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Study notes EC104: american reform
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Revision notes with content from lectures and seminars for EC104 topic 15: America reform
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American reform: 1979-2001Inequality in the US
Trends in wage inequality
● Acemoglu and Autor (2011) - wage premium fell in the 1970s but then rose for
3 decades (by about 97% by 2008)
● Real wages have risen for college graduates since 1980 - college wage
premium
○ Have fallen for less-educated workers - especially men
● Increasing polarisation in the US and EU
○ Growth in high-skill, high-wage and low-skill, low-wage jobs
● A&A consider a “canonical” model
○ Skilled and unskilled workers are substitutes
○ Exogenous tech change increases the relative productivity of skilled
workers
○ Can explain real earning declines for some, polarisation, tech change,
offshoring and outsourcing
● A&A propose another model which distinguishes form skills and tasks
○ Tasks can be performed by workers with different skill levels, by
machines or be offshored
○ Routinisation (computers replacing workers in routine tasks) is an
explanation of polarisation (1980-2006)
■ Real cost of performing standardised computations fell by 70% a
year
○ Jobs that are non-routine manual task intensive are harder to replace
○ Wages only rise for high-complexity jobs where computers are
complements, not substitutes
Trends in the top 1%
● Alvaredo et al - % of income received by the top 1% rose from 9-20% (1979-
2011)
○ Also in Australia, Canada and the UK
○ Does not hold in Europe and Japan
● Changes in demand and supply cannot explain this
● Several explanations:
○ Tax - most countries have cut top tax rates (top rate was 60% in 1932
US and <40% in 2011)
○ Pay determination - high earners bargained more as top rates fell
■ ICT, deregulation of finance and globalisation increased demand
for top skilled workers
, ○ Capital income and inheritance - inheritance flows are rising as a % of
national income in France and Germany
○ Wealth concentration - greater in the US (the top 1% owns 35% of
wealth)
○ Distribution of earned and capital income - 61% of individuals in the top
1% of capital income were in the top 20% of earned income (2000)
Welfare reform in the US
Changes in the 1990s
● Blank (2002) - Aid to Families with Dependent Children replaced with
Temporary Assistance for Needy Families (1996)
○ Made block grants conditional on >50% of recipient families being in
work or training
○ Imposed a 5 year maximum for TANF fund recipients
● Minimum wage increased from $2.25 to $5.15 (1989-1997)
● Earned income tax credit expanded - subsidised low wage workers
● Increased the real income of a woman with 1 child working full time from
$10,500 to $12,650 (1989-2000)
● Spending on working families rose from $11-66.7 billion (1988-1999)
● Spending on non-working families fell from $24-13 billion
● Global influence - welfare reforms in Canada
Changes after the reform
● Blank (2002) - those claiming welfare fell by 56% (1994-2000)
● FLFP of single mothers with children rose by 10% (1994-1999)
● Women on welfare were more likely to work
● Families in poverty fell from 12-8.6% (1992-2000)
● Poverty among single-mother families fell from 35-25% (1992-2000)
○ Poorest quintile of single mothers had declining incomes
● These changes happened after the policy change
○ Booming economy also contributed
○ Hard to find causal inference
Welfare recipients (1999 and 2009)
● Bitler and Hoynes (2010) compared the profiles of welfare recipients in 1995
and during the Great Recession
● 1995 - 70% single women, 40% non-Hispanic whites, 34% non-Hispanic
blacks. Similar in 2009
● Most families receiving cash welfare combine it with other programmes
○ 1995 - 87% had food stamps and ⅓ were in govt housing
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