Mind the Income Gap

•February 7, 2013 • Leave a Comment

income500

So, I just recently finished my graduate studies thesis that required econometric analysis on an international development topic, and thought I would make a post about it and share it here. For those that are learning regression analysis through school, like me, might find this post fairly insightful. Especially, those who might be preparing to venture on a serious research study will find empirical economic research can be very daunting. Being given a four-month time frame to begin and fully complete a research study, I absolutely do understand the hair-pulling stress that comes with it! Though I must say, I am really proud of the end product.

Anyhow, I found it appropriate to write my Master’s Thesis on “Economic Openness and Its Effect on Country-Level Income Inequality” given the current political and economic environment. Income inequality has been a hot topic for many economists, namely noble-prize recipient Joseph Stieglitz, for quite some time. But a hot topic not just for economists, but it has also caught the public eye in the recent year or two. Unless you live in a cave devoid of connection to the outside world, the well-known nationwide Occupy Wall Street demonstrations (which I believe are technically still going on, just not as prominent and are not receiving the attention compared to a year ago) are built around this very issue. By no means is this a domestic (US) problem, but a more global issue, and is isolated to not only developed countries, but also the developing ones.

A popular general example is to look at China and their very notable and recent economic developments. With China’s extremely high GDP growth rates, hitting double digits in past years, a majority of that growth is taking place in urban areas. And what we see is the divergence of standard of living between urban and rural areas, which reflects labor wages growing disproportionally faster in the industry sector comparatively to the agricultural sector. Ultimately, widening the income gap.

Economists have argued that developing nations that open themselves up to the force of globalization increase their risk of widening household income gaps. Although the exact definition is debatable, it is generally agreed that the main catalysts driving the forces of globalization are economic interests among nations through international trade and financial integration into the global economy. With that said, in my study I define economic openness as the joint effect of a country’s trade openness and net foreign direct investment (FDI) flows.

My study implements the following fixed-effects model, along with instrumental variable techniques, using a monthly panel of country data for the period 1970 through 2006.

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I sampled 147 countries, where each country’s income distribution is measured by a Gini coefficient (dependent variable). The key independent variables measuring economic openness are: (i) a country’s trade openness, which is measured by the sum of a country’s imports and exports of goods and services as a share of its GDP emphasizing the share of a country’s economy that is devoted to international economic interaction, and (ii) a country’s net FDI inflows, where an attraction of FDI inflows strengthens a country’s connection to world trade networks. Additionally, a number of control variables are used since other significant factors may influence income inequality. These control variables include: GDP per capita, education, and a country’s sectorial share, which are incorporated into the model. To appropriately account for the Kuznets Hypothesis and its non-linear relationship on income inequality, the square of GDP per capita is also incorporated into the model. Empirical analysis also accounts for two separate developmental groups, developed and developing countries, as it is suggested and nearly unanimously determined by other studies, that there exists differentiating inequality consequences for different development levels.

However, the methodological specification has potential endogeneity problems of income influencing trade openness, where some studies have found that countries with high incomes are relatively high for motivations other than openness of trade, and cause them to be more open to trade. Frankel and Romer’s (1999) discussion of the gravity model demonstrates that a country’s geographic characteristics are powerful determinants of trade. Moreover, a country’s geographic characteristics are also not affected by a country’s income, government policies, or even other elements that influence income. Thus, I employ the use of a country’s geographic characteristics, and utilize them as suitable instrumental variables to address trade openness’ issue of endogeneity.

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All regressions employ robust standard errors to account for heteroscedasticity. Regressions 1 through 4 utilize standard OLS regression, while taking into account for potential regional differences. Regressions 5 through 8 utilize fixed-effects regression and instrumental variables to account for unobservable characteristics and potential endogeneity.

Beginning with Regression 1, general indications display a negative and significant relationship of trade openness on income inequality as well as a statistically significant positive relationship of a net gain in FDI inflow on income inequality across all countries. However, after accounting for time-invariant unobserved characteristics, Regression 5 reveals coefficient estimates lose relative significance, which encourages further investigation. Mentioned prior the model accounts for additional control variables. Comparing regression 2 and 6 suggest that endogeneity and unobservable time-invariant characteristics were placing an upward bias on our coefficient estimate of trade openness. After implementing fixed-effects regression and instrumental variables, in Regression 6, results show to a robust negative relationship of income inequality on trade openness, while also sustaining a significant and positive relationship of a net gain in FDI inflow and the adverse effect on a net loss in FDI inflow. In regression 7 and 8, suitable fixed-effects regressions are estimated separately for both developed and developing countries, shedding light to the finalized results. The negative sign for trade openness in both regressions are statistically significant. Furthermore, a net gain in FDI inflows do have a significant impact on income inequality at the 1 percent level of significance for both developed and developing countries, and a net loss in FDI inflows also have a significant adverse effect on income inequality.

