Lecture 8: Inequality Flashcards
How to measure inequality?
One way is the Gini index (also called Lorenz curve)
• Suppose we had perfect equality:
Gini index
- A is area between actual income distribution and diagonal
- B is area below actual income distribution
With perfect equality: A=0 -> Gini = 0
With perfect inequality (one person has all the
income): B=0 -> Gini = 1
The larger Gini, the larger inequality
Other way to calculate inequality
• Calculate share of income (or wealth) by the x% richest people in the
economy
• Where x% is often 10%
The more the 10% richest people
earn, the higher inequality
What explains this rise in inequality?
Technological change
Trade/globalization
Policy
• Tax rates
• Minimum wage
More monopoly power for firms
Globalization
- Western companies have moved large parts of their production to Asia
- This especially affects low-educated/low-paid workers
- Might be part of the reason why inequality increased
- Trump used this argument during his campaign
Structural change
As people get richer they start to spend a larger share of their income on
services vs manufactured goods (this process is called structural change)
Thus, structural change increases demand for highly educated workers and
therefore their wage
Government policy
• When we calculate inequality we look at income net of taxes and
government transfers
• One reason for rising inequality could be that
• Tax rates have gone down
• Government transfers (welfare state) have gone down
Consequences of rising inequality
• Due to rise in inequality some people feel “left out”
• Although average income has been growing, the poorest 10% today are
not much richer than the poorest 10% 15 years ago
• Some people are poorer than their parents
• While in the 1960s - 1990s almost all children would have a “better”
live than their children
• Was due to fast growth during this period and inequality being low
