module 7 reading Flashcards
what is the distribution of income
How income is divided among the country’s residents
how could a country with a higher level of average income have more people in poverty
- if the income is distributed unevenly
- Ex. India had a higher average income per capita than Pakistan
- but more people in India lived in poverty compared to Pakistan because they their income is distributed unevenly
what process is the distribution of income also related to
the process of economic growth
what can be the impact of a high level of inequality for economic growth
can be good for growth at some stages of development, and bad for growth at others
what does economic growth also affect
the degree of income inequality
why would we also focus on the distribution of income when talking about inequality
because its an important goal of the government to reduce inequality through economic policy
what do some policies do
- reduce income inequality and raise economic growth
- But most times, reducing income inequality and maximizing economic growth are in conflict
who is income inequality an important issue for
- Income inequality in a country is a more important issue for those that actually live in that country compared to others from another country
- Ex. a poor person in the US cares more about the difference in economic status between them and a rich person in the US compared to those from another country that are much poorer than them
- People get their happiness based on how their consumption (wealth) is compared to others instead of how much they have on its own (absolute level of consumption)
what is income inequality focused on
how the residents of a country differ from the country’s average, and how they differ from each other
what are the 2 ways to look at income distribution
- Divide the population into several equal-sized groups and measure how much income each group earns
- Divide income into equal-sized intervals and ask how much of the population falls in each interval
what are summary statistics to describe the income distribution when calculating by frequency in an interval
- mean
- median
- mode
what does the income distribution when calculating by frequency in an interval usually look like visually
- have a long right tail instead of being symmetric
- when mean > median
what is the Gini coefficient
a single number that summarizes the degrees of income inequality in a country to compare between countries or to look at trends of inequality in a country overtime
what do you do first when you want to calculate the Gini coefficient
create the lorenz curve
how do you calculate the lorenz curve
- Get the data on income of all households (or a sample of them) in a given country
- Arrange the households from lowest to highest income
- Calculate what fraction of total income is earned by the poorest %, starting with 1%, then 2%, … all the way until 100%, where the amount of income earned by the poorest 100% of households is 100%
- Graph the data
what is the line of perfect equality
- when the poorest 20% of households would earn 20% of the total household income, poorest 40% would get 40% of total income, etc.
- it is a straight line with a slope of 1
how do you read the lorenz curve for income inequality (the properties of the lorenz curve)
- if its bowed shaped it means there is income inequality
- if income was perfectly evenly distributed, the lorenz curve would fall on the line of perfect equality
- the more bowed out the curve is, the more unequal income is distributed
how is the lorenz curve used to create the Gini coefficient
- Measure the area between the Lorenz curve and the line of perfect equality
- Divide the area by the total area under the line of perfect equality
what are the properties of the lorenz curve in relation to the gini coefficient
- The more bowed out the curve, the higher the Gini coefficient
- If income is perfectly distributed (Lorenz curve = line of perfect equality), Gini coefficient = 0
- If income is unequally distributed as possible (if one household has all the household income in the country), then Gini coefficient = 1
what is the kuznets curve
- a hypothesis that stated that as a country developed, inequality would first rise then fall later
- if graphed with GDP per capita on the x axis and income inequality on the y axis, the curve would be like a negative parabola
how can you look for evidence of the kuznets curve
- Examining the level of inequality in a single country over time
- Looking at a single point in time in a cross-section of countries with different levels of income
what happens if you hold the average level of income per capita in a country constant, and there is a higher degree of income inequality
- theres a larger difference between the rich and the poor
- poor people are worse off
if the kuznets curve exists, what would an increase in income per capita for poor countries mean
- an increase in inequality
- it would mean that economic growth could be bad for the poorest people in the country, as they would become even poorer
when graphing the average income of the poorest quintile (20%) of the population and the average income per capita for the population as a whole on a graph for multiple countries, what does it mean
- the graph would look like a positive linear line
- the countries at the top right end mean they have more equal income distribution
- so even if the individuals are the poorest 20% in a country, those people will be richer than the poorest 20% of another country if their country’s income is more evenly distributed
- the countries on the bottom left are those with unequal income distribution
- but even with equal income distribution, those in a country with low GDP will still be worse off compared to those in an a country with high GDP and unequal income distribution
what was found about the effects policies had on the income of the poor vs overall income
- that policies that affect growth (whether good or bad) doesn’t really affect the distribution of income
- Ex. rule of law and openness to trade increased over income in a country, and have positive, but minor effects on the share of income going to the poor (lowest 20%)
Ex. High rate of inflation & a high level of government consumption are bad for overall income and reduce only a little of the share of income going to the poor
what are the impacts of growth for the poor overall
growth is almost always good for the poor, and so are policies that lead to growth
why does income inequality exist
because people differ in many ways that are relevant to their incomes
what are examples of differences that can cause income inequality
- Human capital (education and health)
- Residence (city vs countryside, or different geographical regions of the country)
- Ownership of physical capital
- Particular skills they have
- Luck
why could someone be rich
because:
- They have a skill that is in high demand
- Their parents are rich/gave them money