Also, comparing the marginal effects of net FDI inflows between Regression 7 and 8, FDI has a much larger impact on inequality in developing countries than developed countries. This result may be because developing countries tend to have less regulated labor markets and a weaker presence of unionization, where Calderon and Chong (2009) find that labor market regulations have an adverse effect on income inequality. Thus, causing income inequality for developing countries to have a stronger positive relationship with a gain in net FDI inflows.

Now from a policy standpoint…

As seen from recent events this issue of income inequality has significant social impacts, which may lead to social unrest. Results show trade reduces inequality and typically trade is associated with transfer or welfare programs that compensate the losers of increased trade. From a policy standpoint, and as countries continue to experience growth, it is important that governments in developing countries have well established welfare programs, as it is a proven and common practice in developed countries dealing with the consequences of increased trade. In general however, theory shows that the benefits of trade tend to diffuse through a country’s economy, having a relative benefit on all households with an increase in trade. Results also show that FDI raises income inequality and intuition might suggest that recipients of FDI, countries experiencing a net gain in FDI inflows, should also similarly experience a negative relationship of income inequality. However, FDI tends to be concentrated in industries and the richest part of a country where wages are higher. So, this explanation weakens the relationship of FDI and low wages, which consequently increases income inequality. Thus, policymakers need to take measures to reduce the negative effects of FDI, perhaps by offering tax breaks or subsidies to industries or subsets of these industries without FDI to bridge the wage gap between those within-industries that are with and without FDI.

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Gold Standard and the U.S. Deficit

•August 26, 2012 • Leave a Comment

A few days ago, CNN was showing on the LCD TV in the gym I was working out in and I read a headline saying the republican GOP wants to consider reverting back to the Gold Standard. This follows in tandem with recent debates to abolish the Federal Reserve, which presents the classical-based, supply-side, thought that discretionary monetary policy is the true destabilizing element of the economy. Arguments have been made that, “If we abolish the Fed and revert back to the Gold Standard, the government can no longer deficit spend,” and that stable market forces will gravitate the economy back to equilibrium (full employment). This revisits the contrasting views of Classical-based and Keynesian economics, the supply or demand-driven economy debate, or that the market is inherently stable or unstable. But I will save this discussion of different schools of thought for another entry.

Granted, the federal deficit is definitely an important issue that must addressed, but this debt overhang it merely just a dynamic of the current crisis. Quite honestly, this notion to go back to a Gold Standard is just ludicrous, and in my opinion, this idea of Gold Standard reversion is something that really appeals to the wealthy and big business, because now there will be no entity that can influence inflation and inflate away their assets. The inflexibility of the Gold Standard would actually be much more detrimental to the economy than anything else. Any type of shocks to the economy could no longer be buffered, since monetary policy, like stimulus injection, could not be used. Plus, a Gold Standard would further implicate an obliteration of any kind of policy adjustment that could end mass unemployment through minor inflation.

The main issue with the current crisis is that there is a lack of aggregate demand. Businesses are lacking in sales because consumers cannot afford to buy goods, due from the high level of unemployment and the private debt overhang. Typically, in times where private spending is low, conventionally the government increases spending to offset the decrease in private consumption.

I know some may not agree with me here, but efforts to reduce the deficit, namely austerity measures, should really be done when the economy is not struggling, especially right now when the U.S. hasn’t experienced a downturn this bad since the 1930s. For instance, the GOP’s impulse of austerity during a time where the economy really needs more stimulus is only drawing out the recovery process and suffering for those that are unemployed. Paul Krugman, a Nobel prize winner for Economics in 2008, illustrated in the media a few months ago that U.S.’s real government spending (state and federal) per capita over the past few decades, and current 2012 levels are at all time lows. And the GOP wants to cut more public services? Krugman describes it well: “Your spending is my income, and my spending is your income. Both the public and private sectors cannot be saving at the same time because this is only dragging down any potential of economic growth, which growth is something that our country really needs right now.” Back to those who took ECON 101 in their college days, two-thirds of Gross Domestic Product in the U.S. is made up from the consumption of goods and services. So we can see implications of stopping the cycle of economic activity. A perpetual downward spiral.

Improved Survey Reponse in Light?

•October 9, 2011 • Leave a Comment


The front page of The Trinity Journal, Trinity County’s local newspaper, headlined, “Ruth fire claims four residences” (http://www.trinityjournal.com/news/2011-09-28/Front_Page). The blaze, which began on September 23rd, engulfed a little over 1,500 acres until containment. Luckily the wildfire didn’t claim any lives.

Receiving news like this only reinforces why we do this research. It feels unnerving to be doing research in an area that just experienced a wildfire incident, when our study is essentially trying to proactively prevent what they just experienced. Being a part of this research team definitely fills me with a sense of purpose and meaning, and I must say it is very empowering.

