taxation, deregulated finance. Countries with stronger institutions have less inequality.
- Winner-take-all markets: technology and globalization expanded the reach of top performers, creating returns to being the best that are vastly larger than returns to being second-best. CEO-to-worker pay ratio: ~300:1 (up from ~20:1 in 1965).
Most economists believe all four contribute; they disagree about relative importance. Piketty's r > g thesis offers a sweeping explanation but is debated (Auten-Splinter critique).
Three philosophical frameworks
| Framework | Central concern | Key question | Leading thinker |
|---|---|---|---|
| Utilitarian | Total welfare | Does redistribution increase total utility? | Bentham, Mill |
| Rawlsian | The worst-off | Would you accept this arrangement from behind a veil of ignorance? | Rawls |
| Libertarian | The process | Did the inequality arise from voluntary exchange? | Nozick |
Economics cannot tell you which framework is right. Most people hold elements of all three.
Four anti-poverty policies
| Policy | How it works | Strengths | Limitations |
|---|---|---|---|
| Cash transfers | Give money directly to poor people | Simple, effective, reduces poverty directly | Costs taxpayer money; long-run work-incentive debate |
| EITC | Wage subsidy for low-income workers via tax system | Increases both income and work incentive | Phase-out creates high effective marginal tax rates |
| Minimum wage | Price floor on wages | Raises wages for workers who keep jobs | May reduce employment for some; doesn't help non-workers |
| Education | Invest in human capital | Long-run equalizer; reduces skill premium over time | Takes years; unequal returns by field and institution |
The MSU adjunct case
Professor Vasquez (adjunct, $38k) and Professor Chen (tenure-track, $92k) illustrate inequality driven by institutional change (the contraction of tenure), labor market segmentation (field differences in outside options), monopsony power (the university as sole employer of adjunct skills), and winner-take-all dynamics (a few secure positions, many precarious ones).
Themes this chapter touched
- Tradeoffs — efficiency vs. equity is the central tension of the entire chapter
- Disagreement — about causes (four explanations), about values (three frameworks), about policies (four options)
- Markets power+imperfect — monopsony, institutional erosion, winner-take-all
- Behavioral — relative-income concerns and loss aversion shape how people experience inequality
- Affects daily life — the Vasquez-Chen gap, the college premium, the poverty line
One sentence summary
Inequality has risen substantially since 1980, the causes are genuinely multiple and contested, the philosophical frameworks for evaluating it are irreducibly plural, and the policy responses each involve real tradeoffs — which is why this is one of the most contested topics in economics and one of the most important.