ML 14.1 - 14.3: Income Inequality

How can you recompute poverty rate?

-Change the scaling for family size (no strong effect) -Change the price index: shift to CPI-U-RU instead of official CPI-U [large legit effect] -Shift to households instead of family: not clear which is best, depends on sharing [some effect] -Shift to after-tax income: large legit effect -Add non-cash benefits: tiny net effect -Shift to consumption (modest effect on poverty rate, huge effect on deep poverty)

What factors explained the evolution of poverty?

-Increasing pre-tax inequality: stagnant bottom wages in spite of economic growth per capita [large effect] -Changes in family structure: single parent families increased from 7% in 1967 to 14.4% in 2003. Increases poverty rate by 4% [large effect] -Increase in female labor force participation -> reduces poverty rate [significant effect since 1980] -Immigration: accounts for only 0.7% in the poverty rate increase from 1969 to 1999 [small effect] -Means-tested transfers [medium effect because they are concentrated below poverty line]

Chetty et al., 2014 found out what about intergenerational income mobility in the US?

-US has less mobility than European countries (especially Scandinavian) -Substantial heterogeneity in mobility across cities in the US -Places with low segregation, low income inequality, good K12 schools, high social capital, high family stability tend to have high mobility

What is the role of higher education in intergenerational mobility?

1. Access: huge variation in access across schools. 2. Outcomes: with good colleges, outcomes of poor vs rich kids are similar. 3. Mobility rates: large discrepancies across colleges in fraction of students who come from bottom 20% and reach top 20% 4. Trends: Fraction of poor kids stagnated at top schools and dropped at the best public schools and community colleges

In many OECD countries, people pool what percentage of their income through their government to fund transfer programs?

30-50%

How many people were lifted out of extreme poverty between 1990 and 2015?

A billion

What is the number of individuals living in absolute poverty?

About 0.8 billion

Does absolute poverty or relative poverty fall in the long run with economic growth? Why?

Absolute poverty fall in the long run, since no one in the US is World Bank poor. But relative poverty does not.

In the US, how are the thresholds for the US poverty rate definition adjusted?

Annually using the official CPI

Measured poverty is based on the consumption or disposable income at what level?

At the family level and everybody within the family has the same poverty status

Ideally, at what level should poverty be defined?

At the individual level based on individual consumption

How do people measure intergenerational income mobility?

Average income rank of children by income rank of parents

In the US, what is their poverty rate definition based on?

Based on money income, which is equal to... Market income before taxes + cash gov transfers + cash private transfers

Absolute poverty captures what?

Both growth and inequality effects

How was growth in bottom 50% and 90% incomes in US?

Bottom 50% pre-tax income per adult have stagnated since 1980 in spite of 60% increase in average national income

How can inequality be measured?

By indexes such as Gini coefficient

Which is more concentrated? Capital income or labor income?

Capital income

For the poverty rate disposable income definition, what is difficult to measure?

Consumption c

What is the most intuitive notion of poverty based on?

Consumption c (not pre-tax income z)

What regions have low probability of reaching top quintile given parents being in bottom quintile?

Deep South

What is a criticism of the poverty rate disposable income definition?

Does not fully capture in-kind elements of B(z) such as Medicaid

What is capital income inequality?

Due to differences in wealth k (due to past saving behavior and inheritances received), and rates of return r

What is labor income inequality?

Due to differences in working abilities, work effort, and luck

Currently, who makes up the individuals who live in absolute poverty. Where do they come from?

East Asia and Pacific, South Asia, and Sub-Saharan Africa.

Who holds the top 1% share internationally?

English speaking countries

When talking about poverty rate, what does absolute mean?

Fraction of population with disposable income (normalized by family size) below poverty threshold z* fixed in real terms (e.g. World Bank: $/day in 1990 dollars)

When talking about poverty rate, what does relative mean?

Fraction of population with disposable income (normalized by family size) below poverty threshold z* fixed relative to median (e.g. EU: 60% of median)

What is the trend regarding share of women by labor income fractile?

Gender gap has decreased but remains substantial especially at the very top

Do taxes and transfers affect economic behavior?

Generates an efficiency and equity trade off (size of economic pie vs distribution of the economic pie)

In the US, what is the threshold of the poverty rate definition depends on?

Household size/structure

In the US, what doesn't count in the poverty rate definition?

In-kind market income and transfers (employer health insurance, Medicaid, nutrition, public housing)

In the US, what is not deducted from the poverty rate definition?

Income and employee payroll taxes

In the US, what is not added to the poverty rate definition?

Income tax credits

Explain what was behind the trends in poverty rates.

Initiatives like Medicare and SS helped tackle elderly poverty. Intiatives like Food Stamps helped with children poverty.

What was the trend in the number of people in poverty?

It have increased to 43.1 million in 2015.

What was the trend in the percent of those in poverty?

It have stagnated around 10-15% since the 1970s.

Individuals derive market income (before tax) from what two things?

Labor and capital

What are issues with the US poverty rate definition?

No longer... -In kind transfers have grown substantially -Payroll tax and income tax credit have grown substantially for low income families -Official CPI overstates inflation [and understates economic growth] because it is not chained [does not take into account that relative price changes lead to changes in consumption] Also, hard to change definition politically

In terms of the top 1% share, how is Japan and Continental Europe doing?

Not as much surge in top income shares in these places

Relative poverty captures what?

Only inequality effects

Why does inequality matter?

People evaluate their economic well being relative to others, not in absolute terms -> Public cares about inequality

Why does relative income matter?

The fact that inequality stays in the debate in spite of huge growth since 1800

What is the Gini coefficient? Explain with a graph as well.

The most famous inequality index Gini = 2 * area between 45 degree line and Lorenz curve Lorenz curve L(p) at percentile p is fraction of total income earned by individuals below percentile p Gini = 0 -> perfect inequality Gini = 1 -> complete inequality (top person has all the income)

Why could labor income inequality in the US increase substantially since 1970?

There's a debate between skilled biased technological progress view and the institution view (min wage and unions).

What is the trend of the top 10% of pre-tax income share in the US?

Top income shares dropped drastically from 1929 to 1950 and increased dramatically since 1980.

What regions have high probability of reaching top quintile given parents being in bottom quintile?

West Coast, New England, Plain states. Pretty much anywhere, but the Deep South.

What does the equation look like for the most intuitive notion of poverty that is based on consumption c (not pre-tax income z)?

c = z - T(z) + B(z) + E - s T(z) = tax B(z) = government transfer E = net private transfer (charity, friends, family) s = net saving

For the poverty rate disposable income definition, how is disposable income measured?

z - T(z) + B(z) [post-tax income] measured in traditional Current Population Survey (CPS)

Individuals derive market income (before tax) from labor and capital. What is the equation?

z = wl + rk w = wage l = labor supply k = capital r = rate of return on capital