Approaches to Equity: Interview with Miles Corak, Full Professor of Economics, Graduate School of Public and International Affairs, University of Ottawa

Monitoring and Evaluation

Miles Corak speaks to us and elaborates the concepts of equity and equality in terms of labor economics by using certain measurements such as earnings, how the job market works and access to jobs. He further goes on to explain why he believes human capital is vital in understanding inequality. On the effects that inequalities may have on marginalized children and families, he points out how in the United States “families have to work harder just to stand still”.

Interview conducted in July 2014

Q.How would you define equity and equality and what are the key concepts that you pull from to explain them?

A: I work in labor economics, which is the study of work and pay, so my focus on inequality tends to be in terms of the monetary resources. While there are certainly much broader concepts, it is earnings inequality and income inequality that are of most concern to me.

Labor economists frame a discussion of inequality in terms of how the job market works, and access people have to jobs. What determines your earnings or access to good jobs or bad jobs is what I look to theory to help me understand, and so in general the workhorse model in economics is one of demand and supply.

Supply refers to the differentiation of individuals according to the skills and human capital that they bring to the market. Human capital is a central component in understanding inequality. It refers to all those attributes of an individual that are, in some sense, open to economic choices and incentives that determine earnings capacity. For example, education, migration, and health are all dimensions of human capital. These attributes are central to appreciating why people earn what they do and why there are differences between them that lead to inequality.

On the demand side of the market it is very important to understand the skill requirements of firms and in particular how they have changed as a result of changes in technology. It is the meeting together of the skill sets of individuals and their distribution across the population with the requirements and demands of firms based upon an evolving technology that determines differences and changes in incomes

The way in which these two sides of the market match up ultimately determines earnings and earnings inequality.

Now in using this as our theoretical guide we can’t be too naive. While this is the workhorse model, labor economists are also very conscious of the fact that social institutions will also determine the market outcomes. So institutions like minimum wages, like unionization, like how corporate executives get paid–these also play a role in determining outcomes.

So the theoretical framework economists use is strongly routed in demand and supply of labor, but also how they interact with social institutions.

Q.Do you have a working definition of equity and how it compares or contrasts with equality from the labor economics standpoint?

A: I’m not sure that the labor economics literature makes a sharp distinction between those two concepts. Labor economists certainly look at different statistical measures of earnings and wage rates. Inequality refers to how much variation there is across the earnings distribution, and there are different summary statistics used to measure that. But I don’t think a distinction is drawn between equity and equality.

Certainly, how inequality is measured can vary, and is done in different ways. At the lower end of the income distribution one might be concerned with a poverty line that is in some sense tied to inequality. For example, it is common to measure poverty in terms of a fraction of typical earnings, like median earnings: 50% of the median earnings is often considered to be the poverty line, and it refers to inequality at the lower end of the income distribution. There are other statistics and measures used to describe the entire distribution, like the Gini coefficient or perhaps more appropriately the shares of total earnings going to different factions of the population. How much total earnings go to the top 1%, 10%, the top half, for example.

Q. What are the main causes of inequity? Are labor economics more concerned with the manifestations than the causes?

A: Earnings inequality is the outcome of a process, and labor economists certainly want to describe that outcome carefully and as accurately as possible. This in turn sets the groundwork for a deeper discussion of the causes, and there has been a good deal of research in the economics literature on these causes.

In part, all of this interest on causes has been driven by the very significant increase in earnings and income inequalities in many of the rich countries. The US certainly stands out in that regard, but inequality has shot up tremendously since the late 1970s in many other countries, and this has engendered a great deal of thinking about the underlying causes.

I think it is fair to say that there is not one factor driving this change, and the factors vary at different points in the earnings distribution.

Part of what is going on has to do with the changing nature of the demand for labor. As I alluded to earlier, there has been a very important change in the nature of technology as informatics and the computer have entered the workplace. This in part interacts with globalization, but from this perspective the discussion is about the changing skill requirements of an evolving technology.

A distinction is often made between tasks that are, on the one hand, cognitive or not, and tasks that, on the other hand, are routine or not. For example, the introduction of the computer into many production processes has negatively affected people who have non-cognitive skills and work in routine jobs. Computers can do these sorts of things very easily, and they have become a substitute for traditional factory workers or the middle manager that used to process information.

But computers can also complement the skills of some people, people who non-routine tasks, whether they are physical or creative. Some of these people have actually benefitted significantly from the rise of the computer.

So the question is what are the skill biases in the change of technology? At the lower end of the pay scale, for the people in the roughly bottom 30-40%, who relied on routine jobs to make their way through life, it is probably fair to say that they have been negatively affected by changes in the production process driven by informatics and communication technologies.

