RESEARCH AND CRITICAL REVIEW EXERCISE

Research and Critical Review Exercise

Indtsructor:

Article: Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality

The article presents how some researchers such as Emmanuel Saez and Thomas Piketty have advanced the public’s understanding of wealth inequality and income. Thus, the article highlights issues on how income and inequality issues relate to macroeconomics and economic theories such as the distribution of income and wealth among other economic factors. The article attempts to show how much inequality exists in the labor and capital income. The author uses economic concepts accurately to show the inequality that exists in income. For instance, the author uses concepts such as GDP to present how capital income is attained, which is then used to present the inequality in income. Thus, it leads to the economic concept identified as the pareto distribution. The Pareto Distribution presents the la of probability distribution that effectively shows income inequality.

The article is related to the microeconomics through showing how income inequality occurs in labor while in macroeconomics it relates the inequality to capital income (Mankiw, 2014). The article handles the issue of inequality in a perspective of individual and national levels (Baumol & Alan, 2015). As the author attempts to relate capital and labor income between the split of GDP, where the entire wealth is relevant to the population, while leading to the overall inequality in distribution.

Pareto distribution is considered as a key issue to understanding the factors influencing the top inequality distribution of income. Pareto distribution deals with the fraction of income earned by top earners and that of low earners while Piketty is all about the top share (Piketty & Emmanuel, 2001). The article has demonstrated that the top share varies from the Pareto distribution (Jones, 2015). Where an increase in the income earned by the top earners increases the top share in income. Consequently, the difference in the income sharing leads to the labor income inequality.

The theory of top income inequality as used in the article explains the purpose of Pareto distribution in income sharing while providing the economic factors that influence its occurrence (Arnold, 2015). The Pareto economic determinant is dependent on the income growth. According to the article, wealth inequality is more than the income inequality identified. Wealth is accumulated over time, while it is not obtained easily as a monthly income or other salaries. Pareto inequality is also perceived in the wealth inequality (Heathcote, et al., 2010). That is; the inequality derives from the exponential growth of income attained over time.

In wealth, inequality is linked to the interest rates tied to growth rate of the wealth. The growth in wealth occurs against the overall economic growth. The income between capital and labor and that of wealth and income leads to the economic concept identified as between-inequality. That is; aggregate changes in the national income lead to high inequalities, where growth in wealth also leads to inequality. Thus, the article presents how top share distribution inequality occurs. The inequality occurs between the 10 percent of the top earners and the rest of the population (Corak, 2013). The article focuses on labor income inequality.

The article is well written where it begins by describing some of the concepts implied in the article, the later presents how it is related to income inequality or wealth inequality while showing how the wealth and income inequality and labor vs. capital income related to each other and instigate income inequality growth. The article is written in a way that one understands easily where all concepts are followed by a theory showing evidence of what the author stipulates, which is effective in understanding the labor income and wealth inequality and its relations to the population and economy in general.

From the article, I have learnt that labor inequality of income is mainly linked to the depressions experienced in economies that affect the business incomes wages and salaries, and the capital income (Jones, 2015). Capital income will always have a higher distribution followed by the business and wages later (Jones, 2015). Thus, in the distribution of the labor income, the capital earners have higher proportions compared to the employees. That is; the government and other people who are at the higher social classes will earn more than the employees linked to the distribution of the labor income. The inequality is related to the fraction of people that attain high incomes and those with the lower incomes. Income and wealth inequality play significant roles in the economy as wealth creation lingers to grow. The assumed growth in wealth accumulation is linked to factors such as interest rates, time and growth, which lead to the growing inequality in income and wealth as presented in the article.

References

Arnold, B. C., 2015. Pareto distribution. New York: John Wiley & Sons, Ltd.

Baumol, W. J. & Alan, S. B., 2015. Microeconomics: Principles and policy. New York: Cengage Learning.

Corak, M., 2013. Income inequality, equality of opportunity, and intergenerational mobility. The Journal of Economic Perspectives , 27(3), pp. 79-102.

Heathcote, J., Fabrizio, P. & Giovanni, L. V., 2010. Unequal we stand: An empirical analysis of economic inequality in the United States, 1967–2006.. Review of Economic dynamics , 13(1), pp. 15-51.

Article: Jones, C. I., 2015. Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality. Journal of Economic Perspectives, 29(1), pp. 29-46. Retrieved from: http://web.stanford.edu/~chadj/piketty.pdf

Mankiw, N. G., 2014. Principles of macroeconomics. NY: Cengage Learning.

Piketty, T. & Emmanuel, S., 2001. Income Inequality in the United States, 1913-1998 (series updated to 2000 available). National bureau of economic research. No. w8467.