Introduction to the Economics of Inequality

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Introduction to the Economics of Inequality
A B Atkinson, Nuffield College, Oxford
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• Why study income distribution?
• Inequality of what among whom? Definitional
  Issues
• Income inequality in OECD countries today
• Trends over time the Kuznets Hypothesis or has
  there been a great U-turn?

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• Central to mainstream economics
• Economics too pre-occupied with means of
  economic variables
• Income distribution assists our understanding of
  the working of the economy
• Distribution of economic resources is a social
  phenomenon we should be able to understand
• Many policy issues are at heart distributional

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Heart of Classical Economics "The produce of
earth - all that is derived from its surface by
the united application of labour, machinery, and
capital, is divided among three classes of the
community, namely, the proprietor of the land,
the owner of the stock or capital necessary for
its cultivation, and the labourers by whose
industry it is cultivated.   To determine the
laws which regulate this distribution is the
principal problem in Political Economy"   David
Ricardo, Preface to Principles of Political
Economy, 1817
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Wages Profits Rent NATIONAL INCOME
Functional distribution of income
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Earnings of Romano Earnings of
Luisa Interest on savings Pension of Luisas
mother Rent on mothers house
Personal distribution of income
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• Policy salience
• National Commissione di Indagine sulle Povertà
• EU level common social indicators
• Global Millennium Development Goals

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Primary Indicators Agreed by European Union 2001
1. Percentage of individuals living in
households with low incomes (below 60 of the
national median equivalised income) 2.
 Persistent financial poverty 3.  Depth of
financial poverty 4. Ratio of income of top
20 to that of bottom 20 5. Coefficient of
variation of regional employment rates   6.
Long-term unemployment rate   7. Percentage of
people living in jobless households   8. Early
school leavers not in further education/training
  9. Life expectancy at birth   10. Self
perceived health status by income level.
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• Summary of Millennium Development Goals by 2015
• Halve the proportion whose income is less than 1
  a day, and halve the proportion who suffer from
  hunger.
• 2.   Ensure universal primary education.
• 3.   Eliminate gender disparity in education.
• 4. Reduce by two-thirds the under-5 mortality
  rate.
• 5. Reduce by three-quarters the maternal
  mortality ratio.
•  
• 6. Have halted by 2015, and begun to reverse,
  the spread of HIV/AIDS, of malaria, and other
  major diseases.
•  
• 7. Halve the proportion without sustainable
  access to safe drinking water achieve a
  significant improvement in the lives of slum
  dwellers.
•  
• 8. Develop a global partnership for
  development.

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• Summary So Far
• Distributional issues central to economics.
• Key policy areas where salient.
• Raise a number of definitional issues, to which
  now turn.

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• Section 2
• Inequality of
• WHAT
• Among
• WHOM?

Income, Consumption, Earnings, Wealth, Lifetime
income?
What about benefits from public spending?
Individual, income recipients, nuclear family,
spending unit, household?
How do we adjust for different sized units?
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Answers may depend on objective. E.g. when
measuring poverty Economists tend to think of
consumption, but most measures use
income Consumption standard of living, But
income potential capabilities Income minimum
right
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• Y1
• Y2

• (Y1Y2)/2
• (Y1Y2)/2

• (Y3Y4)/2
• (Y3Y4)/2

• Y3
• Y4

• Y5
• Y6

• (Y5Y6)/2
• (Y5Y6)/2

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• Why study income distribution?
• Inequality of what among whom? Definitional
  Issues
• Income inequality in OECD countries today
• Trends over time the Kuznets Hypothesis or has
  there been a great U-turn?

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Checklist
Household Adjusted by OECD scale Weighted by
individuals Disposable income Annual Relative

• Reference unit
• Equivalence scale
• Weighting of observations
• Concept of resources
• Time period
• Absolute or relative?

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Sen measure of real national income Y(1-Gini)
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• Why study income distribution?
• Inequality of what among whom? Definitional
  Issues
• Income inequality in OECD countries today
• Trends over time the Kuznets Hypothesis or has
  there been a great U-turn

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• Kuznets Model of Inverse-U Shape
• Agricultural and manufacturing sectors
• Inter-sectoral income differential
• Inequality may rise and then fall in course of
  structural change

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Great progress in data availability
Compare Kuznets (1955) 5 observations for the
US, 5 for the UK and 2 each for Prussia, Saxony
and united Germany.
With Deininger and Squire 2,600 observations
on Gini coefficients and quintile shares from 135
developed and developing countries for the years
1947-1994.
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• Deininger-Squire secondary dataset assembled at
  the World Bank, now at WIDER
• Luxembourg Income Study (LIS) micro-data,
• Earnings data assembled by OECD.

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• The US income distribution is a facet of
  economic life which changes slowly when it
  changes at all (Solow, 1960)

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• By the early 1980s, inequality in the US had
  reached 1948 levels .. The figures suggest that
  the 1950s and 1960s .. were periods of unmatched
  equality (Gottschalk and Smeeding)
• the Golden Age witnessed declines in income
  inequality in a number of countries. This trend
  was reversed over the last two decades as country
  after country has experienced an upsurge in
  inequality (Cornia and Court)
• the correlation between the Gini coefficient and
  the time variable is almost zero and there is
  only a weak U-shaped relationship (Gustaffson
  and Johansson)

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Chunks of History
US
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Summary

• Significant differences across countries in
  income inequality and poverty.
• US and UK experience suggests major changes over
  time, but no simple time pattern.
• Explaining these differences and changes over
  time is a challenge.