People at the upper end of the pay scale, with more education, involved in more creative and judgmental types of job tasks, have probably benefitted from the computer. This has been an important force pulling the wage distribution out both at the lower and the upper end. This doesn’t necessarily explain the very sharp rise of the top 1% which has also been an important part of inequality.

So there is a need to also understand what a branch of the literature has called “the economics of superstars.” The reference is to people with very specific talents in an increasingly globalized world who are able to project their talents further and capture a bigger slice of the pie. Think of the athlete or singer who a couple of generations ago played in front of only a local or perhaps national audience, but is now seen or listened to across the entire globe.

But there are also institutional forces at work. In some countries institutions have changed in a way that increases inequality. The earnings prospects of people in the bottom half have declined because of the fall in the real value of minimum wages, and the decline of unionization.

Similarly the family is a very important institution determining human capital development of children. At the upper end there has been an increase in what is called assortative mating, where well-educated people are increasingly marrying each other and having fewer kids who basically have access to much more monetary and non-monetary resources from their families.

At the same time, the dramatic changes on the demand side of the labor markets have really stretched families to the limit, and as a result we have seen a significant decline in the traditional nuclear family as it has become more difficult to balance work and family responsibilities.

The family is another institution that plays an important policy role in understanding how inequality has evolved.

In sum, the main causes of growing inequality have to do with the changing configuration of demand and supply, particularly the skill requirements needed for success, the capacity of people to develop these skills through formal or informal education, and the role of family and public policy in giving them the support they need.

Q.How do you see these issues impacting the most marginalized children and families?

A: This varies a good deal across countries, but in the United States these issues have overall been a negative force, making the lives of families in difficult circumstances much more challenging, and more challenging for their children.

In part this, as I suggested, reflects the fact that families have to work harder just to stand still. Two or three decades ago in the 1960s and 1970s, things had already started changing but it was much more likely that someone with relatively less education could work at the mine, the mill, or the factory and have sufficient resources to raise a family. That is much less likely now. One response has been to work longer hours, and many families have in fact increased their hours of work in order to maintain their incomes.

Certainly, one of the most dramatic changes in the labor market has been the rise of female labor force participation. Women are much more engaged in labor markets, and this has helped to keep families afloat. This also creates huge time stresses as many families struggle to balance work with other responsibilities, and this balancing act has been much harder at the lower end and also for the middle class. In effect the first and most crucial safety net that children depend upon, the family, has been stretched and in cases torn. It has been stretched, and stretched, and, in some societies, stretched to its limit. In the US a deal more children are raised in single parent families, but nothing has come along to replace that to give them more of a buffer. It is very crucial that other systems of support be put in place to strengthen the safety net, and indeed turn it into more of a trampoline.

Q.In your opinion, what are some recommendations for policy makers and programs, institutions to close these equality gaps and improve the lives of the most disadvantaged?

A: I think very broadly there are probably two dimensions to think about.

First, as our discussion up to now has suggested, my view and I think the view of labor economics in general, is to look at the causal forces coming from the market. It is important that people, regardless of their skill levels, to continue to be engaged in the labor market, but they somehow need to make a reasonable wage. Robust minimum wage policies are important, and I also think an important innovation is a type of social wage which might be captured in something called the employment-earnings tax credit (EITC). The EITC basically involves individuals getting their wages topped up through a tax-based refund.

This is very important but it has to go along with a minimum wage policy because otherwise there is a risk of increasing the supply of labor at the lower end of the market, and as a result it is not necessarily clear that wages will go rise as employers may tend to lower wages. I think delivering social policies through something like an EITC is a very important innovation because it does keep people engaged in the labor market, but it may not be the entire answer, particularly not for individuals who are much more than just marginally poor.

It is also important to appreciate that with more labor market participation there is a greater need to support children because they are going to have less time with parents. As a result public policy also can’t ignore the need of families for flexibility in setting work schedules, and in the provision of daycare, and high quality childcare. Otherwise the burden of child care will fall to older siblings, and put them in a more challenging situation, which some studies have shown to be the case. Also some families don’t necessarily have available support from relatives, so the delivery of income support through the labor market might still leave children falling through the cracks.

Another important dimension concerning the development of a child’s human capital is, regardless of how the inequality of the labor market is evolving, we still have to keep higher inequality from impinging upon the quality of education for the least advantaged. A very high quality start in early life, and an education system throughout the primary and secondary years that is high quality regardless of income status is absolutely essential for children to develop the skills to become self-sufficient adults.

Q. Are you aware of any particular policies or programs that would illustrate some good practice models or policies that would illustrate?