Trinity Journal Front Page on September 28th, 2011, taken from trinityjournal.com

To update, I just had a research meeting last Thursday with Dr. Wade Martin & Dr. Ingrid Martin, who have been doing environmental economic research for years and leading the project, and Dr. David Horne, professor of Marketing, all discussed the next phase in our research. We have begun to receive a lot of feedback and retrieval of data on our study area. Excitedly, our data construction has now begun and I’ve been given responsibility in compiling and completing our data set. Definitely will be a lengthy process. I am estimating that our set will be about a 250×250 size matrix; along with a 250×20 open comment matrix, and Code Book. Surely, those financial and/or healthcare analysts out there are scoffing at how little the data set probably is compared to what they are used to manipulating, but creating one from scratch for me is definitely new.

In concluding, in The Trinity Journal, there is also a trail article after this main “Ruth fire” headline explaining the Economics Department research study, which is great exposure, telling residence that we are working beside them. With the documents we have sent to Trinity County, I definitely expect to see more thorough results and contribution in our data retrieval in light of this recent wildfire occurrence.

Fire Risk Mitigation Environmental Economic Research

•September 28, 2011 • Leave a Comment

Wildfire

Dr. Wade Martin, Chairman of the Economics Department at Long Beach State University, was awarded a CSULB Multidisciplinary Research Grant to evaluate the decision making process of homeowners that are exposed to risk from wildland fires. For the past two months, in complementing my Masters studies, I have had the opportunity to work on the Fire Risk Mitigation Research Project and plan to finish out the research all the way up until publication. My main focus is Developmental Economics in the Masters Program though, still my second choice is involvement in Environmental Economics so regardless, I am still really excited to be a part of this team as I am sure much of the approach will still parallel any economic research study. To go through all the motions of every phase of research will be great so I feel really fortunate to have this opportunity!

Our focus area of study is Trinity County, up in northern California, which is a high fire risk, dense, forested area. So, summarizing our economic research study in a nutshell… “Homeowners have a variety of options to mitigate or increase their risk of loss from wildland fires. An improved understanding of their decision making process and the factors that influence their decisions will improve overall risk mitigation efforts from land management agencies and result in a more targeted risk communication message.” (From CSULB’s Office of Economics Research)

Thus far, I have been researching and annotating other economic, psychological, and sociological journals that could supplement our study, as this study seems to be very multidisciplinary, given the nature of our research. Even though we are doing economic research, there are extensive sociological and even psychological aspects that need to be accounted for in regards to analyzing the decision-making process for property owners. The past couple months we have been preparing our data collection approach to survey random samples of home and property owners in Trinity County. So far, the preparation phase tends to be much of the grunt work in laying the foundation for our research. I must say, I am looking forward to the data analysis phase of our research where we will be using an analytical statistical package called SAS, though I am sure other programs like Stata could probably accomplish the same analysis, to analyze the numerous relationships that affect the decision making process of risk mitigation. I am really interested to see though, in a time where social media is so prevalent and has become so much a part of peoples’ lives, how much of social media now really influences homeowners decisions in Trinity County for it would certainly add another dynamic to our study. Or perhaps it might not have any effect at all.

But until I our team starts receiving responses and constructing the data set. The exciting part will have to wait…

USPS’s continual existence on the deficit list.

•March 25, 2011 • Leave a Comment

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I have a bit of bias when news arises about the United States Postal Service. Particularly, activities and decisions within the Postal Service could directly affect several of my family members’ decades of federal employment in the USPS.

CNN staff reporter, Charles Riley, had announced on March 24th, 2011 that the Postal Service is slashing 7,500 administrative positions. Of course, this kind of sad news is nothing particularly new. The USPS workforce has been in reduction for quite a few years now because of the continuous loss of service. With the rise of practically digitizing all information and “transporting” it all electronically has trended fewer and fewer physical pieces of mail. Unfortunately, downward trends of revenue of the USPS will 100% likely to continue in the coming years. The real questions we need to ask is can the U.S. Postal Service be as self-sufficient as it once was or will it now forever be an added government cost?

Several months ago I was reading USA Today’s December 15th, 2010 release and came across a related comment written by the president of the National Association of Letter Carriers Auxiliary, Linda Kirby. Ironically, her published statement in the USA Today column was titled Roundup: U.S. Postal Service is self-supporting. Is the USPS really self-supporting? So I proceeded to write to the USA Today editors the next day responding to this misleading title, but suffice to say I don’t think my response was published.

