No, taxes and transfers do not explain differences in inequality between US and Sweden

(See update below)


At Vox, Dylan Matthews claims that "government is the only reason the US has more inequality than Sweden." He bases this claim on the fact that the United States has a pretax Gini coefficient equal to that of Sweden, Norway, and Denmark; Finland's pretax Gini coefficient is actually higher than that of the United States. But after government taxes and transfers are accounted for, the Gini coefficients of the social democracies drop precipitously, while the United States' decreases far less:

Matthews argues that these data prove that government taxes and transfers are the "only" reasons why Norway, Sweden, Denmark, and Finland have lower inequality than the United States. Nothing else explains why the pretax/pretransfer Gini coefficients would be equal and posttax/posttransfer Gini coefficients so different. Clearly, it's only government intervention that reduces inequality.

This is analysis wrong, however, and makes little sense even at first glance. McDonald's workers in Norway and Denmark make almost three times their American counterparts. With a paucity of the minimum wage McJobs that dominate the American underclass, how can Scandinavian pretax/pretransfer inequality possibly be equivalent to the United States?

Our interpretation of these data matters greatly. If Matthews is correct, then taxes and transfers are the only useful weapons against inequality, and policies that take aim at pretax/pretransfer inequality--like full employment and laws to make unionization easier--are not worth pursuing.

But Matthews is wrong here, and the fault lies with the Gini coefficient.

Gender inequality and social democratic policy

Image: A seahorse couple. Seahorses are very unusual in that males, not females, carry offspring through pregnancy and give birth. Thus, much of the following analysis will not apply to seahorses. (source)



For decades, the Scandinavian social democracies have led the world in limiting gender inequality. Currently, the World Economic Forum's Global Gender Gap report--which looks at several areas of women's status, including labor market indicators and the number of female representatives in government--ranks the Scandinavian social democracies very high. Four of the five Scandinavian social democracies take the top four spots; Denmark, the laggard, still finishes in the top ten at #8. Clearly, social democratic policy is effective in helping to limit gender inequality, and this post will broadly outline some social democratic strategies--universal child care and paid parental leave--and the evidence behind them.

This is a social policy blog, so I'm narrowly focusing on the policy basis of gender inequality. But it's important to note that sexism and discrimination have many causes and social policy can only be one medicine that cures a sick society. Confronting the economic roots of discrimination can only go so far. For example, women are disproportionate victims of violence. American men work about 10 hours more per week in paid employment, but women do so much housework that they have on average 5 fewer hours of leisure each week. Addressing the societal perpetuation of sexism in the workplace and beyond cannot simply be the sole responsibility of social policy. Aggressive enforcement of anti-discrimination laws and challenging everyday discrimination is also necessary. Social policy can only take us so far.

The economic case for sexism
In a fascinating article, Gwynn Guilford presents a very clear case about the economic incentives for sexist hiring and promotion practices, and the role of social democratic policy in fighting gender inequality. First, she addresses employers' economic incentives to pay women less than men, and to favor men for promotions:

For the vast majority of women who don’t return to work after giving birth, this is because the costs of returning—both financial and psychological—outweigh the benefits.

Here are the factors they’re likely weighing. Since it’s assumed the mother will take a long leave after giving birth, businesses systematically underpay women and skip them for promotions in favor of their male colleagues. Their husbands, therefore, likely have a much higher salary and aren’t eligible to take much more than a few weeks, at most, of paid childcare leave.

So women have little choice but to take many months off work to care for their newborn. Even in countries with robust maternal employment protections, low-skilled women in particular still face pressure to quit their jobs. Many who consider returning to work once their child is old enough for daycare struggle to find a job that pays well enough to cover childcare—or, with their skills now outdated, to find a job at all. Highly educated women, meanwhile, often find that taking a lengthy leave jolts them off the management track. And since this group tends to have wealthier husbands, without the professional motivation, there’s no point in returning.

Much evidence supports this argument. Danielle Kurtzleben summarizes research showing that American employers really do penalize women but not men for having children.

Guilford misses another reason women often drop out of the labor force: most human societies expect women, not men, to care for elderly or disabled relatives who are not able to care for themselves. This contributes to the gender pay gap for similar reasons. Another key issue (which she takes up outside this block quote) is that many women only work part-time after they have a child.

Putting this all together, we're really interested in three statistics--the gender pay gap, or the ratio of men's to women's wages; a comparison of the female and male labor force participation rate (the number of employed people as a percentage of working age adults); and a comparison of percentage of employed women and men working part time.

It's particularly important to keep track of all three because none can fully capture women's opportunities in the labor market. Two examples will make this clear. First, an increase in the gender pay gap can actually mean that the labor market is becoming less discriminatory towards women. Though counterintuitive, this can occur because these three measures are not independent. For example, the Scandinavian social democracies actually have a larger gender pay gap than countries with much more sexist labor markets, like Italy. The gender pay gap in Italy is so low because the Italian female labor force participation rate is very, very low. This low female labor force participation rate occurs because it's so difficult for Italian women to find employment that only the most highly skilled Italian female workers are reliably employed. In other words, most Italian jobs are low skill, but most women who have jobs in Italy are physicians, lawyers, or in other high skill fields where pay is high; there aren't many low skill female workers with jobs because they are unable to find work. Hence, high wage workers are grossly overrepresented in the female labor force, thus artificially decreasing the gender pay gap.

