Economic inequality and Macroeconomics

Question 1

For Greek philosophers, economic inequality is called

Answer 1

The “natural order of things”, the “natural hierarchy”.

Question 2

Malebranche : Who is he ?

Answer 2

French philosopher, 1684, Traité de morale: he is one of the first authors that theorizes equality and inequality. He debates the natural equality of individuals. Individuals naturally equal. For him, when people are born, they are equal. Institutions and religious elements make them different.

Question 3

Rousseau : What he said ?

Answer 3

Discours sur l’origine et les fondements de l’inégalité parmi les hommes, 1755: he says that inequality is not a natural order. Inequality is due to human history and human institutions. Inequality is a social construct and it is «random» (aléatoire). There is no purpose, it just happens.

Question 4

John Locke : What he said ?

Answer 4

1689: he discusses “private property” and argues that individuals are born equal. Inequality comes from private property.

Question 5

Marx : What he said ?

Answer 5

There is a bourgeois order. The source of inequalities is that the egalitarian laws are applied to different individuals. If you are rich enough, you don’t really care to pay for social security because you can pay but for poor people it is different.

Question 6

John Rawls :

Answer 6

Theory of justice: in societies, there is the search for justice and search for economic efficiency, this creates inequality.

Question 7

Atkinson and Bourguignon (1999) :

Answer 7

“the question of income distribution may be considered the normative economic issue “par excellence”: they develop another way to measure inequality. Their main object if distribution, that’s a normative view because a lot of people think what should be done.

Question 8

Monetary inequality :

Answer 8

Inequality measured in terms of differences of magnitude of something (could be income, earnings, consumption, wealth). You can measure whatever you want to measure in terms of magnitude.

Question 9

Non monetary inequality :

Answer 9

Another concept is non monetary: more general not always related to monetary measures: well-being,
we associate monteray to well being.

Question 10

“the wealth of Jeff Bezos (Amazon CEO) could end world hunger”, what is wrong with this affirmation?

Answer 10

No, there is a difference between flow and stock variable.

Bezos could end world hunger in 6 years in a row but after, he would no longer be a billionaire.

Question 11

A stock variable :

Answer 11

variable measured in a point of time and that is cumulative or decumulative. Example: wealth, public debt…etc.

Question 12

A flow variable :

Answer 12

variable relative to a certain period of time (not the same at point of time). Flow variable can be measured over 1 year and a stock variable can be measured today. It is not cumulative or decumulative. Examples: income, wages, earnings…

Question 13

Kuznets and Jenks (1953) : What did they ?

Answer 13

provided the first comparable long-run income distribution data. This dataset shows a secular decline of the top income shares at least since the 1920’s. This is the basis of the Kuznets Curve theory. It is an attractive representation: when development index is low, high inequalities and when high development, less inequalities but it is false.

Question 14

The Kuznets curve postulates a…

Answer 14

hump shaped relationship (U inverse) between economic development and inequality.

Question 15

This curv shows 3 phases in development :

Answer 15

1. Economics go from rural to urban, this change is accompanied by increasing inequality.
2. Stabilisation, plateau
3. As economics grow further, inequalities are decreasing.

Question 16

Critics of the The Kuznets curve :

Answer 16

Many countries in the dataset have the same history of inequality, there is a lack of diversity in the data because most of the countries are from Latin America.

Technical criticism: criticism about the econometrics method: not enough control for country fixed effects.

Critique de Piketty et Saez: they show that for the USA the strong reduction of inequality during the first half of the 20th century is not due to natural economic development process. They think this reduction is due to specific chocks (one of them is the war: for instance WW1 was a big disturbance for the economic activity because there was a lot of losses for the capitalists, it was also a period of high inflation between the war and the great depression). These chocks empoverished people.

Question 17

There are other explanations for the reduction of inequality. Another is…

Answer 17

… taxation (explanation that comes after WW2) : new fiscal tools appeared (two of them are progressive taxation and estate taxation).

• Estate taxations: taxes against legacy (there was a different level between countries, high level in France).
• Progressive taxations: different level of marginal taxes (taux marginaux d’imposition). The highest revenus are more taxed.

Question 18

Towards taxations, Piketty and its co-autors have given historical and institutional views of the reduction of inequalities. Their main proposition is that….

Answer 18

…societies have moved from capital rent earners to high wages earners. There was a societal change of the nature of rich people.

Question 19

Paul Krugman view of inequality :

Answer 19

“we have a society in which money is increasingly concentrated in the hands of a few people, and in which that concentration of income and wealth threatens to make us a democracy in name only”. Indeed it threatens democracy because rich people can influence important medias (Figaro possessed by Dassault, Le monde possessed by Niel).

Question 20

Joseph Stiglitz view of inequality :

Answer 20

“the simple story of America is this: the rich are getting richer, the richest of the rich are getting still richer, the poor are becoming poorer and more numerous, and the middle class is being hollowed out”. He is pointing out the increase of inequality.

Question 21

Piketty view of inequality :

Answer 21

“indeed socioeconomic inequality has increased in all regions of the world since the 1980’s. In some cases, it has become so extreme that is difficult to justify in terms of the general interest”.

Question 22

In macroeconomics, there is a strong focus on 3 types of inequality :

Answer 22

• Wage inequality
• Income inequality
• Wealth inequality

Question 23

Wage inequality : definition :

Answer 23

Wage inequality measures how much wages are distributed unequally in the economy.

Question 24

Wages : definition :

Answer 24

Money that an individual receives in exchange for paid employment work (for instance entrepreneur don’t have wages because it is not an employed work). Wage inequality is a per individual concept. Wages different from earnings (vague concept, earnings are more general, it includes different forms of income).

Question 25

Decile (informal definition) :

Answer 25

Once a distribution has been ordered, deciles divides this distribution in 10 equal parts.

Question 26

Percentiles (informal definition) :

Answer 26

Once a distribution has been ordered, percentiles divides it in a 100 equal parts

Question 27

Interdecile ratio :

Answer 27

Divides the value of a higher decile by the value of a lower decile. It’s a population way to measure inequalty in a population.
The higher the IR is, and the higher the inequality is
P90/P10 or D9/D1