Linda Kirby was arguing, “No federal tax dollars support the operations, salaries or benefits of letter carriers… and that the USPS is funded by postage revenues and the sale of other products and service.” Regrettably, it hasn’t been this way in quite some time. Riley points out that the agency net loss in 2010 summed $8.5 billion dollars, and the previous year the net loss totaled $3.8 billion dollars. Along with already cutting 105,000 full-time positions those two years. In actuality, there is not enough revenue to fund operations, salaries and benefits, because there is a complete lack of profits in the USPS! Surely, years ago the Postal Service was earning a profit with its postage revenue and sale of other products and services, but in the contemporary digital age and mainly in part of the proliferation of the Internet, those days are long gone and there is no turning back.

Privatization of the U.S. Postal Service had been an idea that has been kicked around but certainly the USPS is not something that we can just let go. The agency has also been asking Congress to allow many scale backs of its services and also to raise postage to boost revenue. Postmaster Patrick Donahoe is right that “… it is critical that we adjust our workforce to match America’s changing communications trends as mail volume continue to decline.”

Thank you Roland Martin!

•March 13, 2011 • Leave a Comment

Roland Martin, a CNN contributor, did an excellent job summing up my exact stance on our imperative need for alternative energy. I wrote a recent entry, Alternative energy, now, cannot be any more obvious, that also give further insight to really spurring the next generation energy industry. Not only addressing our dependence on oil but also addressing the U.S. competitiveness issue that is also crucial for America’s long run potential. Regrettably, America is on the trend for mediocrity if we don’t do something about it.

Oil Pump

Read Martin’s column here. I have also added it his column to the links category on the right.

The middle-class America engine is losing fuel.

•March 11, 2011 • Leave a Comment

Middle Class Comic

Barack Obama once said, “It was the labor movement that helped secure so much of what we take for granted today. The 40-hour work week, the minimum wage, family leave, health insurance, Social Security, Medicare, retirement plans. The cornerstones of the middle-class security all bear the union label.” Similar notions reveal that the middle-class of the U.S. is the major engine of American capitalism and its economy, and it is having a large middle class that attributes to large prosperity. But the past few decades, as The New York Times columnist, Paul Krugman describes in his Degrees and Dollars column, “the middle class jobs are being hollowed out.” Essentially, overall high-wage and low-wage employments are increasing, the gap is widening, and the middle class is becoming harder and harder to maintain.

History and economic patterns suggest that ultimately unemployment will ease, despite the current difficult economic conditions and slow recovery. However, the U.S. labor market has polarized considerably, placing significant strain on a great majority, so called middle class, of the American population. David Autor, a labor economist at the Massachusetts Institute of Technology, released a resourceful paper, The Polarization of Job Opportunities in the U.S. Labor Market, wonderfully illustrates this hollowing phenomenon and explains several causes for this.

Outsourcing, one contributor, has been of large concern in the U.S. for many decades now and it has practically become common practice to have a great deal of a business’ production chain to be offshore. Surely, international integration has only made the U.S. labor market almost impossible to compete with in the international labor market, consequently, driving domestic labor demand down. It is this fact that many anti-outsourcing advocates are against offshoring. Not only does it eliminate domestic employment but also it further makes the U.S. labor market even less competitive and advocates argue that, “Potential American jobs are being created in other countries, instead of the U.S.” Effectively, placing significant strain on middle wage and skilled, white and blue-collar jobs. Outsourcing is not only limited to manufacturing, but also call center, bill processing, tax preparation, and other routine information processing type jobs.

As products of globalization, the democratization of information and technology along with the dramatic drop in prices for information technology has skyrocketed automation of many routine type jobs. Autor states, “This process of automation raises the relative demand for nonroutine tasks in which workers hold a comparative advantage.” Reiterating a higher demand for high-skilled workers that can only be provided with higher education, accompanying with analytical and problem solving competencies. Additionally, this put downward pressure on workers with education levels below a four-year degree, fostering the gap even further. Autor further suggests, that the past few decades the earnings of college educated workers have steadily increased relative to non-college educated workers, and that educational attainment has not been able to keep up with educational returns. Consequently, extending the wage gap between college and non-college workers.

So what do we do then to reverse this polarization, especially if the middle class is still thought to be to major driver of prosperity? One of Autor’s recommended responses is to continuously encourage higher education as the demand for higher skilled workers increases. However, Paul Krugman completely argues, “… If we want a society of broadly shared prosperity, education isn’t the answer.” He further suggests that the solution is a more structural concern to restore the bargaining power and essential benefits to ordinary workers. In no way does Krugman convey that education is still not essential, in fact, it has become more competitively essential given the positive attainment rate of college degrees over the past decades.

Educational Attainment

"Educational Attainment in the United States: 2009". U.S. Census Bureau. Attainment statistics are cumulative.

Is this dichotomy of the labor market and income distribution just an inevitable product of globalization? Or can progressive policies replenish our deteriorating middle class?