Inequality, Youth Unemployment And Retirement Incentives

By Ben Casselman
from Pacific Standard

Every Monday, the National Bureau of Economic Research, a nonprofit organization made up of some of North America’s most respected economists, releases its latest batch of working papers. The papers aren’t peer reviewed, so their conclusions are preliminary (and occasionally flat-out wrong). But they offer an early peek into some of the research that will shape economic thinking in the years ahead. Here are a few of this week’s most interesting papers.

 

Title: “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data”

Authors: Emmanuel Saez, Gabriel Zucman

What they found: Wealth inequality in the United States has followed a “U” shape over the past century: high early in the 20th century, falling in the decades after World War II, then rising again in more recent decades. The recent increase in inequality is due almost entirely to the increasing wealth of the richest 0.1 percent of households.

Why it matters: The debate over inequality often focuses on income, or how much money people earn. But perhaps even more important is wealth, or how much money people have. A person’s income can vary significantly from one year to the next, but wealth tends to be more durable, not just from year to year but from generation to generation. In this paper, the authors construct a new time series on wealth from Federal Reserve, Internal Revenue Service and other data. They find that wealth inequality, like income inequality, has increased significantly in recent decades. In 1978, the richest 0.1 percent of households held about 7 percent of all household wealth; in 2012, they controlled 22 percent. (The top 0.1 percent in 2012 comprised about 160,000 families with net assets above $20 million.) But wealth inequality still isn’t as high as it was in 1929, when the top 0.1 percent had 25 percent of all wealth. Overall, the authors find that the bottom 90 percent haven’t seen any increase in wealth since the mid-1980s after adjusting for inflation.

Key quote: “Income inequality has a snowballing effect on the wealth distribution: top incomes are being saved at high rates, pushing wealth concentration up; in turn, rising wealth inequality leads to rising capital income concentration, which contributes to further increasing top income and wealth shares. Our core finding is that this snowballing effect has been sufficiently powerful to dramatically affect the shape of the U.S. wealth distribution over the last 30 years.”

Data they used: Flow of Funds data from the Federal Reserve for the post-1945 period, and conceptually similar data compiled by other researchers for earlier years. They also looked at data from the Internal Revenue Service, the Survey of Consumer Finances and Forbes magazine.

 

Title: “What Should I Be When I Grow Up? Occupations and Unemployment over the Life Cycle”

Authors: Martin Gervais, Nir Jaimovich, Henry E. Siu, Yaniv Yedid-Levi

What they found: Unemployment is higher among younger workers because they are more likely to leave or lose their jobs, not because they have more trouble finding them. As workers age, they become more likely to find an occupation that fits their skills, and therefore are less likely to be unemployed.

Why it matters: The unemployment rate for Americans ages 20 to 24 was 11.4 percent in September, more than two and a half times the 4.3 percent rate for 35- to 44-year-olds. Even during good economic times, unemployment rates are nearly always higher for young adults. Perhaps surprisingly, given this fact, young Americans don’t have more trouble finding jobs than older workers; their job-finding rate is actually somewhat higher. But their job separation rate — the rate at which they quit or are laid off — is significantly higher. That’s consistent with both young people’s higher unemployment rates and their lower rates of long-term joblessness. One reason young people are so much more likely to change jobs: They’re still in the process of figuring out what they’re best at. About 40 percent of 20- to 24-year-olds change occupations each year, compared to less than 15 percent of 35- to 44-year-olds. The authors build a model of this “occupational learning” that successfully predicts the age disparity in unemployment.

Key quote: “In order to learn her true calling, a worker must sample occupational matches over her career … Over time, the worker and firm learn whether the current occupation is the worker’s true calling. If it is not, the worker-firm pair can either maintain the match or choose to separate. Upon separation, the worker seeks employment in a new occupation, having ruled out the previous occupation as being her true calling. As the worker samples more occupations and accumulates knowledge about her occupational fit, the probability of finding her true calling rises.”

Data they used: Current Population Survey and the Panel Study on Income Dynamics.

 

Title: “Will They Take the Money and Work? An Empirical Analysis of People’s Willingness to Delay Claiming Social Security Benefits for a Lump Sum”

Authors: Raimond Maurer, Olivia S. Mitchell, Ralph Rogalla, Tatjana Schimetschek

What they found: More people would work longer if Social Security paid them a lump sum for delaying retirement, rather than paying an increased monthly benefit.

Why it matters: The aging of the baby-boom generation has led policymakers to look for ways to encourage Americans to work longer into life. The current strategy is to offer increased Social Security benefits for people who retire later; people who retire at age 70 get 77 percent more each month than they would if they retired at 62. That approach has been only moderately successful; a significant share of Americans still retire before age 65. The paper’s authors consider an alternative strategy: offering people a larger lump-sum payment if they delay retirement. On average, recipients wouldn’t actually get more money than they would under the current system, they would just get it all at once. In a survey designed by the authors, respondents said they would work six months to eight months longer on average under the lump-sum scenario.

Key quote: “To the extent that workers can be incentivized to voluntarily delay retirement in exchange for lump sums, they will also pay Social Security payroll taxes for additional years which could help the system’s solvency. Moreover, there is some evidence suggesting that continued labor force participation results in improved physical and mental health among the elderly, which could improve both individual quality of life as well as the financial status of healthcare systems such as Medicare and Medicaid.”

Data they used: A survey conducted under the framework of RAND’s American Life Panel, “a nationally representative sample of 6,000 households regularly interviewed over the Internet.”

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