Lecture 13.2

Globalization

Emmanuel Teitelbaum

Inequality

Illustrative statistics from Stiglitz


  • 20% of wage earners earn as much as bottom 80%
  • Top 1% earn in a week what bottom 20% earns in a year
  • Top .1% earn in a day what bottom 90% earns in a year
  • Walton family controls as much wealth as is owned by bottom 30% of society (~$238 billion)

Measures We Will Use


  • Income/wealth shares — what fraction of total income/wealth a group captures
  • Gini coefficient — summarizes the whole distribution (0 = perfect equality, 1 = perfect inequality)
  • Median household income — measures living standards at the middle; useful for tracking whether the middle is keeping up

Lorenz Curve and Gini Coefficient


The diagonal is the line of equality — every X% of the population earns Y% of income. The bowed curve is the Lorenz curve (the actual distribution). Gini = A/(A+B): ranges from 0 (perfect equality) to 1 (perfect inequality).

Income vs. Wealth Inequality


  • Income: what people earn from work and returns from investments like stocks, bonds and investment properties
  • Wealth: value of everything a person or family owns minus any debts
    • Net worth: marketable assets minus debts
    • Financial wealth: non-home wealth

Wealth Inequality

Bottom 90% vs. Top 10% Wealth Shares (U.S.)

The Problem of the 1%

Decomposing the 1%

Wealth Shares in France

Piketty: Why Wealth Concentrates


  • Thomas Piketty’s central argument: r > g
    • r = rate of return on capital (dividends, interest, rent, capital gains)
    • g = rate of economic growth
  • When r > g, those who own wealth accumulate faster than the economy grows
  • Historical averages: r ≈ 4–5%, g ≈ 1–2% over the long run

The Mechanism


  • Owners of capital reinvest returns → wealth compounds over time
  • Workers depend on wage growth, which roughly tracks g
  • Over time, capital’s share of total income rises relative to labor’s share
  • Inherited wealth comes to dominate over earned income
    • Piketty: “the past devours the future”

Exercise: Testing Piketty

  • Go to wid.world → Country graphs → Wealth inequality
  • Select a country: Canada, United Kingdom, Germany, France, Sweden, China, or India
  • Look at top wealth shares over time and discuss:
    • Has wealth concentrated at the top in your country?
    • Does the trend fit Piketty’s prediction — slow, steady concentration driven by capital returns?
    • Or does the pattern look different? What might explain that?

Limitations of r > g


  • Predicts slow, gradual concentration — but U.S. inequality rose sharply after ~1980
  • Most Americans have little non-home wealth to compound, so r > g doesn’t help them
  • Better at explaining wealth concentration than income inequality
    • We need a different theory for that

Income Inequality

United States Gini Coefficient

United States Median Household Income

Bottom 90% vs. Top 10% Income Shares (U.S.)

United States Average Incomes

Stiglitz: Rent-Seeking and Market Power

  • Joseph Stiglitz argues inequality stems from rent-seeking
  • Economic rent = income earned by capturing value rather than creating it
    • Monopoly pricing, financial speculation, control over intellectual property
  • Key insight: market rules are not natural — they are shaped by those with power
    • Who benefits from deregulation? From weak antitrust enforcement?

Market Power and Worker Wages

  • Monopsony: when employers dominate local labor markets, they can suppress wages
    • Workers paid less than the value they produce
  • Non-compete clauses trap workers and reduce their bargaining power
  • Fissured workplace: outsourcing, franchising, and gig economy shift risk onto workers
  • Concentrated industries (healthcare, tech, retail) → lower wages for workers

Executive Pay vs. Worker Pay

  • CEO pay has grown ~940% since 1978; typical worker pay ~12%
  • Executives sit on each other’s boards → mutual back-scratching on compensation
  • Shareholder primacy shifts gains to executives and shareholders at workers’ expense
  • Stock buybacks and options concentrate rewards at the very top
  • This is Stiglitz’s core target: inequality within firms, not just between them

Stiglitz’s Remedies


  • Revive antitrust enforcement — break up existing monopolies, block anticompetitive mergers
  • Broaden the standard — move beyond consumer prices to consider worker welfare, innovation, and market structure
  • Regulate platforms — prevent companies from competing on their own marketplace (Amazon selling against third-party sellers)
  • Reform corporate governance — give workers a seat at the table; rein in executive pay
  • Reduce political influence of corporations — money in politics perpetuates the rules that allow rent-seeking

Debate: Fixing Market Power

  • Pick one of the major tech platforms: Meta, Amazon, Apple, Google, or Microsoft
  • Stiglitz proposes several remedies — which would you apply to your company, and why?
    • Break it up?
    • Regulate it as a platform?
    • Reform its governance?
    • Something else?
  • Who wins and who loses from your proposed remedy?

Lina Khan and the New Antitrust


“Anti-monopoly is a governing philosophy that broadly views concentrations of power as a threat to freedom, recognizing that tyranny comes in many guises. Just as the Constitution creates checks and balances in our government, safeguarding against concentrated political control, anti-monopoly laws create checks against concentrations of economic power.”

— Lina Khan, former FTC Chair (2021–2025)


  • Khan argued the consumer welfare standard, antitrust’s focus on keeping prices low, is blind to how platforms accumulate and abuse market power
  • How does Khan’s argument follow from Stiglitz? Should we think of concentrated economic power as a threat to freedom?

Conclusion

The Bigger Picture


  • Piketty and Stiglitz give us two complementary mechanisms:
    • Wealth inequality: capital compounds faster than economies grow → the wealthy pull away
    • Income inequality: market power suppresses wages and inflates executive pay → workers fall behind
  • Neither theory alone is sufficient because inequality is overdetermined
    • Multiple forces reinforced each other from the 1980s onward
  • Inequality is not an accident of markets
  • It reflects the rules of the game, and rules can be changed

Other Forces Worth Noting


These factors amplified the Piketty/Stiglitz dynamics rather than replacing them:

  • Economic globalization — trade competition suppressed wages in exposed sectors; financialization expanded returns to capital (Piketty)
  • The Reagan revolution — deregulation, removal of capital controls, and cuts to top marginal tax rates weakened redistribution and widened the gap between r and g (both)
  • Technology and skill change — reduced demand for low-skilled workers, increased returns to education (Stiglitz)
  • Decline of unions and left parties — eroded worker bargaining power, accelerating wage stagnation (Stiglitz)
  • Weakening redistribution — lower minimum wages and a thinner safety net allowed market inequality to translate more directly into living standards