“The Piketty Transition” by Prof. Eric R. Young
Eric R. Young
University of Virginia
Daniel R. Carroll
Federal Reserve Bank of Cleveland
We study the effects on inequality of a "Piketty transition" to zero growth. In a model with a worker-capitalist dichotomy, we show first that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth can raise or lower inequality, depending on parameters, but the effect operates through changes in capitalist labor supply and not through returns. Extending our model to include idiosyncratic wage risk we show that growth has quantitatively negligible effects on inequality, and furthermore the effect is negative rather than positive. Finally, following Piketty's thought experiment, we study how the transition might occur without declining returns; here, we find inequality decreases substantially if financial innovation acts to reduce idiosyncratic return risk, and does not change much at all if it acts to increase capital's share of income.