Inequality Flashcards
Anonymity principle
It does not matter who is earning the income. Everyone is treated the same way
Population principle
Care about the different people living on each side of the income distribution.
Inequality measures should be independent of the size of the economy
Four criterias in Inequality measure
- Anonymity principle
- Popoulation principle
- Relative income principle
- Dalton principle
Relative income principle
Income is calculated relatively, not in absoulte terms. (1000, 2000) is the same inequality as (2000, 4000).
Dalton principle
Regressive transfer, transfer from the lowest to the richest earners (Reversed Robin Hood), will increase inequality.
5 measurements of inequality
- Lorentz curve
- Coefficient of variation
- Gini Coefficient
- The Theil Entropy Index
- Income shares and Kuznets ratios
Lorentz curve
The convex curve.
Fullfills principle 1-3, not the forth.
Coefficient of variation
Spread ex. standarddeviation
Gini Coefficient
The area over the Lorentz curve, but under the total equality curve.
Useful to compare between countries
1= max inequality
Theil Entropy Index
A measure of variance. The higher it is the more inequality we have.
Not scaled –> difficult to compare
Income shares and Kuznets ratios
An inverted U-shaped curve, measuring the relationship between inequality and income per capita. Where inequality increases to a certain point where it thereafter decreases again.
The proportion of income held by the top 10% and bottom 10%
Does not satisfy most of the criteria that we’ve gone through
Decomposibilty
Break the population into subgroups. Calculate their inequalities and add them together.
Can be done in Theil measure
Growth impact on inequality
Growth has no impact on inequality- it impacts the highest income as well as the lowest. This is a result of countries initial inequality.
Inequality impact on growth: Aggregate savings and growth
1) people with high income will save/invest more –> the country will grow faster –> the inequality between the country and other countries grow.
– Often not true, rich people do not save more than poor people.
Solow-curve: savings=investment (closed economy)
Inequality impact on growth: Market failures
2) Markets failure- effciency (growth) can be improved if resources are distributed to those who use them most effciently.
Richer people should be given resources since they have higher education ex. Since they maybe use the resources more efficiently. Ex create cooperatives (add farms together) to get economies of scale.
Inverse agricultural rule: The more land you have the more productive you are.
Law of diminishing returns - more land will decrease the effiency.
Law of diminishing returns
More land owned will decrease the efficiency. (Market failure)
Inverse agricultural rule
The more land you have the more productive you are.
Inequality impact on growth: Social and political instability
Positive relationship: Inequality creates differences between groups → animosity → conflict, discrimination, lower social capital.
Nigeria oil, South Sudan etc. Inequality in redistribution. Global financial crises. Iran.
→ lack in trust → less growth
Polarization
Differences i society ex. social inequality
Fractionalization
A type of polarization, segregration.
In-groups and out-groups based on social identity
Inequality impact on growth: Political Economy and Fiscal Policy
More inequality → the median voter is poorer → redistribution taxes → inefficiencies (economic), or reduction of poverty → can increase growth in part.
Prospect of upward mobility - Poorer want less taxes if they get richer in the future
The prospect of upward mobility
- Political Economy and Fiscal Policy
When you have inequality and a lot of poor people. The people that are the most against redistribution taxes are the poorest, they don’t want to have taxes if they get richer in the future.
Republican have lower incomes in general, and want less tax.
The prospect of upward mobility
- Political Economy and Fiscal Policy
When you have inequality and a lot of poor people. The people that are the most against redistribution taxes are the poorest, they don’t want to have taxes if they get richer in the future.
Republican have lower incomes in general, and want less tax.
Median voter theory
To win an election you need the majority. The party that wins is the one that appeals to the average person.
Dead weight loss
Inefficiency
Taxes effect on growth
Can lead to dead weight loss
Can reduce poverty
Overall effect on growth is uncertain
Democrisation on inequality
- Political economy and fiscal policy
May harm inequality through The prospect of upward mobility.
High social mobility and tax policy sticky → poor don’t support high taxes bc future opportunities
Inequality on power
Inequality → concentration of power in rich elites → use state for their advantage→ decreasing growth
Inequality on growth: Access to financial capital
High inequality → rich hold most of the capital →
diffcult for poor to get access to credit →poor cant invest in potential business → Reduces growth
Inequality on growth: Education
poor people can invest less → lower levels of education → more income inequality → lower human capital accumulation → less economic growth
Human capital: cannot be transferred.
Inequlity on growth: incentives
Inequality → resentment and feeling of unfairness → reduces productivity → reduces growth
Inequality on growth: Domestic Market size
Inequality → reduces potential domestic consumer market → reduce demand
Why does inequality exist within a country?
1 Differences in ownership of physical capital
2 Human Capital
3 Norms
4 Fertility
5 Differences in where people live.
Why does the degree of income inequality vary across countries?
- Differences in the distribution
- Differences in the returns
- Norms, the value society places on helping the poor.
How does rate of return to capital and growth correlate?
return > growth → higher inequality
The interest rate of capital is higher than the income growing → people that already have wealth will have a continous growth in it that is higher than peoples income growth.
Wealth inequality is always higher than income inequality. Due to accumulation of wealth over time, goes on to children etc. → wealth inequality will be sustained. This will however always have some mobility due to shocks.
Collectivist
Collectivist societies value reduction in inequality
Policies agains inequality
Education subsidies can raise poor households’ income and the opportunity cost of children.
Taxes - redistribution
Social Security
Afordable education and health care.
