What Policies Will Really Reduce Inequality?

May 8, 2013
What Policies Will Really Reduce Inequality? Koji Yamada

In the United States, there is ongoing debate about how people of different income levels will be affected by policy decisions.

How are the “poor” (households in the bottom one or two quintiles of the size distribution of income), the “rich” (the top decile or top percentile), and the “middle class” (households “between” these two groups) affected by fiscal policies and other initiatives such as raising the minimum wage? 

In a new SCEPA/INET paper prepared for the Eastern Economics Association (EEA) conference in May, 2013, "U.S. Size Distribution and the Macroeconomy, 1986-2009," the authors use a social accounting matrix, or SAM, and a simple demand-driven model to investigate rising inequality and the effects of redistributive economic policies. The database for the paper is made available as a spreadsheet.

They find that the resulting simulations of macroeconomic policy measures do not markedly affect the distribution of household disposable income. Only policies directed at explicit wage equalization in the form of rising wages at the bottom lead to significantly greater equality.