Lecture 2 : Inequality

Today’s Topic’s

• Schiller’s major points

• Introduction to Census data

Schiller’s Major Points

• Questions raised:• Why does economic inequality matter?• What problems do we encounter if we measure economic

inequality with gross income?• How do we summarize income to reflect inequality?• How much inequality is there in the U.S.?• How much inequality is there across nations?• What is income mobility and why is it important?• How much income mobility is there in the U.S.?• How does income mobility in the U.S. compare to other

developed nations?

Why does economic inequality matter?

• Costs of inequality

• Benefits of inequality

• Equity versus efficiency

What problems do we encounter if we measure economic inequality with gross income?

• Ignores fringe benefits• Includes realized capital gains but ignores

unrealized capital gains• Consumption is often greater than income,

particularly for persons receiving non-cash transfers such as poor families and professionals who barter services

• Gross income exceed the amount of disposable income (taxes cannot be consumed)

Is there a better measure than income?

• Other possible candidates:– Wealth?– Consumption?

Is there a better measure than income?

• Other possible candidates:– Wealth: reflects economic power– Consumption: reflects current living

standards

What does income reflect?

Is there a better measure than income?

• Other possible candidates:– Wealth: reflects economic power– Consumption: reflects current living

standards– Income: reflects market participation

• Which concept is superior when measuring inequality conceptually? Practically?

How do we summarize income to reflect inequality?

• Between group averages

• Income shares

• Lorenz curves and Gini coefficients– http://en.wikipedia.org/wiki/Gini_coefficient

How much inequality is there in the U.S.?

Between group averages

• See Tables 1 and 2 (pp. 4-6)and Figure 2 (p. 7) in Income, Poverty, and Health Insurance Coverage in the United States: 2004 http://www.census.gov/prod/2005pubs/p60-229.pdf – Black household median income ($30,134)

was only 62 percent of the median for non-Hispanic White households ($48,977).

How much inequality is there in the U.S.?

Income Shares

Table A-3 2004 2003 2002 2001 2000 1999 1998 1997 1996

Income, Poverty, and Health Insurance in the U.S. 2004, p. 40

Sources: 1947-79: Analysis of U.S. Census Bureau data in Economic Policy Institute, The State of Working America 1994-95, p. 37. 1979-2001: U.S. Census Bureau, Historical Income Tables, Table F-3: http://www.census.gov/hhes/income/histinc/f03.htmlThresholds: U.S. Census Bureau, Historical Income Tables, Table F-1: http://www.census.gov/hhes/income/histinc/f01.html

Sources: U.S. Census Bureau, Historical Income Tables, Table F-3: http://www.census.gov/hhes/income/histinc/f03.htmlThresholds: U.S. Census Bureau, Historical Income Tables, Table F-1: http://www.census.gov/hhes/income/histinc/f01.html

How much inequality is there in the U.S.?

Gini Coefficient Trends

• Gini coefficient increased every year between 1967and 2001

• Gini coefficient increased by 17 percent between 1967 (0.397) and 2001 (0.466)

• Gini coefficient fell to 0.462 in 2002 but rose to 0.466 again in 2004.

– Source: P60-229, pp. 40-41, http://www.census.gov/prod/2005pubs/p60-229.pdf

How much inequality is there across nations?

• Income inequality is greater in the U.S. than in other industrialized nation.

• Inequality is generally more severe in developing nations.

• In 1992, the richest top 10 percent of the world’s population received 53 percent of the total world income.

• World inequality increased substantially between 1920 and 1950. No significant change since 1950.

What is income mobility and why is it important?

• Income mobility refers to the amount of movement across income ranks experienced by persons or families– the simplest measure of economic mobility is the percentage

of individuals who move into a new income quintile.

• Easiest to use Social Security earnings records to follow persons

• Income mobility is important because it offsets inequality. Increasing inequality might be accepted if it were accompanied by increasing mobility.

How much income mobility is there in the U.S.?

• Method:– In a base year, rank all incomes in the sample from

highest to lowest, and then break them into five equal-sized income quintiles, with the top twenty percent in the highest quintile, etc. Then do the same to the incomes of the same individuals in a later year, breaking them into equal quintiles, and then examining the relative movement of individuals within the distribution

• Estimates vary. – See Daniel P. McMurrer and Isabel V. Sawhill, Economic Mobility

in the United States, at http://www.urban.org/publications/406722.html

How much income mobility is there in the U.S.?

• Gottschalk (1996) finds that between 1974 and 1991, 62 percent of individuals age 16 or over in 1975 moved to a different quintile – 58 percent for those originally in the lowest

quintile – 56 percent for those in the highest – In the one year between 1974 and 1975, 39

percent moved to a different quintile (33 percent of the lowest quintile, 21 percent of the highest).

Intra-generational Income Mobility in the U.S.:How often do the children of the poor become rich?

Source: The Century Fund, Rags to Riches: The American Dream is Less Common in the United States than Elsewhere http://www.inequality.org/teach.cfm

Income Mobility in the U.S.: Similarities in Fathers and Sons Incomes

Source: The Century Fund, Rags to Riches: The American Dream is Less Common in the United States than Elsewhere, http://www.inequality.org/teach.cfm

Income Mobility in the U.S.: What explains the relationship of Fathers and Sons Incomes?

How does income mobility in the U.S. compare to other developed nations?

What’s the Problem? Why worry about rising inequality in America?

See slide show at

http://www.inequality.org/facts.cfm