- They happened to be in the right place when a good job came available
why could someone be poor
- They live in an economically depressed part of the country
- They suffer from a physical condition that limits their earning
- They had no access to education
how can inequality also differ among countries
from the distribution of different economic characteristics among a population and how different characteristics = different levels of income
why could a country have a high degree of inequality
because:
- There is a great difference in these characteristics
- Ex. some people have a high level of education and some have none at all
- There is a large effect of differences in some characteristic on the amount of income that a person earns
- Ex. people with 9 years of education earn much more than people with 8 years
how can the inequality for a country change overtime
because of a change in the way characteristics are distributed or rewarded
what is the return to education
- the % rise in earnings from an additional year of education
- ex. if the return to education = 10%, it means one more year of education = 10% more money
if two countries have the same distributions of education, but different returns to education, what is the affect of a lower return to education
- a more tightly compressed distribution of income
- means a lower level of income inequality
- also means a lower Gini coefficient
if two countries have different distributions of education, and the same returns to education, what is the affect of a narrower distribution of education (when more people are in the middle educational groups, and less are in the highest and lowest educational groups)
- means a narrower distribution of income
- means a lower Gini coefficient
what about the determinants of inequality can happen in real life
- multiple can change at the same time
- they can either reinforce each other or work in opposite directions
- Ex. in a given country, the distribution of education might become more equal and the return to education rises
- In this case, the total effect on inequality depends on which force was stronger
how do you properly determine inequality
- need to know the distribution of every characteristic and its rate of return in the labour market
- but there is so many that its impossible to know
- there are also some characteristics that are not something that can be measured
- like someone’s persistence, energy, or ambition (these also affect income)
what does kuznet’s hypothesis say about economic growth caused from the arrival of new technologies and changes in the structure of the economy
- it would first raise the rate of return to skills like education and entrepreneurial ability
- because skilled workers are better than unskilled workers at adapting to new ways of production
- New technologies will raise the rate of return to physical capital because they are usually in the form of new capital goods
what would happen to income inequality when the rate of return rises from skills and capital and why
because skills and capital are in the high end of income distribution, the increase in the rate of return raises income inequality
what are the 2 things that would happen overtime from the economic growth caused by the arrival of new technologies and changes in the structure of the economy
- The distribution of the qualities that determine income distribution would change over time in a way that lowers inequality
- The rates of return to skills would decline as technological progress and structural change slows down
how would the distribution of the qualities that determine income distribution would change over time in a way that lowers inequality
- Higher return to skills would cause unskilled workers (or their children) to get an education
- Workers would also move out of regions or sectors that were falling behind and into fast-growing areas
what would the rates of return to skills that would decline as technological progress and structural change slows down also do
reduce income inequality
how does technological progress happen
in discrete waves, each one centred on general-purpose technology
what is the most recent general-purpose technology
the semiconductor, which laid the basis for the revolution in information technology
what did the increase in information technology do
- increase the rate of return for certain characteristics of workers, mostly education
- Educated workers were able to use computers well, making them more productive, while it did less to raise the productivity of uneducated workers
what does international trade do
- changes the effective scarcity of different inputs into production
- lowers the rate of return for goods that is scarce in a country, but common in the world
- But it also increases the rate of return for goods that are common in a country but scarce in the world
what is the effect of trade on inequality in a country
- depends on how the skills who returns are affected are distributed in the population
- Ex. there is more education in a developed country compared to the rest of the world
- Opening trade will raise the rate of return to education, but also raising inequality
- Because people without education in the country would not benefit
what is another effect of trade
- to change the payoff from living in different regions of a country
- Ex. since China opened up to international trade over the last 20 years, the economic advantages of coastal provinces have increased relative to the interior
- Since coastal provinces were already richer, international trade increased income inequality
what is the “superstar” dynamic
- when people with the highest levels of some qualities earn much more than those with only slightly lower qualifications
- Ex. in sports where the best athletes earn huge premiums over those who are almost just as good
what jobs seem to have the “superstar” dynamic
- entertainment
- law
- corporate management
- finance
- because of the rise of communication technologies that allows one person to interact with a lot of people
what does the superstar dynamic do to income inequality
since it represents a rise in the return to certain qualities, which increases income inequality
what do we know about inequality and its effect on growth
we know that it has an effect on growth, but just not if its a good or bad effect
what does the effect of income inequality on economic growth depend on
- a country’s stage of growth
- other factors like if they are open to capital flows from abroad
when would income inequality affect growth more
if a country’s growth is driven by physical capital accumulation compared to one that is driven by human capital accumulation
when would income inequality affect growth less
if a country is open to flows of physical capital from abroad compared to one that is closed to capital flows
in countries where income inequality is higher, what is the accumulation of human capital through education like? is income inequality good for growth?