For a second example, the United States has traditionally had a surprisingly high female labor force participation rate. This is certainly due to a much higher poverty rate. Thus, for the United States, the labor force participation and part time work rates alone are likely to be misleading. Clearly, we need to consider all three measures to get an accurate picture.

In any case, in every country on earth, these measures are heavily weighted against women. Guilford summarizes research that suggest that unprecedented rates of economic growth could occur if the female labor force participation rate rose to that of men--there's simply so much bottled up talent and productivity in the world's women that can't be put to use because of sexism.

Using social policy to address economic roots of sexism
It should be very obvious that social policy can address each of the three root incentives for gender discrimination in hiring, pay, and promotions. Parental leave policies can be structured to encourage fathers to take parental leave, diminishing employers' incentives to pay women less. Universal child care services make it easier for women to return to work when babies become toddlers. Universal long term care services ensure that elderly relatives who are no longer able to care for themselves receive competent care even if their adult daughter or daughter-in-law returns to work. This isn't a new idea. Since the 1970's, the social democracies have implemented these policies with the stated intention of maximizing female labor force participation.

But do these policies actually work? Have countries that have implemented these policies actually seen an improvement in our three indicators of workplace discrimination? Let's take a look:

U6 Watch bonus: Can there be any doubt that the point of student loans is to maximize inequality?

While preparing this month's U6 Watch, I kept coming across evidence that student loans are strangling American innovation. First, the in the Wall Street Journal:

Having the student-loan debt “is preventing me from being able to take a lot of chances or risks that are usually necessary when starting a business,” Ms. Carney says…

Some academic experts say leftover loans are the biggest impediment to upstart entrepreneurship by those who recently received college or graduate degrees. “I mentor students all the time,” says Vivek Wadhwa, a fellow at Stanford University Law School. “The single largest inhibitor to entrepreneurship is the student loans.”

Recent graduates and college dropouts account for a disproportionate share of the founders of technology startups that have transformed the economy over the past decade, says Shikhar Ghosh, a senior lecturer at Harvard Business School. Many freshly-minted M.B.A.s “are willing to sleep on a couch for a year or two, but they can’t do it with the burden of student loans,” he adds.

U6 Watch: August 2013

U6 Watch is a monthly feature monitoring the poverty-sustaining compromise of Democrats and Republicans to use the U3 measure of unemployment to obscure the reality of the labor market. Read the first U6 Watch for more background. U6 Watch also highlights other "recovery" and labor market news. All U6 Watches can be found using the U6 Watch tag.

I started U6 Watch back in July in response to the June BLS jobs report. In that jobs report, the most widely-reported measure of unemployment--the U3--fell--while the more accurate U6 unemployment rate increased. Since the U6 is a far more accurate measure of workforce underutilization than the U3, the positive press surrounding the "drop" in unemployment was smoke and mirrors; the situation had actually gotten worse, not better. Since the U3 was misleading while the U6 was not, I named the feature U6 Watch. However, had I started this month, I might have called it something different--for, this month, U3 and U6 are both misleading.

U3 unemployment fell from 7.4% in July to 7.3% in August; U6 unemployment rate fell 14.0% to 13.7%. This certainly sounds encouraging.

Unfortunately, the number of employed persons decreased from 144,285,000 to 144,270,000 (because it's a survey, BLS rounds to the nearest 1,000). The number of people working as a percentage of population fell from 58.7% to 58.6%. The labor force participation rate fell from 63.4% to 63.2%.

Once again, the numerator of the U3 and the U6 only count someone as unemployed if they are actively looking for work. If people stop looking for work (because they give up their job search or retire), the unemployment rate will fall, even if the employment situation hasn't changed. That is exactly what happened this month. Both U3 and U6 are used to report that the situation is getting better--that fewer people are unemployed. In fact, both measures fell only because people left the labor force. People didn't find jobs--fewer people are working this month than they were last month.

It's true that jobs reports are almost always inaccurate, and this one will almost certainly be revised--perhaps reversing these conclusions. Nevertheless, any attempt to make these numbers tell a positive story is an outright lie--and that's the key point. A essential feature of poverty sustainment (policies designed to keep people poor) is obscuring the reality of the situation. This is clearly what both U3 and U6 unemployment rates have done this month--they paint a rosy picture when things are--at best--not getting worse.

Now, BLS statistics suggest that the fall in the labor force participation rate was mainly due to people retiring. While that's better than the alternative--people giving up on their job search--this is no consolation whatsoever to the unemployed, since the data argue that we are losing jobs, not creating them.

On to other labor market news.

I forgot to put this in the July U6 watch: per the Bureau of Labor Statistics, job postings increased in June, but hiring fell. Sure, there's a lot of job postings up, but that doesn't mean employers are actually hiring. Remember that before you poke an unemployed person.

