A holistic model of the whole economy & inequality

Simon D. Halliday, Harriet Brookes-Gray, Scott Cohn, and Bridget Diana

Princeton Pre-doc

Ernst & Young

UMass (PhD Candidate)

Follow along at:

“What is the most pressing problem economists today should be addressing?” 2020: approximately 3500 students from 17 universities across 8 countries responded.

2020

Over time

Big questions

• In what ways does inequality manifest in modern economies?

• What ways of measuring inequality do we teach students?

• How can we model our economies in ways that show the mechanisms producing inequality in modern capitalist economies?

• New ways of connecting micro with macro

Where/how have these ideas been taught?

• LACs and big state universities; US, UK, Germany, India & elsewhere

• Intermediate Micro; Advanced Micro; Labor Econ; Inequality seminar

• Classes of 15 to 300 (mostly UGs; some grad classes)

• DON'T HAVE SURVEY DATA; I'm just demo-ing the ideas

• Part of wider curricular reform movements (             )

Sam & I formalize the model here

(Chapters 9, 11, 13, 15)

Aspects of our model are also in CORE's The Economy and Economy, Society, and Public Policy 

Related

Chris Makler created econgraphs.org to for intermediate micro. He's also writing an interactive intermediate micro online book. 

He, Doug McKee, Bridget Diana and I have a new project on interactivity.  

All my figures are here

+ open source code

Evidence of inequality?

Wealth & income inequality, rising markups, increased profit shares, increased concentration...

Waldenström and Roine (2014)

Alvaredo, Atkinson, Piketty, Saez, and Zucman (2017)

Markup and profit share

Profit share and inequality

De Loecker, Eeckhout, and Unger (2020), Barkai (2020), WDI (2020)

The product market

Imperfect (Cournot) competition with barriers to entry

Basic Cournot

• Downward-sloping demand $$p(X) = \bar{p} - \beta X$$ Where $$X = x^A + x^B$$ for firms A and B.
• Firms impose negative external costs on each other and over-produce $$\pi^i = (p(X))x^i - cx^i$$

As n increases, markup (and markup ratio) decrease. (Cournot’s “unlimited competition”)

Standard Cournot, with increasing number of firms (increasing n)

Inequality in welfare

• Firms' economic profits decrease with the number of firms (profit per unit decreases as p decreases)

• Consumer surplus increases as n increases and p decreases

Cournot with Barriers to entry

• Barriers to entry (b) and probabilistic failure.
• Incur marginal costs (c) regardless, only successfully enter with probability (1 - b)
• Therefore expected profit per unit is: $$\frac{\pi}{x} = (1-b)(p(n) - c)$$

The labor market

Efficiency wages (labor discipline)

& barriers to entry

Sample of 2.34 million workers are males aged 26-64 over the years 1979-2013. Earnings are in 2013 dollars. Data source: BLS, Stephen Machin, 2015

The economy-wide wage curve

An economy-wide  wage curve estimated for the United States economy, 1979-2013

Blanchflower & Oswald (1994, 2005, etc)

The "whole economy"

The product market, labor market, and inequality

Lorenz curves: Wages & Profits

3 "classes" of people in corresponding proportions:

1. Unemployed (u) - get 0
2. Employed (n) - get wage shares
3. Owners of firms (1 - u - n) - get profit shares

The whole economy model: wage curve and competition condition curve

The Lorenz curve associated with the whole economy model

Conclusion?

• Tie the variables in product & labor markets to inequality
  • barriers to entry (b)
  • probability of termination (t) 
  • unemployment benefits (B)
  • labor productivity (\(\gamma\))
• Get students to think about public policy implications (through interactive models)
  • fiscal policy
  • competition policy
  • monetary policy (opp cost of capital (\( \rho\)))