econscius

Archive for the ‘Inequality’ Category

Why Applaud “Reverse Robin Hood”, Regressive Lotto?

In Inequality, Top 1% on March 30, 2012 at 11:34 pm

Sorry, you didn’t win! 

At the risk of sounding curmudgeonly, may I ask why large Lotto prizes are covered breathlessly in the media?  Why are so few of the people who generally complain about what they call “Reverse Robin Hood” wealth transfers so quiet about PowerBall?

Today, the media has been focused on the $640 million MegaMillions payout.  Why?

A new “1%”er will be minted.

Tens of millions of Americans, many poor, working class and struggling, will have used some of their meagre excess money to purchase losing tickets.

Wealth will be more concentrated.

Please do not get me wrong.  It is every adult’s personal choice whether or not to play Lotto.  For many, a $5 or $10 purchase is not a major financial imposition.  I suspect many do it for the psychological thrill of what they would do with the money if they win the jackpot. 

Full disclosure:  I have never played any form of Lottery in my life.  Perhaps I am no fun.  🙂  Perhaps I am too mathematical and analytical; I cannot overlook the fact it is a sucker’s bet. 

Illinois Lottery.svg

Interestingly, many studies have found scientific evidence the poor are the most likely to play Lotto. [1] [2] [3]  A study by the University of Georgia found, “respondents with more education, especially a post-graduate degree, were least likely to have purchased a lottery ticket in the past year.”  [3]

Just for fun, I ran the numbers on what a hypothetical poor lottery player is foregoing.  If a person plays $10 per week for 30 years, they give up $15,600.  That is more than many low-income people even save for retirement.  When you add the impact of compounding, assuming an annual return of 6%, the amount that would have been saved is a sizable $41,100.  If those $10/week were used to pay down debt, most loans are above 6%.  Six percent also is a reasonable long-term stock market return. 

Yes, I understand people playing lotteries for fun.  I question, though, why the media needs to hype large jackpots.  I am surprised the Occupy crowd is so silent about the “Reverse Robin Hood” effect of lotteries.  I also recommend anyone who is struggling financially, please use the $5 or $10 or $20 to pay a little extra against credit cards or car loans, rather than squander it on making someone else worth a half billion dollars overnight.

Then you wouldn’t be bothered tossing your losing ticket out.

If you enjoy lotteries, why?  Do you also save?  Please comment below.

[1] http://old.post-gazette.com/pg/08207/899406-298.stm

[2] http://arkansasnews.com/2009/07/26/sc-studies-show-poor-blacks-most-likely-to-play-lottery-often/

[3] http://www.cviog.uga.edu/free-downloads/70.pdf

Pictures from Wikipedia Commons.

Minimum Wage Workers: 5.4% of Texas Workforce

In Inequality, Job Creation, Minimum Wage, Texas on January 28, 2012 at 10:57 pm

Some left-leaning websites state Texas is heavy with minimum wage jobs.  I looked and using data from the US government’s Bureau of Labor Statistics, the proportion earning at or below the actual minimum wage rate in Texas is only about 5.4%. [1]  Hardly scandalous.

Furthermore, minimum wage workers tend to be young, with a full one-quarter of all teenagers earning minimum wage (full disclosure: that was me, once upon a time!). [2]  The average age in the US 2010 Census was 37.2.   The average age in Texas was 33.6, making it the second youngest state of 51 (including DC). [3]  This means we would expect Texas to be unusually high on minimum wage workers.

Texas has lower taxes (on income tax, actually) and a lower cost of living so a minimum wage worker in Houston lives much better than a minimum wage worker in a similar sized metro area like San Francisco.

For more on impressive job growth in Texas, see my posts https://econscius.wordpress.com/2011/09/03/stellar-texas-job-growth-in-above-average-wage-cities/, https://econscius.wordpress.com/2011/09/11/stellar-job-growth-in-high-wage-austin-texas/, and https://econscius.wordpress.com/2011/10/06/astronomical-job-growth-in-houston-texas/.

