Eco 100 Outline Inequality by Gazelle
Transcript of Eco 100 Outline Inequality by Gazelle
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ECO100: Introductory Economics
inequality and redistribution
Robert Gazzale, PhD
Department of EconomicsUniversity of Toronto
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overview
income inequality in Canada
According to the OECD1 and the CIA World Factbook:
Across countries:Canadian incomes distributed relatively equallycompared to other rich countries
Worse than Sweden, Norway, and GermanyAbout the same as France and ItalyBetter than Russia, the U.S., and Hong KongClose to midway between Sweden and the U.S.
Across time:Some evidence that distribution becoming moreunequal in Canada
much evidence that it is worsening in U.S., China.
1Organization for Economic Cooperation and DevelopmentGazzale (University of Toronto) ECO100: inequality and redistribution 2 / 20
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overview
inequality is an economic goodhow to make yourself unpopular with your non-econ friends
Inequality is an economic good: The proofImagine a world in which your income in no way depended on yourchoices.
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inequality is an economic badJohn Rawls Veil of Ignorance thought experiment
The assertionHolding everything else constant, and beforeit is determinedwho gets how much of the economic pie, most people prefer arelatively evenly divided pie (of total income) over a slightly
larger pie that is less evenly divided
Of course, it depends on the extent to which redistributionshrinks the pie!
The proof
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john rolls: holding everything constant, before anything is
determined we decide the distribution
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overview
inequality and economic growth
What is the relationship between the size of the economic pie and
how evenly it is divided?
some recent empirical evidence
International Monetary Fund (2014)
higher inequality seems to lower growthredistributing income no effect on growth
Organization for Economic Co-operation and Development (2014)
income inequality economic growthmechanism: human capital investments of least well off
duration of any particular growth spell
the traditional microeconomic analysis
redistribution of income DWL
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redistrbution may caseu totalpie to decrease: taxing
labour creates more
deadweight loss. createspotential moral hazard
problems.
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the redistribution problemredistribution expected to be costly in terms of efficiency
take from the well off
deadweight loss and taxes
societal benefits from those seeking to get ahead
give to the not-so well off
moral hazard problem: difficult to design redistribution programs
maintaining incentives to fully participate in labour market
Costly redistribution does not necessarily mean undesirable . . .
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mark twain: there are lies, damn lies and statisticsstatistics in inequality:
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Roadmap
1 overview
2 measuring inequality
some standard measuresdifficulties interpreting the measures
3 reducing inequality: policy tools
4 philosophical views on inequality
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i i li d d
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measuring inequality some standard measures
measures
1 Poverty Rate
loosely defined in Canada as percent below the low-income cutoff
2 top-bottom ratios
e.g.,ratio20 = Average household income, top 20 %
Average household income, bottom 20 %
3 Lorenz curve Gini coefficient
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missing info..therefore best way to measure inequaity is by the ginicoefficient
i i lit t d d
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measuring inequality some standard measures
Lorenz curve Gini coefficient
the trick:sort households from lowest income/wealth to highest
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canada is 2000
quintilelowest 20%
(20%-40%) second 20%(40%-60%) third 20%(60-80%) fourth 20%
(80-100%) fifth 20%
% of total income22%12.7%17.2%23.0%
39.9%
cumulative %7.2%19.9%37.1%60.1%
100%
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measuring inequality difficulties interpreting the measures
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measuring inequality difficulties interpreting the measures
interpreting inequality IWhat are we measuring?
Consider Canada in 2007:
ratio20 = Average household income, top 20 %
Average household income, bottom 20 %
beforetaxes andmoneytransfersratio25
aftertaxes andmoneytransfersratio8.8
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measuring inequality difficulties interpreting the measures
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measuring inequality difficulties interpreting the measures
interpreting inequality IaWhat are we measuring?
