By Matthew Higgins and Jeffrey G. Williamson Explaining Inequality the World Round: Cohort Size, Kuznets Curves, and Openness. By Matthew Higgins and Jeffrey G. Williamson

The three hypothesis Inequality and cohort size Inequality and openness Kuznet curve hypothesis

Cohort size hypothesis „Fat age cohorts tend to get low rewards“ Important where the fat cohorts lie in the demographic structure Cohort size variance across countries vs. within countries over time

Inequality and openness Rising inequality correlated with increasing globalization Trade (Heckscher- Ohlin argument) Immigration Labor supply shifts important Globalization as cause for falling inequality in developing countries and increasing inequality in developed countries?

Kuznets curve hypothesis I – Strong version Inequality first decreases and then declines during economic development Demand for different skill levels causes the inequality development

Kuznets curve hypothesis II – Weak version Demand forces not necessarily the reason for Kuznet movements Other forces possible Forces of some demographic transition (cohort size) Different policies (attitude towards liberal policies, schooling,…) Natural resource endowments

EMPIRICS Pooled dataset of 111 countries, 1960-1990ies Variables: Decadal average of Real GDP per worker (RGDPW) RGDPW2 GINI-coefficent Log of (Q5/Q1) income ratio (GAP) 8 dummies, including decadal dummies

Problems Simultaneity bias - Instrumental variables? Omitted variable bias Heteroskedasticity - heteroskedasticity-robust-estimators

Monotonically declining Inverted U, but imprecise estimations

Extension of the model MATURE: share of population with age between 40- 59 OPEN: Sachs-Warner index a black market premium of 20 percent or more for foreign exchange an export marketing board which appropriates most foreign exchange earnings a socialist economic system extensive non-tariff barriers on imports of intermediate and capital goods.

Quite high

Lacks degrees of freedom!

M3/GDP is a measure for financial depth (how sophisticated are financial institutions in a country, how many have access to these…) FREEDOM geometric average of two indices, one measuring civil liberties and one measuring political rights

Alternative measures for openness: quantitative and tariff restrictions on imports, the share of imports plus exports in GDP Natural level of openness: the logs of country size, population, per capita income, per capita crude proven oil reserves, the average distance from trading partners, and two dummy variables describing, respectively, whether a country is an island or is landlocked

Globalization and Inequality Milanovic (2005) proxies openness by the ratio of trade to GDP, finds negative effect of openness on inequality in poor countries Ravallion (2001) as well Dollar and Kraay (2000, 2002) find that openness has no impact on inequality

Alternative demographic measures: total fertility rate population growth rate labor-force growth rate the infant mortality rate life expectancy at birth

Fertility rate De La Croix and Doepke (2003) find negative correlation between high fertility and growth, via education Barro (2000): High correlation between inequality and fertility

Fixed country effects Dummy variable for every country Unbiased and consistent under the assumption that unobserved effects are correlated with the explanatory variables Loss in efficiency Serial correlation -> LDV

Explaining cohort size effect on inequality Three channels 1) altered age structure, leaving age-earnings profile constant (+) 2) different age groups with different within inequality levels (+) 3) age-earnings structure changing, different experience premium (-)

Simulations - I Three key sets of parameters 1) Age profile of labor productivity over the lifecylce 2) Age profile of the variance of earnings over the lifecylce 3) Elasticity of substitution between different age groups

Simulations - II Treat estimated mean age-income as representing the age-profile of labor productivity Select various values for the elasticity of substitution across age groups Evaluate inequality indexes associated with various steady-state population growth rates

Simulations - III Perfect substitutability Small effect by changing mix between older and younger workers caused by different wage levels (32.5 to 32.1) Larger effect caused by different variance within age groups (43.1 to 39.7) Taking mean-earnings and variance effects together: similar effect

Simulations - IV Imperfect elasticity of substitution necessary for cohort size effect to be true 3.0 : offsets first two channels suggests lower elasticity of substitution

Barro, R. J. (2000). Inequality and Growth in a Panel of Countries Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of economic growth, 5(1), 5-32. De La Croix, D., & Doepke, M. (2003). Inequality and growth: why differential fertility matters. The American Economic Review, 93(4), 1091-1113. Dollar, D., & Kraay, A. (2002). Growth is Good for the Poor. Journal of economic growth, 7(3), 195-225. Milanovic, B. (2005). Can we discern the effect of globalization on income distribution? Evidence from household surveys. The World Bank Economic Review, 19(1), 21-44. Ravallion, M. (2001). Growth, inequality and poverty: looking beyond averages. World development, 29(11), 1803-1815.