Inequality and Poverty: Agenda

1
Inequality and Poverty Agenda

• Inequality and Poverty Measurement
• Technical University of Lisbon
• Frank Cowell
• http//darp.lse.ac.uk/lisbon2006

July 2006
2
Introduction

• The course focuses on inequality and poverty
  analysis
• develop theoretical approaches
• prfactical applications as illustration
• Begin with something very simple indeed
• What do we know?
• Data
• Tools
• Comparisons
• Then to some questions
• Methods
• The way forward

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Overview...
Inequality and Poverty Agenda
Income distribution
What we know about the US
Inequality
Poverty
Methods
4
What do we know? data

• Try a simple thought experiment
• Use the Current Population Survey data
• See DeNavas-Walt et al (2005)
• Data, descriptions and computations
• Just take standard definitions
• Do everything in 2004 dollars
• Focus on income of households
• What do the data tell us?
• Key tables
• Begin with Table A-1

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What is income? (1)

• 1. Earnings
• 2. Unemployment compensation
• 3. Workers compensation
• 4. Social security
• 5. Supplemental security income
• 6. Public assistance
• 7. Veterans payments
• 8. Survivor benefits
• 9. Disability benefits
• 10. Pension or retirement income

• 11. Interest
• 12. Dividends
• 13. Rents, royalties, estates trusts
• 14. Educational assistance
• 15. Alimony
• 16. Child support
• 17. Financial assistance from outside the
  household
• 18. Other income

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What is income? (2)

• Covers money income received
• exclusive of certain money receipts such as
  capital gains
• Before deductions
• personal income taxes
• social security, union dues
• Medicare deductions
• Does not include noncash benefits
• food stamps
• health benefits
• subsidized housing
• goods produced and consumed on the farm
• business transportation and facilities,
• payments by business for retirement programs.
• Lets look at the standard CPS presentation

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A snapshot view

• Gives proportions of households in each income
  category, year by year
• Straight from the official table
• Cut down to manageable number of years
• omitted population totals
• But, check in a diagram
• standard frequency polygon.

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Representing the distribution?
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Questions

• Mixed messages from this illustration
• Shifts over time make sense
• income growth
• But weird stuff on the right
• arises from arbitrary grouping
• Get more insight from a better representation
• Use the concept of quantile
• includes well-known concepts
• median, quartiles etc
• a boundary income
• Examine DeNavas-Walt et al (2005) Table A-3
• Do this for 1974, 2004
• Check out the growth

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Quantile Incomes by Households
More detail.
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Quantiles 1967 2004
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The Parade quantiles vs population
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Inequality from quantiles?

• But does this way of representing distributions
  tell us about inequality?
• Clear that growth is lopsided
• top decile grew by almost four times as much
  four times as much as bottom
• Suggests increase in inequality?
• (whatever that may be)
• We can also use quantiles to derive simple
  inequality measures
• eg 90/10 ratio
• (increased from 8.6 to 11.1)
• or ratios to medians
• Have a look at path of these ratios
• and then think again

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Quantile ratios US 1967 2004
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Overview...
Inequality and Poverty Agenda
Income distribution
More of what we know about the US and elsewhere
Inequality
Poverty
Methods
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Fuller income information

• Focus on additional income from same source
• DeNavas-Walt et al (2005) Table A-3
• Again, we dont question the definitions
• household income before deduction
• income receiver household
• Divide distribution up into five equal slices
• Compute mean income of each 20 slice

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Mean incomes by groups of households
More detail.
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Differential growth of mean incomes
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Three alternative views

• First, plot these mean incomes cumulatively
• Plot against population shares
• Do this for any given year
• Get a powerful tool
• Second, plot income shares against time
• Divide each group mean by overall mean
• Graph these for whole period
• Lopsided growth?
• Third plot income shares against population
  shares
• Do this for any given year
• Get a very powerful tool