A: As suggested, the EITC, as a labor market tool, is important. But it has to go along with a progressive tax and transfer system. There are several examples of well designed early childhood education programs, but it is always important to embed a rigorous evaluation into any program.

Q.What do you think is important to monitoring and evaluation as it relates to equity and equality for children in particular?

A: I work at the broadest level, so I think it is important to have a reasonable, or relatively clear, view of the big picture.

To support this sort of monitoring I think it is necessary to have in place a reasonable measure of child poverty, one that is both income-based and non-income based. I also think such a measure has to be a relative measure: one that is tied to some acceptable standard of living and regularly updated as that standard changes.

There is a lot of research around relative poverty lines compared to absolute poverty lines. I don’t believe there is such a thing in rich countries as an absolute line. Rather, I like to think of the distinction as one between a fixed poverty line versus a moving line.

All poverty lines are relative, and need to be updated at regular intervals. I think if governments are clear on that, it would give them a broad picture of the situation of children at the lower end of the distribution. I would, for example, recommend that governments use a poverty line based on 50% of the median income (and that should be individual-equivalized income), and that they should set explicit poverty reduction goals at the onset of their mandate. I imagine that when a government’s mandate begins it would take the poverty rate resulting from 50% of the prevailing median income as a starting point and seek over the course of its time in office to improve the situation. In other words, take as its yardstick for success a poverty line fixed at that point in time, reflecting the situation that has been inherited.

I then imagine this line being updated regularly as new governments are elected. A poverty line that is fixed over a government’s mandate, and then regularly updated with each new mandate, is one way of giving children, if it is designed properly, the first call on society’s resources, and focus public policy attention on inequality in the lower half of the income distribution for the segment of society most dependent upon others.

To answer your question, the best way of monitoring developments is to draw an appropriate poverty line, and update in a way appropriate for public policy.

________

[1] David Autor (2014). “Skills, education, and the rise of earnings inequality among the “other 99 percent”
“Science 23 May 2014: Vol. 344 no. 6186 pp. 843-851 http://www.sciencemag.org/content/344/6186/843 .
See also this interview with the author http://newsoffice.mit.edu/2014/qa-david-autor-inequality-among-99-percent-0522

[2] Andrew Cherlin (forthcoming, 2014). Labor’s Love Lost: The Rise and Fall of the Working-Class Family in America. New York: Russell Sage Foundation https://www.russellsage.org/publications/labors-love-lost

[3] Miles Corak (2012). “The US Senate wonders about tax policy for the American Dream: How can income transfers be designed to benefit all children in need?” http://milescorak.com/2012/11/25/the-us-senate-wonders-about-tax-policy-for-the-american-dream-how-can-income-transfers-be-designed-to-benefit-all-children-in-need/

[4]Miles Corak (2011). “Inequality and Occupy Wall Street: causes of growing inequality and policies to address it.”
http://milescorak.com/2011/12/07/inequality-and-occupy-wall-street-8-causes-of-growing-inequality-and-policies-to-address-it/

[5] Miles Corak (2011). “Inequality and Occupy Wall Street: the top 1% are superstars.”
http://milescorak.com/2011/11/10/inequality-and-occupy-wall-street-3-the-top-1-are-superstars/

[6] Miles Corak (2005). “Principles and Practicalities for Measuring Child Poverty in Rich Countries.” IZA Discussion paper no. 1579. http://ftp.iza.org/dp1579.pdf

[7] OECD (2011). Divided We Stand: Why Inequality Keeps Rising. Paris: Organization for Economic Cooperation and Development. http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm


 

miles-corak2Miles Corak is a full professor of economics with the Graduate School of Public and International Affairs at the University of Ottawa, where he has worked since 2007 teaching principles of economics, labour economics, and social policy in a way relevant for public policy.Much of his research involves comparisons across countries. It focuses on labour markets and social policy, and is detailed in publications on child poverty, access to university education, social and economic mobility, and unemployment. He has also edited three books, and his paper, “Income Inequality, Equality of Opportunity, and Intergenerational Mobility,” published in the 2013 volume of the Journal of Economic Perspectives, examines the relationship between inequality and social mobility across countries, a relationship that has become known as the “Great Gatsby Curve.” His research has been used by The White House, and cited by many of the major print and electronic media, including The Wall Street Journal, The New York Times, The Economist, Bloomberg Business Week, The Sunday Times, The Guardian, The Washington Post as well as the BBC, the CBC, TVO and The Globe                                              and Mail.

Professor Corak maintains his own blog at milescorak.com and you can follow him on Twitter @MilesCorak.

 

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