Lecture 8: Income Inequality and Intergenerational Mobility Flashcards
Fundamental properties of an inequality index
Anonymity (A): The name of the individual does not matter.
Permutations of the elements in Vector Y should have no effect on the inequality index.
Example: I(1, 3, 5) = I(5, 1, 3)
Population Principle (P): multiplying the population should have no effect on the inequality. Ex.: I(1, 5, 7) = I(1, 1, 5, 5, 7, 7)
Scale-free (S): Inequality is measured in relative terms, hence it should not vary if all income are multiplied by the same factor. Ex.: I(1, 5, 7) = I(1000, 5000, 7000)
Pigou-Dalton Principle (PD): If we make a “Robin Hood” transfer, that is from a rich individual to a poor individual, inequality should decrease
Lorenz Order
Theorem: An inequality index satisfies the Lorenz Order if and only if it satisfies the axioms (A, P, S, PD)
If two Lorenz curves cross each other, we cannot compare them by using the Lorenz order
We can use some inequality indexes, but clearly the final result may depend on the index chosen
Could we link inequality and social welfare? It’s possible, if we compare income distributions with the same mean income
Income inequality -> Social Welfare
SWF: W = F (U1, U2, …, Un)
If this SWF respects the Pareto-Principle, then each positive variation of one of the Ui increases W: each change that increases the utility of one of the individuals without decreasing the one of the other, increases social welfare
Optimal level of redistribution depends on the SWF and related assumptions
Gini Index
Ratio between average distance of income among individuals and average income (between 0 and 1)
The Gini index is one of the most used inequality indexes
Equal opportunity and social mobility
The utility of a given level of income is not the same for everyone
The same income may result from a large effort or without any effort
Some results may depend on different factors
-> effort, social circumstances, luck
Two main principles behind equal opportunity
Compensation principle: The differences in the individual results due to circumstances beyond individual responsibility are unjust and public policy should try to reduce them
Reward principle: The differences in the results due to individual responsibility (effort) should be accepted and not jeopardized
Results: Important variables for individual and social welfare. They are measurable and depend on the mix of effort, circumstances and luck
Circumstances: Factors that influence results of individuals but that are beyond their responsibility
Effort: Factors that positively influence the individual results and that are due to individual responsibility
Equality of opportunity: Two approaches
Two ways to shape public policies on EO
Ex-Post EO approach: Individuals who exert the same level of effort (even if they differ in the other circumstances) should obtain the same results/income
Ex-Ante EO approach: Individuals with different circumstances should have the same opportunity to earn a given level of income for a given level of effort
A society that guarantees an adequate social mobility is:
Efficient: More able/skilled individuals perform more important tasks have positions with higher socio-economic status
Fair: It gives equal access opportunities to individuals based on personal skills
With high social mobility, distribution of income may not be of particular ethical interest
Two types of intergenerational mobility
Structural mobility (income): Provides a measure of the difference between the distribution of income of the parent generation with respect to the one of the children generation; e.g. if a country has a high GDP growth rate, this is usually associated with wider and richer occupational choices for the young generation and thus structural mobility is able to capture these changes
Exchange mobility: Measures the correlation between the status of the parents and the one of their children (Is used when the overall distribution of income does not change across generations)