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1 The Generalised Lorenz Curve
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2 Income shares US 1967-2004
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2 Top income shares in US
Piketty, T. and E. Saez (2003) Income inequality
in the United States, 1913-1998, Quarterly
Journal of Economics, 118, 1-39.
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3 Lorenz curve

• Natural interpretation in terms of shares
• Gives a natural definition of the Gini
  coefficient
• Use this to have a quick look at inequality in
  different countries

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Lorenz around the world
Get full version
Source World Bank (2004)
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Income or consumption?
See World Bank (2005)
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Overview...
Inequality and Poverty Agenda
Income distribution
Yet more of what we know about the US
Inequality
Poverty
Methods
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An approach to poverty

• Now use standard source to get information on
  poverty
• DeNavas-Walt et al (2005) Table B-3
• The official poverty thresholds do not vary
  geographically,
• Updated annually for inflation using Consumer
  Price Index
• Definition uses money income before taxes
• Does not include
• Capital gains
• public housing
• Medicaid
• Food stamps
• other noncash benefits

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Poverty thresholds in 2004
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Proportion in poverty1974-2004
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Overview...
Inequality and Poverty Agenda
Income distribution
Approaches for these lectures
Inequality
Poverty
Methods
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Questions to resolve

• Theoretical basis for using quantiles and shares
• Theoretical derivation of intuitive concepts
• Why use Gini?
• Why use this simple poverty concept?
• Relationships between economics and statistical
  concepts
• Place of distributional analysis in welfare
  economics
• Why be concerned with inequality and poverty?

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Approaches

• Start with welfare-economics setting
• Then move to axiomatisation
• Use empirical evidence as we go
• on the performance of indices
• on the structure of values
• But how to get evidence on values?
• Its not like consumer theory
• Use experiments
• Or questionnaire experiments
• One coming up
• Finally examine statistical problems of
  implementation

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References (1)

• Amiel, Y. and Cowell, F. A. (1999) Thinking about
  Inequality, Cambridge University Press, Cambridge
• Atkinson, A. B. (1983) The Economics of
  Inequality (Second ed.). Oxford Clarendon Press.
• Cowell, F. A. (1995) Measuring Inequality (Second
  ed.), Harvester Wheatsheaf, Hemel Hempstead.
• Cowell, F. A. (2000) Measurement of Inequality,
  in Atkinson, A. B. and Bourguignon, F. (eds)
  Handbook of Income Distribution, North Holland,
  Amsterdam, Chapter 2, 87-166
• Cowell, F. A. (2006) Inequality Measurement
  forthcoming in The New Palgrave, 2nd edition
• DeNavas-Walt, C., Proctor, B. D. and Lee, C. H.
  (2005) Income, poverty, and health insurance
  coverage in the United States 2004. Current
  Population Reports P60-229, U.S. Census Bureau,
  U.S. Government Printing Office, Washington, DC.
• Fisher, G. M. (1992) The Development and History
  of the Poverty Thresholds, Social Security
  Bulletin, 55 (4), 3-14.

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References (2)

• Jäntti, M. and Danziger, S. (2000) Income Poverty
  in Advanced Countriesin Atkinson, A. B. and
  Bourguignon, F. (eds) Handbook of Income
  Distribution, North Holland, Amsterdam, Chapter
  10, 309-378
• Lambert, P. J. (2002) The Distribution and
  Redistribution of Income (Third ed.). Manchester
  Manchester University Press.
• Piketty, T. and E. Saez (2003) Income inequality
  in the United States, 1913-1998, Quarterly
  Journal of Economics, 118, 1-39.
• Sen, A. K. and Foster, J. E. (1997) On Economic
  Inequality (Second ed.). Oxford Clarendon Press.
• The World Bank (2004) 2005 World Development
  Report A Better Investment Climate for Everyone.
  Oxford University Press, New York
• The World Bank (2005) 2006 World Development
  Report Equity and Development. Oxford University
  Press, New York