- In countries where income inequality is higher, the accumulation of human capital through education is lower
- The total fertility rates for those countries is also higher
- High fertility slows growth
- So in this channel, income inequality is bad for growth
what was is the history of income inequality between the US and Canada vs Latin America
- there was a lot of colonization and slavery that happened in Latin America
- compared to the US and Canada where workers worked more voluntarily
- which caused the income in the US and Canada to be more equal compared to Latin America
- even though they don’t have slaves anymore, theres still a pretty large income inequality in Latin America since the political institutions were built on that history
- the US and Canada also provide public funding (like education) compared to Latin America who didn’t because they saw no point and they thought more educated people would want more political power
- because of the income distribution, US and Canada were able to grow much more than the countries in Latin America
what is economic mobility
The movement of people from one part of the income distribution to another
what does it mean for a country to have high economic mobility
people are constantly shifting from one part of the income distribution to the other
what does it mean for a country to not have economic mobility
people always remain at the same position in the income distribution
2 countries have the same distributions of income, but one has high mobility while the other doesn’t have mobility. which country has greater equality
The country with the higher mobility
how can economic mobility be measured on
- many different time horizons
- Ex. we want year-to-year or decade-to-decade movements of individuals through income distributions
What is intergenerational mobility
- The change in economic status of families from one generation to the next
- Usually described as “equality of opportunity”
what does a high degree of intergenerational mobility mean
means that the children of either poor or rich parents all have the same probability of being rich or poor
what does a low degree of intergenerational mobility mean
means that the children are likely to be in the same part of the income distribution like their parents
what is one way to study mobility
look at a transition matrix
what is a transition matrix
A table showing the probabilities that individuals will move from one income group to another
what is it like to measure mobility
- Since you need to track families over a long period of time, its much harder to measure mobility compared to measuring inequality
- We also know much less about how mobility compares among countries than about comparisons of inequality
what are possible channels that mobility might affect economic growth
- A society with a high degree of mobility is likely to be more able to use the talents of all its citizens
- The political sphere
how can a society with a high degree of mobility is likely to be more able to use the talents of all its citizens
- Anyone (rich, poor, or middle-class) can have talents that can contribute to economic growth
- This means that anyone can end up being the president, a scientist, a CEO, etc.
- The people in these roles will also be more gifted compared to a society that limits these roles to only members of a specific class
how can the political sphere affect economic growth
- Recall: higher degree of income inequality = greater pressure for income redistribution
- So in more unequal societies, there is:
- More redistribution, Which causes inefficiency from higher taxes
- Or more social conflict over redistribution, Which causes instability, which is also bad for growth
- The degree of economic mobility can affect the desire for income redistribution
- Ex. a poor person who knows that their children have a good chance of moving up in the world would have less interest in income redistribution compared to one that knows their children will stay poor
- Therefore, more mobility = less want for redistribution
what are some determinants of mobility
- The most important: access to education
- The nature of a country’s institutions and government
- The nature of marriages in a country
- Racial or ethnic discrimination
how does access to education determine mobility
- Education allows children to move up in the income distribution (if they are poor)
- Its more likely for mobility in countries that have generous public education systems
- Public health policies and broad access to medical care also helps raise the degree of economic mobility (since the poor won’t get set back from medical expenses)
how can the nature of a country’s institutions and government determine mobility
- From the influences of technology and trade, growing countries can go through huge changes
- New technologies can economically harm whole regions or whole sectors of the economy
- Powerful interest groups often want to and are able to block these changes
- If new technologies or openness to trade are blocked, specific groups can benefit, but there wouldn’t be economic growth
- It would also limit economic mobility
- Economic mobility is when the rich people are replaced by people who were originally not rich
- So its usually the most powerful people in society that often oppose policies to increase the degree of mobility
- The more the rich control economic policy, the less mobility-enhancing policies are likely to be implemented
what is assortative mating
When people marry those with the same economic and social class as each other
how can the nature of marriages in a country determine mobility
- When assortative mating happens, there is usually less economic mobility
- When people marry for love instead of their economic class, there would be more of a mix of classes
- When 2 parents come from different classes, a certain amount of intergenerational mobility is guaranteed, since the child can’t have the same class as both parents
- Research shows that the degree of assortative mating varies significantly among countries
- Something that determines the ability/chance to marry across different classes is based on the level of inequality in a country
- Its easier for a rich person to a person poorer than them in a country where the income gap between the groups isn’t too big
how can racial or ethnic discrimination determine mobility
- Will also lower economic mobility
- The children of those who are discriminated will also be discriminated against
