Global Economy B: Topic 5 - Inequality

Question 1

List & elaborate on the different aspects of areas that inequality can prevail and is researched

Also, reference this information

Answer 1

• Research done by Mcgregor et al (2019)
  i) Opportunity: Refers to the ability of individuals to freely and fairly generate outcomes
  (consumption, happiness, utility, income, wealth) -> “level playing field”
  How to measure equality of opportunity?
  (ii) Happiness and utility
• Happiness: Focus on self-reported life satisfaction surveys -> How to measure it?
• Utility: Definition? Measure?
  (iii) Consumption: Consumption -> relates directly to individual welfare.
  Difficult to measure -> Tracking expenditure on all goods and services (survey data).
  -> Does not account for the use or access to public goods.
  (iv) Income:
• It gives a clear indication of the ability of someone to meet their material needs (short term).
• Data on income is readily available and it is easy to collect.
• Weaknesses:
  1. Doesn’t capture lifetime variations of income: young (low-income and asset poor) vs rich (low-
  income and asset rich).
  2. Current income does not consider accumulated wealth passes through generations
  (inheritances).
  3. It usually includes only formal income (excludes informal wage, returns from assets, etc.)
  (v) Wealth:
• It measures individual access to resources.
• It reflects differences in income over a long time span, saving rates, inheritances, etc.

Question 2

List & elaborate on whom the inequality is between

Also, reference this information

Answer 2

• Research done by Mcgregor et al (2019)
  (i) Global inequality:
  Inequality among all individuals in the world, regardless of nationality.
  Limitation -> Redistribution policies occur at the national level.
  (ii) Between-country inequality:
  Considers individual countries as the population of interest -> based on mean income or
  wealth.
  Limitation -> Mean income might hide huge within country inequalities-> focus on people
  (iii) Within-country inequality:
  Analysis of the distribution of income within a society
  Advantages:
• Individuals compare their levels of income with the income of other around them
• Redistribution policies are implemented at the local level.

Question 3

Describe & explain measures of inequality

Also, reference this information. Briefly list other inequality measures

Answer 3

• Research done by Mcgregor et al (2019):
  1. Gini coefficient:
• Most famous inequality index.
• Calculation: Compares the Lorenz Curve of a population’s income distribution with the line of
  perfect equality:
  𝐺𝑖𝑛𝑖 = 2 ∗ 𝐴
  Where: A = area between the 45° line and the Lorenz Curve
  2. Lorenz Curve:
• Graphical representation of the distribution of income.
• It shows the fraction of total income (y%)
  earned by a bottom fraction (x%) of the
  population.
• A graph of “Cumulative proportion of population” (x-axis) against “Cumulative proportion of consumption”. Both scaled from 0-100%. There’s a straight 45 degree line and then a curve underneath this line that’s curved upwards and intersects the straight line at either end of the straight line. The area between these curves is “A”, which is the index of inequality where the bigger A is, the more unequal the country
• Other popular inequality measures are:
  Theil index, Hoover index, Atkinson index

Question 4

Elaborate on Piketty’s research on measures of inequality

Answer 4

Inequality indices (e.g. Gini coefficient) give an abstract and sterile view of inequality.
- They aim to summarise in a single numerical index all that a distribution can tell us about
inequality.
- These indices of income inequality mix very different things: Inequality respect to labour vs
inequality respect to capital.
- It is impossible to distinguish clearly among the multiple dimensions of inequality driving
changes in the indices.
- The social reality and economic and political significance of inequality are very different at
different levels of the distribution.
⇒ The share of income (or wealth) going to the top decile of the population is a useful index for
judging how unequal a society is.
“Although the Gini coefficient was intended to sum up inequality in a single
number, it actually gives a simplistic, overly optimistic, and difficult to
interpret picture of what is really going on.” (Piketty, 2014)
⇒ The share of income (or wealth) going to the top decile of the population is a useful index for
judging how unequal a society is

