Tuesday, October 4, 2011

Frank Levy Term Paper

Frank Levy Research Paper

Since the 1970's income inequality in the United States has grown significantly. In The New Dollars and Dreams, Frank Levy argues that this widening gap among Americans has occurred for several reasons. All together, Levy presents four powerful arguments that help guide his reader to a deeper understanding of our current economic income situation. These arguments are centered on skill bias in current markets, restructuring of firms and businesses, market structures and distribution of earnings, geographical changes in income distribution and their affect on the nature of income inequality and, finally, the current state of American welfare institutions (Levy 5). Ultimately, Levy feels that the government can do a better job of providing equal opportunity for all members of society and protecting individuals who are victims of economic change.


First of all, it is important to recognize that our current economy has a much larger skill bias than it did fifty years ago. Levy identifies this primary economic difference as a precursor to many later arguments in the book: "the 1950's economy was not skill biased: Low skilled workers displaced in one industry could get good jobs in another industry and so incomes automatically grew throughout the distribution" (Levy 3). Between 1979 and 1996, however, skill bias increased significantly in the job market. Most of this change was attributed to new developments in market technology, which created a higher demand for skilled workers. [The net effect of this job bias was an increase in the number of jobs in the upper and lower income range.] In addition, restructuring of businesses and firms in the 1980's in response to government deregulation also contributed to unequal income distribution (Levy 75). Firms fired thousands of employees, closed many existing plants, and opened up new plants using new technology and machinery that the previously fired workers could not operate. Restructuring extended to the service industry as well. For example, a large degree of deregulation took place in the banking industry in the late 1980's, putting banks under greater competitive pressure to both cut costs and build market share (75). To reduce their costs, banks increasingly relied on computers and new technologies to perform routine tasks (ATMs are a good example). In addition, banks tended to focus much of their labor force on marketing as a means of expanding their market share. The overall result was that banks favored different types of employees: skilled computer technicians to operate the machines and marketing experts to help sell the new services that had been created with the banks improved technologies (76).

Levy also argues that the structure of today's labor has led to income disparity. In chapter 5, Levy addresses two main perceptions of today's job market: the first is that earnings correlate with genetic intelligence and so earnings inequality cannot be moderated by policy; the second idea is that the economy is based on a winner take-all market in which the very highest incomes grow enormously while other incomes remain the same (Levy, 77). In 1994, Richard Herrnstein published The Bell Curve. The book proposes that a person's skill and, consequently, his or her income, is a matter of individual intelligence. Ultimately, this is a natural variable which cannot be affected by public policy.

Levy believes, however, that the situation is more complex. For example, gender provides an important exception. It is commonly known that both women and men have similar intelligence and yet women earned only 70 to 75 percent of the wages of men. In addition, college education plays a key role because different incomes exist between college graduates and non-college graduates. Which individuals decide to go to college, however, is determined by more than just intelligence. Family income, family background, and one's previous level of education also play a critical role, according to Levy. A third determining factor of income inequality is accounting rules. Accounting rules allow executives to have large stock options that are tax-free until exercised. Unlike Herrnstein's intelligence factor though, these benefits arise because of "man-made rules" and an individual's position within a firm or company (Levy, 118). All together, gender, education, and accounting rules play a key role in income distribution and undermine the claim that intelligence is the sole cause of income differences amongst individuals (Levy, 118).

Levy also addresses the idea of the "winner-take-all" market which he believes has led to greater income disparity. Much of these markets involve CEOs, a group whose average earnings were nearly 70 times that of the average adult male in the 1980's (Levy, 123). Winner-take-all markets often involve high-stake, complicated services where specialization or expertise is necessary (121). Winner take-all-markets do not account for all increases in concentration of income, however. Deregulation and an increasingly competitive environment are also important causes of economic inequality (123). Financial markets tend to place pressure on a firm's CEO to pursue cost-reduction techniques, often in the form of downsizing and layoffs. Such practices created a climate where employees are often cautious about asking for higher wages. In addition, corporate boards have traditionally approved higher CEO pay. CEO's can increase this money even further through the accounting rules. While CEO wages found plenty of opportunities to rise, other wages stayed at the same level, creating greater income inequality. Ultimately, the combination of winner-take-all markets and deregulated, competitive markets created lower job security and less bargaining power for workers. More emphasis, Levy argues, is needed on education to provide workers with the skills that are necessary for today's labor market (125).