 

 

Footnotes:

[1] Calculation:  according to the BLS, 550,000 Texas hourly workers were at or below the minimum wage (http://www.bls.gov/ro6/fax/minwage_tx.htm) but there were 10,089,870 total workers in the state of Texas (http://www.bls.gov/oes/current/oes_tx.htm#00-0000), indicating only about 5.4% of workers were minimum wage.   Note the BLS tends to discuss minimum wage in terms of hourly workers, rather than total workers, for the obvious reason salaried workers are almost never at, or even close to, the minimum wage.  Nearly half of Texas workers are salaried.

Note: some workers, for example restaurant wait staff, may legally be paid below the minimum wage.

[2] Quoting directly from the BLS: 

“Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly-paid workers, they made up about half of those paid the Federal minimum wage or less. Among employed teenagers paid by the hour, about 25 percent earned the minimum wage or less, compared with about 4 percent of workers age 25 and over.” (http://www.bls.gov/cps/minwage2010.htm)

[3] http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf

Pictures from Wikipedia Commons (Austin, TX skyline & San Antonio, TX Riverwalk).

Which City Has The Most Inequality: New York or Salt Lake?

In Gini Ratio, Inequality on October 28, 2011 at 1:44 am

Following up on my state level inequality post, the Census Bureau has now released metro area details, also based on Gini ratios.  [1]  New York City has the greatest level of inequality, which is quite consistent with the hypothesis I advanced in https://econscius.wordpress.com/2011/10/21/which-state-has-the-most-inequality-texas-or-new-york-why/.

Salt Lake City was the most equal metro area. 

Coincidentally, Salt Lake City’s Utah is arguably the most Republican in the nation, whereas New York City and New York State are amongst the most Democratic.  This presumably is the opposite of what many expect.  As shown in my state inequality post, higher income tax rates are not even correlated with equality.

The least equal metros are:

1. New York City [labor specialization in finance, fashion, advertising and media]

2. Miami-Fort Lauderdale [home of many wealthy retired New Yorkers]

3. Los Angeles [a city with a high degree of labor specialization in entertainment, as mentioned in my post]

4. Houston [a city with a high degree of labor specialization in energy]

5. Memphis

6. New Orleans

7. San Francisco [a city with a high degree of labor specialization in technology]

8. Birmingham, AL

9. Chicago [a city with a high degree of labor specialization in finance]

10. Boston [labor specialization in biotech and technology]

It is interesting and perhaps not coincidental that other highly unequal cities are located in the Deep South and smaller than the other top 10 (Memphis, New Orleans, Birmingham).  One might hypothesize some vestiges of historic racial discrimination might possibly be a factor.  But, some of the least unequal (e.g. Virginia Beach-Norfolk #2 least unequal is Deep South and Raleigh-Cary, NC and Richmond, VA are also below average inequality).  The trick with testing such a theory is it is difficult to measure city by city “racism” in an objective statistical way.   Other factors, such as education systems, might also be a contributor to inequality in those Deep South cities.

My urbanization-concentrated specialized skills theory was as follows:

“Why would sparsely populated states be more equal and densely populated states have a greater gap between the rich and poor?  I hypothesize higher density means more urbanized areas, which means more specialization of skills.  The economic concept of division of labor shows how the greatest economic benefits come from having each person focus on what they are most economically productive at and then trading their output with the output of someone else for all other items.  One way to think of it is to imagine Steve Jobs working in isolation in a rural area.  He would have less time to spend inventing computers and whatnot if he was unable to employ other people to mow his lawn, clean his car and other household chores.  Imagine if he had to do his own legal work, build his own house, cook his own food because there were no restaurants, etc. 

Large cities allow a high degree of division of labor.   Urban areas tend to be centers of economic specialization.  There are centers of specific industry specialization such as entertainment in Los Angeles, energy in Houston, finance and media in New York, insurance in Hartford, government in Washington DC, pharmaceuticals in New Jersey, autos in Detroit and technology in San Jose.  Most cities provide network benefits for commerce.  Corporate headquarters are mostly found in large metropolitan areas as employers can easily find necessary skilled workers in management, marketing, human resources, accounting, law, consulting and finance. 

The concentration of highly paid professionals in these large cities also leads to a concentration of poorly paid service workers because of the high degree of division of labor.  Whereas a small town worker may handle many household chores on their own, the highly compensated professionals around big cities like Los Angeles and New York hire maids, nannies, gardeners and even dog walkers.  They outsource some of their work to dry cleaners and restaurant employees.  They also may do more retail shopping, which means more need for low skill, low wage workers at retailers plus truck drivers and distribution center workers to deliver the goods.  It is no surprise, then, that large cities like Chicago, New York, Detroit and Los Angeles are both very rich and very poor at the same time.” 

