Opportunity & Inclusive Growth Institute

Individuals, Institutions, and Inequality Conference Summary

Read this summary of the Opportunity & Inclusive Growth Institute conference held on Sept. 28, 2018

People vary enormously in their chances of having a job, committing a crime, or being in prison. In turn, those fortunate enough to be employed differ widely in how much they earn over their lifetimes. The bottom line: Income inequality has risen dramatically in recent decades, and U.S. incarceration rates are also historically high.

What accounts for these vast differences among individuals? On Sept. 28, 50 economists explored the sources of variation at a one-day Opportunity & Inclusive Growth Institute conference, paying particular attention to the role of institutions such as companies and legal systems.

University of Chicago and Institute senior scholar Derek Neal, the conference organizer, opened the day with the observation that even when these variations were smaller 30 years ago, economists fiercely debated the importance of technological change favoring higher-skilled individuals with more education versus the role of institutions like unions and minimum wage laws. The debate continues today, at far higher levels of inequality, but it now centers on schools, prisons, police, and access to labor markets as potential sources of variation. For this conference, Neal chose papers that focus on policing, prisons, legal systems and, especially, the role of firms.

Sources of earnings inequality

The first three papers presented were analyses of earnings variation and how much of the disparity among individuals is due to differences within firms, among firms, and among workers themselves, as well as correlations of all three. The first paper examined U.S. data between 1981 and 2013 and found that between-firm differences explained two-thirds of the increase in earnings inequality, due equally to a rise in sorting of high-wage workers to high-wage firms and rising segregation of similar workers between firms. The remaining third is rising inequality within very large firms, those employing over 10,000 workers, with rising top executive pay and collapsing low-skill pay. Because of their small number, the very highest paid employees at large firms contribute very little to rising inequality.

The next paper presented new static and dynamic models that are less restrictive than standard models and used them to analyze inequality in Sweden, finding that much of Swedish wage variation is due to workers sorting among firms, with high-skill workers working at high-skill firms and low-skill workers at low-skill companies. It also found strong effects of earnings at a worker’s previous employer on future earnings, due to job search and bargaining.

The third paper also explored the role of firms in rising earnings inequality, determining that in Austria, as well, sorting in the labor market is a significant factor behind rising inequality. The finding that high-wage workers work for high-wage firms again stands in contrast to standard models and conclusions. It suggests that growing differences among firms will prove to be a powerful explanatory force behind rising income inequality among individuals.

Falling labor share

A fourth paper looked at a related but different issue: the falling share of national income going to workers. For over a century, a two-thirds/one-third split between labor and capital was fairly stable in industrialized nations but, since the 1980s, labor’s share has declined internationally. This paper argued that a rise of “superstar” firms—well-known companies like Google, Amazon, Apple, and others—that increasingly dominate their markets explains much of the decline. By using technology with increasing ability, they operate with fewer employees and low wages for many of them. The paper concluded with a call to join the two streams of research discussed that day: “Linking the rise of superstar firms and the fall of the labor share with the trends in inequality between employees should also be an important avenue of future research.”

Crime, policing, and incarceration

The focus shifted mid-afternoon to institutions related to crime, policing, and incarceration. The first paper investigated the effect that federal investigations of alleged police misconduct had on crime rates in major U.S. cities, finding that prior to 2013, crime declined after federal investigations. After the summer of 2013—since the killing of Trayvon Martin, acquittal of George Zimmerman, and birth of Black Lives Matter—crime rates increased after federal investigations.

What accounts for the 2013 pattern break? Why more crime? Possibly due to less policing or lower community engagement/trust or perhaps different consent decrees. No conclusive explanation was found, but it appears likely to be due to less policing after federal investigations occurred. This, too, is difficult to explain. A possible hypothesis: After 2013, increased media about police conduct lowered police-civilian contact due to a fundamental change in the relationship between minority communities and police. In any case, the results speak to a need for better investigation procedures so that policing doesn’t decline—and crime increase—post-investigation.

The day’s final paper also looked at criminal behavior, specifically at Norway’s experience with the broader social impact of incarceration. To what extent does an individual’s being in prison spill over onto the former prisoner’s family and his or her crime networks?

This paper was a follow-up to an earlier paper by the same authors that showed that being in prison reduced recidivism and improved employment by those previously unemployed, but hurt employment prospects for those who had had jobs.

The new paper showed that family members—in particular, younger brothers—and one’s criminal networks were positively affected when an individual was incarcerated: 30 percent to 50 percent less likely to commit another crime. Such large effects made paper discussants cautious about their reliability and even more so about their applicability outside of Norway, with its high spending on rehabilitation and low incarceration rates. Nonetheless, the findings are encouraging: Rehabilitation may have a strong positive impact, on individuals and society-at-large.

Over all, the conference expanded a decades-long exploration of causes of vast and growing variation among individuals by employment, earnings, and justice system experience. No definitive answers, but intriguing findings and promising new methods.