Lect1 inequality-measurement
12
1 Economic Inequality: concept and measurement • The analysis of the distribution of income, or wealth, among different groups in society. Why? • Motivation: (i) philosophical and ethical for aversion to inequality per se; (ii) inequality in income and wealth affects the possibility of growth; (iii) DCs are prone to huge disparities in living standards Outline • Nature of economic inequality • Measuring inequality • Complete measures
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Transcript of Lect1 inequality-measurement
1
Economic Inequality: concept and measurement
• The analysis of the distribution of income, or wealth, among different groups in society. Why?
• Motivation: (i) philosophical and ethical for aversion to inequality per se; (ii) inequality in income and wealth affects the possibility of growth; (iii) DCs are prone to huge disparities in living standards
Outline• Nature of economic inequality• Measuring inequality • Complete measures
2
Economic inequality is the fundamental disparity that permits one individual certain material choices, while denying another individual those very same choices
• Disparities in wealth or income
Aspects of the distribution of income and wealth:• Over which time period we study them? Current or
lifetime inequality hide considerations of social mobility • The distribution of income can also be observed with
respect to the class of recipient (i.e. population grouped by gender, ethnicity, age, marital status and geographical area)
Perspectives on economic inequality
3
Perspectives on economic inequality 2• The distribution of income can be observed among the
population, called size (or personal) distribution of income, and can be expressed between some demographic unit: households, individual earners, or all individuals with respect to the command over some definition of income (gross or net) or expenditure.
• Functional distribution of income relates to disparities in factors of production rewards: income inequality depends on how labour, (physical and financial) capital and land are rewarded with wage, profit, interest and rent (the last two are property income), respectively.
• The distribution of wealth measures the value of a person’s assets at some point in time. It is related to inheritance, different propensities to save, investment talent/luck, and income inequality. Empirically, it is very hard to measure it because a stock of assets is measurable only when sold.
4
Perspectives on economic inequality 3
Household 2
Household 3
Household 4
Wages of DifferentSkills
Profits
Rents
Production
Household 1
Functional Distribution Personal Distribution
Ownership of Factors
Functional and personal distribution of income
5
Inequality comparisons
6
Measuring inequality: notation
• Goal: we have to develop indices that permit the ranking of (lifetime) income or wealth distributions in two different situations
• Suppose society is composed of i=1,2,…, n individuals; income distribution is a description of how much yi is received by each i: (y1, y2,… yn); we want to compare two distributions
• Inequality measure, I, is a rule that assigns a degree of inequality to each possible distribution of the national cake
• I=I(y1, y2,… yn), defined over all conceivable distributions (y1, y2,… yn)
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Inequality measures: Lorenz curve 1A diagrammatic way to depict distribution
• X-axis: cumulative percentages of the population arranged in increasing of income
• Y-axis: % of national income accruing to any fraction of the population thus arranged
• The graph connecting these points is the Lorenz curve
• If everybody earned the same income, this curve would coincide with the 45o
line• The overall distance between the 45o
line and the Lorenz curve is indicative of the amount of inequality present in the society
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Inequality measures: Lorenz curve 2
Cumulative Population 100%
100%
Cu
mu
lative In
co
me
20%
10% A
80%
70% B
45 0
Lorenz Curve
The Lorenz curve of a distribution of income
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Inequality measures: Lorenz curve 3
0
L(1)
L(2)
45 0
Cumulative Population 100%
Cum
ulat
ive
Inco
me
100%
Using Lorenz curve to make judgements
• L(1) lies above L(2)• Interpretation: if we choose a
poorest x% of the population, then L(1) always has this poorest x% earning at least as much as they do under L(2)
• It stands to reason that L(1) should be judged more equal than L(2)
• This criterion for inequality comparison is known as Lorenz criterion
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Lorenz curves for selected countries 1
Lorenz curves for different countries (Deininger and Squire, 1996)
Brazil
27
17
35
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hares o
f In
co
me
(%)
Mexico
310
22
41
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hares o
f In
co
me
(%)
Egypt
9
21
37
59
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hares o
f In
co
me
(%)
India
9
21
38
59
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hares o
f In
co
me (
%)
Kenya
310
21
38
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hares o
f In
co
me
(%)
Uganda
7
17
31
52
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hares o
f In
co
me
(%)
11
Lorenz curves for selected countries 2
Korea
7
20
36
58
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hare
s o
f In
co
me (
%) Taiwan
7
20
38
61
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hare
s o
f In
co
me
(%)
United Kingdom
8
20
36
59
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hare
s o
f In
co
me (
%)
United States
5
15
32
56
0
20
40
60
80
100
0 20 40 60 80 100
Cumulative Shares of Population (%)
Cu
mu
lati
ve S
hare
s o
f In
co
me
(%)
12
ReferencesCore readings:• Ray D., (1998), Development Economics, Princeton University Press, Chapter: 6• McKay A., (2002), “Defining and Measuring Inequality”, ODI Inequality briefing paper No
Recommended readings:• Champernowne D.G. and Cowell F.A., (1998), Economic Inequality and Income Distribution,
Cambridge University Press, Chapters: 3 – 4. This is a valid alternative to the core readings, but it is more detailed and technical.
• Jenkins S., (1991), “The measurement of income inequality”, chapter 1 in Osberg L. (ed), Economic inequality and poverty, M.E. Sharpe. It is a comprehensive exposition, with a focus also on operational issues, on the measurement of inequality.
• Hale T., (2003), “The theoretical basis of popular inequality measures”, University of Texas Inequality Project (UTIP), www.utip.gov.texas.edu
• Litchfield J.A., (1999), “Inequality: Methods and Tools”, Text for the World Bank PovertyNet website: http://www.worldbank.org/poverty, March 1999
Other useful references for developing economies are on land and education inequality:• Ray D., (1998), Development Economics, Princeton University Press, Chapter: 12• Frankema E.H.P., (2006), “The Colonial Origins of Inequality: Exploring the Causes and
Consequences of Land Distribution”, Groningen Growth and Development Centre, Research Memorandum GD-81, University of Groningen
• Frankema E.H.P. and Bolt J., (2006), “Measuring and Analysing Educational Inequality: The Distribution of Grade Enrolment Rates in Latin America and Sub-Saharan Africa”, Groningen Growth and Development Centre, Research Memorandum GD-86