Question 5

Describe & explain the evolution of income inequality

Also, reference this information

Answer 5

• Research done by World Inequality Report (2018)
• Income inequality was very high a century ago, particularly in Europe, but dropped
  dramatically in the first half of the 20th century.
• Income inequality has surged back since 1980 and stabilize since 2010 but at different levels
  -> role of institutions.
  The US is much more unequal than Europe today.
• Different national trajectories show rising global inequality is not inevitable -> This highlights
  the importance of institutional changes and political choices.
  US vs EU: Similar levels of development, size, exposure to globalisation and to new
  technologies in 1980. Radically diverging inequality trajectories due to different institutional
  and policy choices (less progressive taxation, unequal education, falling minimum wage,
  etc.).
  Income inequality was very high a century ago, particularly in Europe, but dropped
  dramatically in the first half of the 20th century.
• Income inequality has surged back since 1980 and stabilize since 2010 but at different levels
  -> role of institutions.
  The US is much more unequal than Europe today.
• Different national trajectories show rising global inequality is not inevitable -> This highlights
  the importance of institutional changes and political choices.
  US vs EU: Similar levels of development, size, exposure to globalisation and to new
  technologies in 1980. Radically diverging inequality trajectories due to different institutional
  and policy choices (less progressive taxation, unequal education, falling minimum wage,
  etc.).

Question 6

Describe & explain income growth’s effect on inequality

Include citations

Answer 6

• (World Inequality Report, 2018)
  Has income growth helped to reduce inequality?
• Global inequality increased since 1980, despite high growth in emerging countries
  (China and India)
• Despite marked differences across income groups -> income growth is systematically higher
  for upper income groups.
• Top 10 percent takes the 52% of the global income. (2022)
• Bottom 50 percent takes less than 10% of the global income. (2022)
• The top 0.1% captured about as much growth as the bottom half of the world population

Question 7

Describe & explain global income inequality in the most unequal region in the world

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Answer 7

(World Inequality Report, 2018)
* The Middle East appears to be the most unequal region in the world.
* There are different determinants to extreme inequality:
- In many of the most unequal regions in the world (Brazil, South Africa), extreme
inequality comes from a legacy of slavery, colonial or racial heritage.
- In the Middle East, the origins of inequality are “modern” -> linked to the functioning of
contemporary capitalism and to the geography of oil ownership and transformation of
oil revenues into permanent financial endowments

Question 8

Describe & explain inequality in egalitarian societies

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Answer 8

(McGregor et al., 2019)
Individuals derive income from labour and capital:
1) Capital income inequality is due to differences in wealth 𝑘 (due to past saving behaviour
and inheritances received), and in rates of return 𝑟. (other determinants?)
2) Labour income inequality is due to differences in working abilities (education, talent,
physical ability, etc.), work effort (hours of work, effort on the job, etc.), and luck (labour
effort might succeed or note, e.g. successful investors).
Two different ways for a society to achieving extreme levels of inequality:
1. Hyperpatrimonial society: Inheritance society with extreme wealth concentration
2. Hypermeritocratic society: A society of superstars, super managers etc

Question 9

Describe & explain inequality of capital ownership

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Answer 9

(Piketty, 2014)
* The sharp drop in total income inequality was due to the collapse of high incomes
from capital -> Destruction of human and physical capital led by the World Wars and
the Great Depression.
* Prior to the shocks of 1914 – 1945 there was no trend towards reduced inequality
of capital.
* The concentration of wealth has never fully recovered from the shocks of 1914 –
1945.
New policy regime after WW II -> social security systems, public education,
progressive taxation
* The distribution of capital is always much more concentrated than the distribution of
income from labour.
* In modern societies, there is belief that inequalities based on individual talent and effort are
more justified than other inequalities.
* Capital ownership is becoming increasingly concentrated once again, as the wealth/income
ratio rises

Question 10

Describe & explain the mechanism of wealth divergence

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Answer 10

A mechanism of wealth divergence should explain three facts:
1) Hyperconcentration of wealth in Europe during the XIX century and up to WW I.
2) The compression of wealth inequality following the shocks of 1914 – 1945.
3) The concentration of wealth has not regained pre-1914 levels.
Source: Piketty and Saez, 2014.

Share of top 10% in total wealth: 1800s – 2010:
Line graph of time from 1870 to 2010 (x-axis) against percentage share of top 10% in total wealth (y-axis). US and Europe have a line each with Europe above US all the way until ~1965 where US took over. Both followed the same trend and shape.

1) Hyperconcentration of wealth in Europe during the XIX century and up to WW I.
Prior WWI -> Primary agrarian societies with low economic growth (𝑔)
Rate of return of capital (𝑟) was markedly and durably higher than 𝑔.
* 𝒓 > 𝒈 -> “This is the fundamental force of divergence…”
Example:
Assume: 𝑔 = 1%
𝑟 = 5%
Saving 1/5 of the income from capital is enough to ensure that capital inherited from
previous generation grows at the same rate as the economy.
𝑟 > 𝑔 means that wealth accumulated in the past is recapitalised much more quickly
than the economy grows.
⇒ Conditions are ideal for an “inheritance society” to prosper…