Changes in the geographical distribution of income also changed the nature of income distribution. In the 1950's, the poorest quintile of the population was concentrated in the south and other rural areas. In 1947, in terms of 1997 dollars, southern white families averaged 12,600 per year while white New York families averaged 21,800 per year (Levy 127). The next fifty years of migration, however, changed the nature of income inequality from regional to demographic. The lowest income group was often female-headed households living in inner cities and with limited education. This situation presents a more permanent problem than income distribution in the 1950's, however, because there was a lack of skill bias in the job market and poor southern families had the opportunity to move north to find decent jobs. Today, Female-headed families who lack a college education have very little to gain by relocating themselves and looking for new work. The demographic nature of income also threatens to pose permanent problems for education. The current system of funding educational services in the _____ was primarily through local governments and, as a result, many school districts lacked the financial resources to give students a good education. This was a problem that could be passed on from generation to generation. Levy summarizes theses important economic differences in the end of chapter 6: "whereas the old regional income differences were eroded by migration and industrial change, the new interregional differences, based on family structure and education, risk becoming much more durable" (Levy 146).

Finally, Levy contends that the current state of welfare also contributes to income inequality. Levy outlines what he believes to be the general function of welfare in chapter 7: "The welfare state is one of the nation's major equalizing institutions, designed to protect individuals against the poverty of old age, unemployment, broken families, and similar conditions" (148). One major concern about welfare, however, is the effect it has on individual responsibility, often providing individuals with an easy way out. For example, Social Securities often discourage individuals to save for retirement. In addition, Aid to Families with Dependent Children (AFDC) which was designed to protect children from a father leaving the family can be viewed as an incentive to form female-headed families (Levy 148). Both of these situations magnified the problems that they were supposed to solve and that exist in the welfare system today.

The current welfare system also assumes that social structures are the same as they were 50 years ago and that a growing economy corresponds to growing wages. Even though the overall economy grew, however, incomes continued to remain stagnant for female single-head families and other sectors of the population that welfare targeted. This stagnation underlined a much wider social problem. For example, from 1973 to 1996, the percentage of GDP that went to welfare transfer payments increased from 5.4 to 14 (Levy, ). Despite this overall increase in welfare expenditures, however, income inequality continued to rise. The prime reason was there were more and more households that lacked a working member and, consequently, transfer payments went to a greater fraction of the population. Ultimately, Levy concludes that more must be done to help the welfare state balance two main goals: "fostering individual responsibility and providing a decent safety net".(149) The combination of providing incentives that encourage recipients not to work and old social assumptions about the welfare state had combined to reduce the effectiveness of the welfare system.

In summary, Levy presents several important reasons for the inequality of income distribution in the United States. Increased skill bias, market restructuring, the current structure of the labor market, changes in the nature of income distribution, and the current state of America's welfare institutions are all major factors. His overall argument in The New Dollars and Dreams is that the evolution of income disparity has developed because of a complex set of factors. An explanation of unequal income distribution cannot be simply reduced to arguments of inherited intelligence and other one-dimensional factors.

Income disparity is an important issue to economists for several reasons. First of all, the same factors that determine income equality are also indicators of the long-run health of the economy. These include the level of skill bias, the quality of equalizing institutions, and the growth of economic productivity (Levy, 188). Since these factors are closely tied together, one can receive good indications about future performance of the economy based on statistics of income distribution. Secondly, economists are concerned about unequal income distribution because of the negative impact it has on education. In general, when income inequality is high, the individuals with the lowest incomes generally receive the poorest education. Without quality education available for all individuals across all demographics, the economy suffers from lower productivity due to skill biases in the market. Economists are also concerned about unequal income distribution because if the income disparity gap grows too much, the market system may eventually lose support and pro-growth policies may vanish. For example, the public or U.S. government may decide that not enough people are reaping benefits from increased production and that equalizing institutions are not effective in preventing the most extreme outcomes of unequal income distribution. A return to government regulated markets would put a damper on overall growth of the economy. Finally, economists are concerned about unequal income distribution because it creates pessimistic attitudes amongst the poorest sectors of the public. For example, if the poorest feel that they cannot escape their poverty through persistence and hard work, they will eventually lack incentive to work hard and will increasingly rely on government assistance programs in lieu of work. Ultimately, if enough people are dissatisfied with the way income is being distributed, there will be a slowdown in GDP and U.S. influence in the world economy.
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