Income Inequality

Poverty Absolute or relative concept? Basket of goods sufficient for basic needs –Normative concept World Bank traditional uses $1 a day –In 2001, decided to use PPP with 1993 prices and $1.08. –Lots of debate about this –No poverty in OECD countries by this standard

Measuring Inequality What should we measure? –Income? Personal or Houshold? –Wealth? Is it important? –Maybe. It is possible for growth rates to be positive and those at the bottom the distribution to be worse off

Measure of Inequality Assume we have an economy with 10 people with the following incomes

Order by income

Compute % of income for each quintile Quintile is 20% In our example each quintile will have two people So for the lowest quintile we would add the income of two lowest which is 20+40=60 and divide by the total income in the economy which is 3410 and we get 2% Do the same thing for the next two lowest

% of individuals % of income

cumulative % of individuals cumulative % of income

Gini coefficient is A/A+B If income is equally distributed Gini is 0. Larger Gini means more inequality

In spite of difficulties in measuring inequality, statistical info can be useful Does growth benefit the poor?

Fig. 6.7

Is more inequality bad? Not clear what the optimal distribution is Gini coefficient is lower in Bangladesh than the United States but most people would not want to trade places

Inequality and Growth Generally there is negative relationship between gini coefficient and growth, but there are countries with high gini and high growth rates

Does high levels of inequality lead to low levels of growth? –More redistribution of income if poor vote to tax rich –If rich have political power it may be in the interest of government to provide institutions that protect their interests

Why is distribution unequal? Unequal access to education Is income distribution unequal because of lack of growth? Unequal access to land –Economies of scale