King Bobs proposal to reduce income inequality in Canada:
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assume: top 20 %divided by bottom 20% = $150k/$80=5after tax $ transfers
1) abolish universal healthcare2)give each HH $10000
3) force all HH to purchase insurance $10000
$160K/$40K=4
on average universal healthcare is more beneficial for poorthan rich
measuring inequality difficulties interpreting the measures
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measuring inequality difficulties interpreting the measures
interpreting inequality IIWhat are we measuring?
the absolute versus relative problem
utility versus income
some choose money over leisure; some choose leisure over money
(consider leisure time inequality . . . )
in-kind transfers generally not included
food and housing vouchersuniversal healthcare and education
changes in household composition issues
dual income families and positive assortative matchingchildren not leaving the nest
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income inequality increasing in china. in
terms of absolute ability to purchasegoods and serices. the income of bottom
chinese society increase. increase ofbottom not been as rapid as increase of
top.
US : 1) increase income inequality2) incrase in leisure time
measuring inequality difficulties interpreting the measures
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measuring inequality difficulties interpreting the measures
interpreting inequality IIIinequality is a static measure
the extreme example: choose the society you preferSociety Ceveryone gets $50,000 per year
Society Dhalf in group D1; half in group D2Odd years: D1 = $100, 000; D2 = $20, 000Even years: D1 = $20, 000; D2 = $100, 000
real world issues
transitory income shocks (see above)
the economic life cycle
mobility
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the extend of luck determines good years and bad years.
reducing inequality: policy tools
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g q y p y
reducing inequalitywhile the line between 1 and 2 is not always clear . . .
1 increase the earnings of the poor
ensuring equality of opportunity (e.g., high quality public schools)
2 redistribute
minimum-wage laws
unemployment insurancewelfare and in-kind transfersprogressive taxationthe negative income tax
cash grant or subsidize wages at low incomesphase-out grant/subsidy as overall incomes increase
Ideally, we implement redistribution programs that do not destroy
incentives to participate in the labour force . . .
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reducing inequality: policy tools
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The incentive problem in traditional social assistance
a typical programIf your income Iis less than $1000 per month, the governmentgives you $1000 Iper month. If your income is greater than
$1000 per month, the government gives you nothing.
Assume you are currently not working and thus receiving $1000 permonth from the government.
scenario IDo you accept a job where you receive $800per month for 80
hours of work?scenario II
Do you accept a job where you receive $1100per month for 80hours of work?
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reducing inequality: policy tools
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negative income tax versus traditional welfare
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philosophical views on inequality
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The Gazzale Conjectureluck versus skill
ConjectureYour beliefs on the desirability of income redistribution
is highly correlated with whether you believe inequality mostly dueto luck or mostly due to skill and choices
There appears to be a subjective/cultural component to this belief
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philosophical views on inequality
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Should we care about inequality?Other Normative Approaches
Utilitarianism (Jeremy Bentham, John Stuart Mill)
Assumption:Government ought to maximize the sum of utilityacross all individuals
Diminishing marginal utility desirability of redistribution
Liberalism (John Rawls)
Assumption:Society ought to be just.
What allocation would you choose under veil of ignorance?
Maximin criterion: improve the well-being of the worse off
Libertarianism
Society owns no income
Role of government: ensure property rights; level playing field
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philosophical views on inequality
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Some thoughts on redistribution and Utilitarianism
While we cannot compare utility across individuals . . .
It is rather plausible that taking $1000 from Bill Gates and giving itto the stereotypical cashier at WalMart will increase the sum of
utility.
Not all cases are as straightforward . . .
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philosophical views on inequality
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A more complicated case
Upon entrance to the UofT, Miwa and Wilson seemed exactly the
same . . .
MiwaStudied 12 hours/day at the UofT. Spent the next 10 years
working 12 hours per day for BMO. Earns an annual income of
$250,000.WilsonDropped out of UofT. Currently works part-time in aHawaiian surf shop, spending all of his free time surfing.
Question 1What do their choices tell us about what brings them
utility?Question 2How confident are you that taking $1000 from Miwaand giving it to Wilson will increase the sum of utility?
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