Unit 19: Inequality

Question 1

Gini Coefficient

Answer 1

measure of statistical dispersion intended to represent the income inequality/wealth inequality within nation/group of people

measure inequality among values of a frequency distribution

ranges from 0-1 where 0 is max equality

Question 2

Inequality within countries

Answer 2

Market income - income from wages, businesses and investments

Disposable income - market income - taxes and transfers

more equality in disposable income can be due to the tax and transfer system

Question 3

Within-country inequality

Answer 3

increasing inequality within most countries associated with the changing distribution of jobs

‘missing middle’ - low paying & high rating jobs are increasing in number while middle-income jobs ate become scarcer

Question 4

Categorical inequality (group inequality)

Answer 4

economic differences among people who are treated as different categories

usually based on incidents of birth - country of citizenship (country and birders limit access to certain economic opportunities)

Gender/ethic group

Question 5

Inherited inequality

Answer 5

intergenerational inequality - the extent to which differences in parental generations are passed on to the next generation

intergeneration transmission takes many forms:

• inheriting wealth
• inheriting genetic makeup
• parental influence on growth

Question 6

Intergenerational elasticity

Answer 6

%difference in the 2nd generations status associated with a 1% difference in the adult generations status

(high elasticity = low intergenerational mobility)

Question 7

Relation to cross-sectional inequality

Answer 7

inequality on earnings tends to be postively correlated with intergenerational inequality because:

• societies with strong culture of fairness tend to have policies that reduce cross-sectional inequality and promote intergenerational mobility
• effect of good/bad shocks (luck) are passed on the next generation contributing to cross-sectional inequality

Question 8

Explaining inequality

Answer 8

technology along with institutions and their policies leads to differences in endowments thus arising economic inequality

Question 9

An individuals income depends on

Answer 9

1. Their endowments - facts about an individual that may affect their income (e.g wealth, physicality, human capital)
2. Value of each item in their endowments - technology and institutions affect the value of particular endowments

Question 10

How economic inequality can influence institutions

Answer 10

political advantages for the rich as well as technology

e.g automation due to minimum wage introduction

differences in endowments affect the balance of power in interactions: in principal-agent relations the principal can exerciser power over agents

differences in endowments also determine ability to become the principal e.g. ability to borrow/lend

Question 11

Example of inequality - work productivity rises

Answer 11

productivity can rise if entire work force is better educated

at initial wage firms make higher profits

firms then enter reducing unemployment

workers now have better reservation option so can have higher wages

thus inequality falls

Question 12

Example of reducing inequality - Labour market segmentation

Answer 12

Primary labour market - good jobs with high wages, job security and TU

Secondary labour market - short-term contracts, limited wages and no job security

eliminating segmentation raises average wages and reduces inequality

Question 13

Example of reducing inequality - automation

Answer 13

Technologies that allow machines to do the work people used to do

New tech increases demand for some skills and reduces for others

short run: machine replaces labour increasing unemployment

workers whose skills are complimentary earn higher wages increasing inequality

But in the long run: higher unemployment reduces workers reservation option lowering wage that firms have to set

But an increase in productivity increases profits which finances capital expansion which creates new jobs, reduces unemployment and increases the wage

Question 14

Policies can help the transition process…

Answer 14

opportunities for displaced workers to upgrade their skills

job opportunities and higher wages in non-routine sectors

Question 15

Addressing inequality

Answer 15

Redistribution - taxes and transfers to reduce differences in disposable income and expenditure on public services

Redistribution - greater equality of endowments e.g property redistribution or raising the value of endowments of the poor via legislation
e.g statutory minimum wage for specific types of workers

Question 16

Redistribution Policies

Answer 16

Welfare state - policies that turn market income into final income
Usually a combination of taxation and expenditure i.e in-kind transfers or social insurance

Progressive policies - directly reduce inequality

regressive policies - policies directly increase inequality
e.g in Mexico, expenditures are more progressive than taxes

Question 17

Explaining declining within-country inequality (1920-1980)

Answer 17

1. Increased education and productivity reduced unemployment
2. Reduced labour market segmentation and other sources of inequality among workers
3. Tech improvements that were complimentary to low and middle skill workers

Question 18

Explaining stable or rising within-country inequality (1980-2017)

Answer 18

1. Increased inequality among workers due to new tech that was: (i) complimentary to skills of high paid workers and (ii) substitutes for workers doing routine tasks
2. Weaker TU’s and conservative parties in power saw bargaining power shift in favour of employers whilst resulting higher profits after taxes weren’t translated in to expanding employment

Question 19

Explaining stable/decreasing between country inequality (1995-2017)

Answer 19

Reduced global labour market segmentation due to rapid growth of labour productivity and demand in China and other poorer countries

Question 20

Inequality and Economic growth

Answer 20

High taxes and transfers don’t necessarily reduce incentives to work hard or innovate

Most countries grow at similar rates and there’s no correlation with the level of inequality

Question 21

Economic benefits of lower inequality

Answer 21

Cooperation and trust necessary for production of knowledge and caring services is harder to sustain with high inequality

Policies that enhance endowments of the poor improve productivity

Less guard labour needed (which diverts resources from production)