The wealthy professionals living in Atherton, CA, Huntington Beach, CA, Wilmette, IL, Grosse Point, MI and Irvington, NY trade some of their copious amounts of money for leisure time by sub-contracting low skill work like house painting and pizza delivery to low skill workers.  These low skilled workers are generally paid below average wages, which helps explain why the large cities, and the states they reside in, are both rich and poor.  This helps explain the high Gini ratios in the more densely populated states.” [2]

 

[1] http://www.census.gov/prod/2011pubs/acs-16.pdf.  Technically, the non-state District of Columbia is less equal than any state.

[2] https://econscius.wordpress.com/2011/10/21/which-state-has-the-most-inequality-texas-or-new-york-why/

Which State Has The Most Inequality? Texas or New York? Why?

In Gini Ratio, Income Tax Rates, Inequality, Texas on October 21, 2011 at 12:25 am

Econscius looked into economic inequality by state and found some surprising facts.  Which state did you think has the most economic inequality, defined by the government’s Gini ratio?  Did you guess Texas or Alabama?  The Gini ratio measures unequal outcomes in wealth; a ratio of 0.0 would mean everyone had exactly the same and a ratio of 1.0 would mean one person held all the wealth.

The District of Columbia has the highest level of inequality (Gini ratio of 0.532).  New York has the highest state ratio at 0.502, followed by Connecticut, Texas, Louisiana, Alabama, Mississippi, Illinois, Georgia and Massachusetts which rounds up the Top 10 with a score of 0.468.

The state with the lowest Gini ratio is Alaska at 0.402.  Utah is second most equal at 0.414, followed by Wyoming at 0.415.

Econscius ran several regression analyses of the most recent state Gini ratios, looking for correlations that would help identify the cause(s).  First, I compared “Right to Work” states against the tally of state Gini ratios, expecting the comparative absence of unions might be a factor.  “Right To Work” states prohibit closed shops (mandatory unions).  But there is no statistical correlation (RSquared = 0.01), which can be easily seen by the high rate of dispersion in the graph below.  An interesting follow-up may be to see if there is any difference using the unionized proportion of the workforce in place of Right To Work state.

State Gini Ratio vs Right to Work (1 = yes, 0 = no)

The scatterplot below shows a rather loose relationship between average income and Gini ratio.  The trend line shows high income states tend to be slightly more equal than lower-income states.  (R-squared is 0.08).  In statistical terms, income and Gini ratio should be impacted by co-variance (the two variables are not independent of each other), making it a less than ideal measure.

State Gini Ratio Vs. Median State Income

Next, I ran a regression of Gini ratio against Net State Income Tax Rate, as calculated by the National Bureau of Economic Research.  The NBER is best known as the group that officially dates recessions.  As seen in the graph below, the trend line is the opposite of what one might expect.  Higher state income tax rates actually imply slightly higher inequality (R-squared 0.08). 

The scatterplot graph below clearly shows how the highest inequality states of New York and Connecticut have high taxes and several of the states with no income tax have the lowest Gini ratios, e.g. Wyoming and Alaska.  While higher income taxes are not well correlated with equality, an observation is states known for high property taxes (which are regressive) are bundled amongst the most unequal, including New York, Connecticut, New Jersey, Florida and Illinois.

State Gini Ratio vs. Net State Income Tax Rate (NBER 2009 Tax Data)

Lastly, let’s look at state Gini ratio vs. population density (people per square mile) .  This regressed variable has the strongest correlation with Gini ratio (R-squared 0.14). 

Why would sparsely populated states be more equal and densely populated states have a greater gap between the rich and poor.  I hypothesize higher density means more urbanized areas, which means more specialization of skills.  The economic concept of division of labor shows how the greatest economic benefits come from having each person focus on what they are most economically productive at and then trading their output with the output of someone else for all other items.  One way to think of it is to imagine Steve Jobs working in isolation in a rural area.  He would have less time to spend inventing computers and whatnot if he was unable to employ other people to mow his lawn, clean his car and other household chores.  Imagine if he had to do his own legal work, build his own house, cook his own food because there were no restaurants, etc. 

