Lecture 6 - Inequality Flashcards

1
Q

Inequality - definition

A

The existence of difference in incomes or in other measures of economic well-being

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2
Q

Poverty - definitions (3)

A

An inability to maintain an ‘acceptable’ standard of living

  • Absolute p.: inability to subsist, constant real amount unaffected by increase in living standards
  • Relative p.: exclusion from the normal activities of society, the poverty line may reflect social norms and expectations
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3
Q

Measuring inequality within countries (2)

A

1) Lorenz curve: cumulative percentage of pop against cumulative percentage of income
- > comparisons b/n countries can be made but are only unambiguous if they do not cross
2) Gini coefficient: 0 when complete equality (Lorenz curve = diagonal), 1 when one person earns everything
- > weights equally all deviations, whether at lower or upper end of the scale

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4
Q

Why is the household used as the unit of distributional analysis? (3)

A
  • many state benefits (in UK) are assessed on the basis of the family’s needs
  • many resources shared within a hh (eg. durable goods)
  • sales taxes can’t be attributed only to the hh member doing the shopping
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5
Q

Issues with household as unit of analysis

A
  • different sizes
  • are households or individuals the object of policy? -> if individuals, we need to know how resources are shared intra-hh
  • > some evidence that distribution within hh matters: child benefits paid to the mother
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6
Q

How to take hh size into account when assessing living standards?

A

Equivalence scales, assigning weights to household members and dividing hh income by the total weight

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7
Q

Current vs. lifetime income

A

Households’ incomes fluctuate over time but if they can borrow and save, lifetime income is their budget constraint -> gov may be more concerned about helping the truly (lifetime) poor than the temporarily poor

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8
Q

Issues w/ lifetime income

A
  • expected value, can’t be measured objectively
  • current consumption may be a good proxy if hhs can smooth, although durable goods make it lumpy
  • > non-durable spending may be the best indicator of living standards
  • what about hhs that can’t borrow to smooth? -> we may still want to have some lifetime redistribution
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9
Q

5 stages of income (ONS)

A
1) Original income
\+ Cash benefits
2) Gross income
- Direct taxes
3) Disposable income
- Indirect taxes
4) Post-tax income
\+ Benefits in kind (health, education, etc.)
= Final income
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10
Q

ONS Stats on the effects of taxes and benefits

A

1) 15-1 ratio of richest to poorest fifth of hhs is reduced to 4-1 by taxes and benefits
2) 52% of households received more in benefits than they paid in taxes (2012/13)
3) cash benefits made up 56% of gross income of the poorest fifth, only 3% for richest fifth
4) share of gross income paid in taxes is similar in both groups (~35%)

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11
Q

Issue with the incidence of benefits

A

If they change demand and supply in some market, the benefits of a cash transfer may shift away from the initial recipient
eg. help to first-time home-buyers may push up house prices and thus end up in sellers’ pockets

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12
Q

Valuing the benefits of public provision of private goods

A

ONS values on the basis of costs, but in median voter model, only he values it exactly at cost
-> O’Dea and Preston argue we should value them in terms of alternative cash transfer that would make a hh equally satisfied (but hard to implement)

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13
Q

Insurance-type spending benefits

A

Many cash benefits are insurance against risks (eg. unemployment)

  • > part of the benefit is the peace of mind to people not receiving it currently
  • > O’Dea and Preston: should be valued by equivalent risk premium people would be willing to pay
  • > would mean the benefit is evenly spread across the population, if risks vary little
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14
Q

Life-cycle redistribution

A

More like enforced saving and borrowing than redistribution

-> credit-constrained people may value it more

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