The Economics of Inequality

Citation

Piketty, T. (2015). The Economics of Inequality (A. Goldhammer, Trans.). Belknap Press of Harvard University Press.

Chapter Summary

This is a short primer: a note to the reader, an introduction and four chapters on about 120 pages of text, followed by references, a detailed contents list and an index (about 140 pages in all). The publisher explains its origin: Piketty wrote it in French as an introduction to the concepts and facts needed to interpret changes in economic inequality over time, it became a standard guide for students and general readers in France, where it has been regularly updated, and Arthur Goldhammer's 2015 translation is its first appearance in English. It is a much shorter book than Piketty's Capital in the Twenty-First Century.

Introduction

A four-page opening (pp. 1–4). According to the publisher's description, the book starts from how inequality evolves and how economists measure it; the introduction sets up that agenda for the four chapters that follow.

Chapter 1: The Measurement of Inequality and Its Evolution

The first chapter (pp. 5–25) explains how economists measure inequality and how it has changed over time and across countries. The terms Google Books lists for the book include deciles, the ratio between high and low earners (P90/P10) and the Kuznets curve, the classic hypothesis that inequality first rises and then falls with development, which belong to this material.

Chapter 2: Capital-Labor Inequality

The longest chapter (pp. 26–65) studies the division of income between capital and labour: what determines the shares of profits and wages, and how inequality between owners of capital and workers arises. The publisher highlights the relationship between labour and capital and the nature of capital markets among the book's key ideas; the elasticity of substitution between capital and labour and the credit market appear among the book's listed terms.

Chapter 3: Inequality of Labor Income

The third chapter (pp. 66–99) turns to inequality among wage earners. The publisher names the effects of education and technological change and the role of unions as topics; human capital, the minimum wage and monopsony (employers with power to set wages) are among the book's listed terms, which places the chapter at the meeting point of labour economics and policy.

Chapter 4: Instruments of Redistribution

The final chapter (pp. 100–122) compares the tools for reducing inequality. The publisher points to the effects of different systems of taxation and the apparent tension between efficiency and fairness; the book's terms include fiscal incidence, fiscal transfers, the negative income tax and basic income, and a distinction between "pure" and "efficient" redistribution. The publisher also singles out the distinction between "historical" and "political" time among the ideas the book introduces.

Key Concepts

Introduction and Chapter 1: Measurement

• Measuring inequality: describing the distribution of income and wealth, for example by deciles and by ratios between high and low earners.
• Kuznets curve: the hypothesis that inequality first rises and then falls as an economy develops, a benchmark for the long-run evidence.

Chapter 2: Capital and Labour

• Capital–labour split: the division of national income between profits and wages.
• Capital markets: the role of credit and capital markets in who owns capital and earns its returns.
• Substitution between capital and labour: how readily one factor can replace the other, which bears on how factor shares respond to prices.

Chapter 3: Labour Income

• Human capital, education and technological change: skills and their changing price as explanations of wage inequality.
• Labour-market institutions: unions and minimum wages, and their effects in markets where employers have wage-setting power.

Chapter 4: Redistribution

• Fiscal redistribution: taxes and transfers that change the distribution of disposable income, and their incidence.
• Pure versus efficient redistribution: broadly, transfers from one group to another compared with interventions that can improve equity and efficiency together.
• Efficiency and fairness: the apparent conflict between them, which the book examines rather than assumes.

Critical Analysis

Strengths

• Compact and conceptual. In about 120 pages the book covers measurement, the capital–labour split, wage inequality and redistribution, and the publisher presents it as a guide to the conceptual and factual background needed to interpret changes in inequality.
• Joins capital and labour. Separate chapters on inequality between capital and labour and on inequality within labour income let students analyse the two separately before Chapter 4 asks which instruments address each.
• Policy is analysed, not only advocated. The final chapter weighs the instruments of redistribution against each other, including the question of when redistribution conflicts with efficiency and when it does not.
• A proven teaching text. The publisher notes that the book has long been used in France and has been regularly revised there; the detailed contents list and references at the end make it easy to use as a study guide.

Limitations

• Dated evidence. The book's data are centred on France and other Western countries around 2000 (Google Books lists "France in 2000" and INSEE, the French statistics office, among its terms); students should not expect it to reflect the larger body of evidence on top incomes and wealth assembled since, including in Piketty's own later books.
• French and European framing. Many examples and institutions are French, so readers elsewhere will need to translate the policy discussion to their own tax and benefit systems.
• Brief on technique. It is a short conceptual book, not a textbook with exercises, so students need a textbook for the analytical tools.

Where It Fits in the Course

Within this public and labour economics course, Piketty's primer is a short conceptual introduction to the distributional questions both fields share. Stephen Smith's Taxation: A Very Short Introduction is its natural pair: Smith explains how tax systems work and what they cost, Piketty asks what redistribution can achieve and why incomes are unequal in the first place. Reading both gives a good map before the textbooks.

Jonathan Gruber's Public Finance and Public Policy develops the tax and transfer analysis of Piketty's Chapter 4 with theory and empirical evidence; Ehrenberg, Smith and Hallock's Modern Labor Economics treats human capital, unions and minimum wages, topics of Piketty's Chapter 3, at full textbook length. Cahuc, Carcillo and Zylberberg's Labor Economics is a graduate text and comes much later.

How to Use This Book

No prior economics is required, although an introductory course helps with the discussion of markets and wages.

• Read it whole. At four chapters it can be read in a week; read the short Note to the Reader first.
• Core chapters: 2 and 3 are the analytical heart. Read Chapter 2 alongside the labour-share and capital material of a macroeconomics or public finance course, and Chapter 3 before the human-capital and union chapters of a labour textbook.
• Chapter 4 for policy work: use it to prepare essays on taxes and transfers, and pair it with Smith's chapters on incidence and economic costs.
• Update the numbers. Treat the data as illustrations of the method; check current figures in recent statistical sources and in Piketty's later work before using them in an essay.

The detailed contents list at the back of the book is a useful revision outline once the chapters have been read.