Monday Morning Links

Miscellaneous material to start your week.

- Miles Corak offers a must-read paper on the two stories most often told about inequality in Canada, reaching this conclusion on the recent accumulation of wealth at the top of the income spectrum and the readily observable inequality of opportunity based on the inheritance of social and economic capital:

(C)areful analyses lean toward the view that higher rents may be behind the greater incomes of the Canadian top 1 percent. Lemieux and Riddell (2016) conclude their detailed study by saying:

On balance, we think that our findings are more consistent with a rent-extraction story than with a market-based explanation…. Although some high incomes are surely compensation for hard work, the growth in top incomes over time has been so large that rent extraction must be the major contributing factor. (134)

They show that top earners are particularly concentrated in certain professions. For example, about one-quarter of those with top-1-percent incomes in 2011 are trained in medicine, law and jurisprudence, or business and commerce. Over a 20-year period, the fraction of the top 1 percent working in finance doubled from about 5 to 10 percent, as did the fraction working in oil and gas extraction industries, moving from less than 3 percent to more than 7 percent of all top earners. This is consistent with research by Murphy and Veall (2015), who document that the top 1 percent are disproportionately found in Toronto and Calgary. Together, these facts are all suggestive of the possibility that institutional factors—such as the capacity to negotiate the terms of compensation from governments, as in the case of doctors, or from boards of directors, as in the case of senior managers—determine pay. They are also suggestive of the possibility that factors beyond individual effort, such as commodity price and exchange rate movements, also create opportunities for higher pay.
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(T)he most common way to find a job is through family and friends. That holds true for all of us, but it is immensely more likely for the kids of the very rich. Corak and Piraino (2016, 2011) show that about 40 percent of young Canadian men have at some point worked for exactly the same firm that at some point also employed their fathers. But if dad's earnings put him in the top 25 percent, these chances are above average; they start taking off if dad is in the top 5 percent and are higher still for top earners. Almost 7 out of 10 sons of top-1-percent fathers had a job with an employer that had also employed their fathers. All parents want to help their children in whatever way they can. However, top earners can do it more than others, and with more consequence: virtually guaranteeing, if not a lifetime of high earnings, at least a good start in life.

Connections matter. And for the top earners this might even be nepotism. This is not a bad thing if parents pass on real skills to their children, skills that might be specific to particular occupations, industries, or even firms. If this is the case, then it makes economic sense to follow in your father's footsteps. Wayne Gretzky often talked about the role his father played in developing his skating and stick handling skills. They spent hours and hours together on the backyard rink. But not all top earners got to where they are because of this sort of investment. In fact, sons of top-earning fathers who do not work at the same employer as their fathers are much more likely to fall out of the top than those who do (Bingley, Corak, and Westergard-Nielson 2012). Bad nepotism promotes people above their abilities by virtue of connections, and it erodes rather than enhances economic productivity. Richard Reeves (2013) of the Brookings Institution encapsulates this intuition when he speaks of a “glass floor” supporting untalented rich kids, a floor that at the same time limits the degree of upward mobility for others.

- Meanwhile, Robert Reich discusses the likely effects of the Trump administration - which of course include making the U.S.' appalling income and wealth inequality all the worse. And Noah Smith highlights the needed development of economic targets to address inequality - though I'd question his implicit view that we should assume that unmeasurable factors such as "the social prestige and self-respect that come from having a job" deserve special mention, while the well-documented costs in health and welfare arising out of poverty and inequality can be ignored.

- PressProgress examines what Brad Wall has gone out of his way to avoid recognizing about climate change - though I'd consider them to be overly generous in stopping at five points.

- Finally, Thomas Levenson makes the case for far more public investment in pure scientific research.