Inequality

1. Inequality

2. Outline: Inequality Definitions: inequality and discrimination Initial views of inequality Does inequality matter? The Kuznets curve Revised views of inequality Issues of measurement: Gini coefficients and income shares and their uses Understanding mobility

3. Inequality Defined Poverty is an absolute measure; how much does someone earn compared to some standard? Measures of inequality or the distribution of income are relative� They capture the income of some individual or group compared to others.

4. Inequality of What? As with our discussion of poverty, the measurement and analysis of inequality need not be limited to income but can include: Inequality of assets or wealth Inequality in the distribution of services (and related opportunities; WDR) Inequality in health or education outcomes

5. Inequality Among Whom? Again as with poverty, we can focus on inequality across households or individuals� �but just as we can consider poverty within different groups, so we can consider inequality across different groups� Ethnic groups Gender Regions Countries �including by social outcomes Inequality between the more and less educated

7. Inequality and Discrimination Inequality (of income, assets or other goods) is often associated with--but should be distinguished from--discrimination Acts that adversely affect opportunities based on characteristics that are not relevant (the relevancy standard): race, religion, sexual preference Market discrimination: labor markets, housing Non-market discrimination: access to public education, health or other services Discrimination is a cause of income and asset inequality� �and its effects may persist after discrimination has ceased (the problem of remedies)

8. Inequality: the Received Wisdom The early stages of growth are (inevitably) associated with rising inequality� �as workers are pulled out of low-productivity, low-wage agriculture into higher-productivity modern sector employment (the Kuznets curve) Rising inequality and falling poverty can coexist� �but over time, inequality will fall

10. Poverty in China is falling�(Headcount index, percent)

11. Does Inequality Matter?Skeptical Views Poverty is a more pressing ethical imperative than inequality; Ie., if you can improve the living standards of the poor at the cost of some inequality, it�s worth it to do so Concern about inequality and relative standing is not rational (�envy�) Inequality reflects a �natural� distribution of talents and capabilities, as well as effort Inequality is good because it creates incentives for effort, and efforts to overcome it (by taxes and redistribution) stifle effort

12. New (and Contending) Views on Inequality The Kuznets curve (probably) does not exist Countries have various experiences with inequality In some, growth is associated with rising inequality� And in others, growth is �pro-poor�

14. New Views of Inequality II More unequal countries appear to grow less rapidly than more equal ones� And since economic growth increases employment and wages, it (should) be good for the poor Mechanisms in dispute, but perhaps: Inequality breeds social and political resentments and conflicts that reduce investment? Inequality in income and (other) assets is associated with unequal investment in human capital (particularly education) and inequality in other government services that lowers growth? Inequality biases political processes in ways that are not only unfair, but also inefficient

15. New Views of Inequality III Income is positively related to health Richer countries have better health Richer and better endowed individuals in poor countries have better health and better access to health (next slide) But holding income constant, more unequal countries appear to have worse health outcomes (measured by life expectancy and morbidity) Psychological mechanisms: depression, stress, anxiety Social networks are denser in more equal societies Adverse health effects via higher levels of violence Political economy: conflict over the nature of health services provided

18. Ethical and Incentive Arguments Poverty and inequality are linked Growth can result in a decline in poverty (China example), but reductions in inequality in income, assets and access to services can also decrease poverty Inequality in income and assets are associated with inequality in political power, which influences patterns of government spending and services Inequality violates notions of fairness and justice

19. Measuring Inequality I: the Gini Coefficient A summary statistic of income distribution. Arrange individuals or households from poorest to wealthiest along the horizontal axis. Draw a vertical line that shows the cumulative share of income earned by the cumulative share of the population (the Lorenz curve) Gini: the area between the diagonal and the curve, divided by the whole area of the triangle.

21. Gini Coefficients II A straight diagonal line indicates perfect equality (ie. the first 20 percent of population gets 20 percent of income, and so on.) Gini would be bounded by 0 (zero) If one person earned all the income, and everyone else earned none, the Gini would be 1. Ginis can be constructed not only for income, but for assets such as land and education

23. Income inequality in the US(Gini coefficients)

25. Income Shares Disadvantage of Ginis: not sensitive to income at bottom of distribution Alternative measures: Income (or asset) share of bottom 10% or 20% Income (or asset) share of top 20% (or 10%, 5% or 1%) Ratio of top 20% (or 10m etc.) to bottom 20%

31. Studying Mobility Just as poverty is dynamic, so is the distribution of income Mobility studies track the relative position of an individual or group over time (even between generations) And therefore need panel data A basic tool is the mobility or transition matrix

33. Transition Matrix with No Mobility

34. US Income Transition Matrix, 1968-1991

37. Summary: Things to Know Inequality So what? The inter-related nature of inequalities: of income, assets, services, political power Measuring inequality and mobility Ginis Income shares Income ratios Mobility and transition/mobility matrices