Large cities allow a high degree of division of labor.   Urban areas tend to be centers of economic specialization.  There are centers of specific industry specialization such as entertainment in Los Angeles, energy in Houston, finance and media in New York, insurance in Hartford, government in Washington DC, pharmaceuticals in New Jersey, autos in Detroit and technology in San Jose.  Most cities provide network benefits for commerce.  Corporate headquarters are mostly found in large metropolitan areas as employers can easily find necessary skilled workers in management, marketing, human resources, accounting, law, consulting and finance. 

The concentration of highly paid professionals in these large cities also leads to a concentration of poorly paid service workers because of the high degree of division of labor.  Whereas a small town worker may handle many household chores on their own, the highly compensated professionals around big cities like Los Angeles and New York hire maids, nannies, gardeners and even dog walkers.  They outsource some of their work to dry cleaners and restaurant employees.  They also may do more retail shopping, which means more need for low skill, low wage workers at retailers plus truck drivers and distribution center workers to deliver the goods.  It is no surprise, then, that large cities like Chicago, New York, Detroit and Los Angeles are both very rich and very poor at the same time. 

The wealthy professionals living in Atherton, CA, Huntington Beach, CA, Wilmette, IL, Grosse Point, MI and Irvington, NY trade some of their copious amounts of money for leisure time by sub-contracting low skill work like house painting and pizza delivery to low skill workers.  These low skilled workers are generally paid below average wages, which helps explain why the large cities, and the states they reside in, are both rich and poor.  This helps explain the high Gini ratios in the more densely populated states.

These four regression analyses do not explain all of the differences in Gini ratios.  While income tax rates have no relationship, it is possible a measure of to marginal tax rates on the rich may be a factor.  We did not look at state and local sales and property taxes.  Other possible explanations may include educational attainment dispersion within each state, the types of industries prevalent in a state, immigration levels, and even cultural differences between states. 

We found New York is actually less equal than Texas, which probably surprises most people but likely reflects the high density of population in metro New York City where many highly compensated, high skilled workers reside as well as many low pay, low skill workers who serve their day-to-day needs.  As we have seen in my posts on Texas, (https://econscius.wordpress.com/2011/09/03/stellar-texas-job-growth-in-above-average-wage-cities/) it is increasingly densely populated and affluent in its large metro areas of Dallas, Austin, San Antonio and especially, Houston.   Metro Houston is the 3rd largest home of Fortune 500 HQs and is now the major home of the energy industry’s professional staffs (senior management finance, legal, accounting, engineering).  Progressive, union-friendly states like Connecticut and Massachusetts are less equal than Right To Work states like Nebraska and Kansas.  It appears one factor is the densely populated concentrations of skilled workers such as hedge fund and insurance workers in Connecticut and biotech and technology in suburban Boston. 

I believe Gini ratio and measures of inequality are overhyped.  If a richer neighbor of mine accidentally drops some of his property, say his iPod, in a river, inequality has been slightly reduced but am I better off?  Nevertheless, the evidence on state Gini coefficients suggests there is no diabolical plot causing high inequality.  Several of the least equal states like New York, Massachusetts and Connecticut are reliably Democratic, high tax and union friendly.  The District of Columbia is the most unequal of all.  The inequality must come from other sources, certainly including the concentration of highly paid, skilled workers in those states. 

 

Notes:

Chart 1: 2009 Gini coefficient data (latest available) from http://en.wikipedia.org/wiki/List_of_U.S._states_by_Gini_coefficient retrieved 10/18/11.   Right-To-Work states from http://en.wikipedia.org/wiki/Right-to-work_law retrieved 10/18/11.

Chart 2: 2006-7 average data (latest available) from http://en.wikipedia.org/wiki/List_of_U.S._states_by_median_income retrieved 10/18/11.

Chart 3: 2009 data (latest available) from http://www.nber.org/~taxsim/state-marginal/avrate.html, retrieved 10/19/11.

Chart 4: Population Density from http://en.wikipedia.org/wiki/List_of_U.S._states_by_population_density retrieved 10/18/11.

Pictures from Wikipedia Commons.

Your comments are welcomed!  What do you think causes inequality?