U6 Watch is about to go from bad to worse:

Gini coefficients / inequality in social democracies in the 2000's

I wrote here about a paper examining the success of social democracies compared to other types of welfare states from the 1960's to 1990's. Unfortunately, the paper was published in 2001, and I haven't found a similar effort that is more up to date. To fill in some blanks, here are three graphs from a different post that compare income inequality of social democracies, Christian democracies, and liberal countries in the 2000's. Let's all give Wikipedia a hand for sensibly organizing the OECD's amazingly disorganized data. As you can see, the pattern still holds: social democracies (left group) limit inequality better than Christian democracies (center group), which do better than liberal countries (right group):

Lesson for Teach for America in statistical versus practical significance

Image: Teach for America founder Wendy Kopp (source)

A recent study has many touting the benefits of TFA. The most overheated has been Dylan Matthews (Teach for America is a deeply divisive program. It also works.), but Matthew Yglesias is similarly condescending (Since empirical evidence doesn't change anyone's mind about this issue...), though Yglesias is at least more reasoned in his assessment (see below). No, the study didn't show that TFA works. It showed that it works for one subject in economically disadvantaged schools versus inexperienced teachers, provided you assume that TFA volunteers weren't teaching to the test. And, just because something's statistically significant doesn't mean it has any real world value. I'll let Dana Goldstein take it from here:

TFA math teachers outperformed non-TFA math teachers in their schools by .06 standard deviations in middle school and .13 standard deviations in high school. The talking point will be that this is the equivalent of an additional 2.6 months of learning per schoolyear. But it's important to realize this represents a relatively modest improvement in student achievement. For the average child in this study, who scored in just the 27th percentile in math compared to her peers across the country, having a TFA teacher will help her move up to the 30th percentile--still a long way off from grade-level math proficiency.

Right. TFA "works," in that it can improve student performance in one subject from well below grade level to...still well below grade level. Also worth noting:

Large, universal Scandinavian-style government welfare programs do not hurt the economy or unemployment

Image: Don't worry kids.  It turns out that alarm over your ability to strangle the American economic system was just hype. (source)

Note: This post is about social democracy.  If you don't know what social democracy is, first read this page on basic social policy.

Several arguments are typically leveled against social democracies.  The most common objection is that universal social welfare programs are simply too large, and thus are a drag on the economy.  Having large programs like universal health care, universal child care, and universal old age and disability insurance thus result in slow economic growth, and thus high unemployment.  So, while these programs may be nice to have, the resulting slow economic growth and high unemployment make them more trouble than they're worth.  The second most common argument is that social democracies really aren't that much better at promoting social welfare.  Are the sacrifices to the economy really worth it for a populace that's only marginally better off?

Navarro and Shi (2001) looked directly at these two (related) criticisms by comparing health and economic indicators of all advanced countries with the four basic types of welfare systems (liberal, Christian democrat, social democrat, and fascist), over four decades (1950's through 1990's).

Links worth reading

I'm working on a few posts right now, but I wanted to post a couple things I've come across that I think are worth reading, but probably won't be able to use.

First, a surprisingly thorough summary of criticism of Burkhauser et al's paper arguing that inequality has decreased from 1979-2007 by Tom Edsall.  Edsall reached out to a huge number of economists of different leanings and put together a surprisingly comprehensive round-up of reactions.

Recovery going according to plan

I am often criticized for making claims like "recovery going according to plan," as if there is a room full of evil, old white men dressed in tailored business suits, sitting around a mahogany table, plotting on how to enrich the 0.01% at the expense of everyone else.

In practice, our political system only responds to the needs of the wealthy, so any concerns of the poor or jobless largely get ignored:

Perhaps the most shocking study the authors cite comes from Martin Gilens, a political scientist at Princeton University. Gilens has been collecting the results of nearly 2,000 survey questions reaching back to the 1980s, looking for evidence that when opinions change, so too does policy. And he found it—but only for the rich. “Most policy changes with majority support didn’t become law,” Hacker and Pierson write. The exception was “when they were supported by those at the top. When the opinions of the poor diverged from those of the well-off, the opinions of the poor ceased to have any apparent influence: If 90 percent of poor Americans supported a policy change, it was no more likely to happen than if 10 percent did. By contrast, when more of the well-off supported a change, it was substantially more likely to happen.”

For example, the fact that there are 3.3 job seekers for every job opening (and the fact that it has been this bad or worse since 2009) is not a problem our political system cares to solve because it does not affect the rich.  Joblessness has been a problem for years; Wall Street didn't have to wait years to get bailed out.  Similarly, the fact that the Great Recession and "recovery" resulted in the replacement of middle class jobs with low income jobs is a good thing to the ruling class, not a bad thing (60% of job losses in the Great Recession were middle class jobs, whereas just 27% of jobs created since the "recovery" started are middle class jobs; 58% of jobs created since the "recovery" are low wage jobs).  This is a great recovery for the rich, but bad for everyone else.