On the welfare loss caused by inequality of opportunity

Based on the ethical principle of equality of opportunity, this paper presents a measure of the welfare loss that is caused by an unfair distribution of a particular outcome (income, health, education, etc). The key idea is that a fair society should produce outcomes that depend on individuals’ effort and not on their external circumstances such as gender, socioeconomic background, etc. We propose measuring inequality of opportunity as the welfare loss attributed to the outcome differences among individuals who exert a similar level of effort. Our results are in line with those aspects of fairness literature that give priority to the ex post compensation approach to equality of opportunity. Finally, we present an empirical application for the measurement of the welfare loss in the income distribution in Europe. We have observed a high degree of heterogeneity among European countries. The welfare loss due to inequality of opportunity ranges in those, from basically zero to almost one fifth of their potential welfare.     

An Ex-Post View of Inequality of Opportunity in France and its Regions

This paper proposes an ex-post measure of inequality of opportunity in France and its regions by assessing the inequality between individuals exerting the same effort. To this end, we define a fair income that fulfils ex-post equality of opportunity requirements. Unfairness is measured by an unfair Gini based on the distance between the actual income and the fair income. Our findings reveal that the measures of ex-post inequality of opportunity largely vary across regions, and that this is due to differences in reward schemes and in the impact of the non responsibility factors of income. We find that most regions have actual incomes closer to fair incomes than to average income, excepted Ile de France where the actual income looks poorly related to effort variables. Finally, we find that income inequality and inequality of opportunity are positively correlated among regions.     

Inequality of opportunity in the land of opportunities, 1968–2001

We measure inequality of opportunity for earnings acquisition in the U.S. between 1968 and 2001. Following recent theories of social justice, earnings determinants are divided into two parts: Circumstances, which are characteristics outside individual control and effort representing factors impacting earnings but under individuals’ responsibility. Equality of opportunity requires that inequality of circumstances must be corrected while differences of effort must remain unaltered. Circumstances are represented by parental education and occupation, ethnic origin, place of birth and age. Effort is modeled with schooling choices and labour supply decisions. Using the PSID from 1968 to 2001, we provide two alternative assessments of inequality of opportunity using counterfactual distributions. The statistical framework is semi-parametric and builds on duration models. Finally, we conclude that inequality of opportunity represents between 20 and 43% of earnings inequality, but decreases all over the period reaching around 18% in 2001.     

Inequality and growth: evidence from panel cointegration

This paper uses heterogeneous panel cointegration techniques to estimate the long-run effect of income inequality on per-capita income for 46 countries over the period 1970–1995. We find that inequality has a negative long-run effect on income, both for the sample as a whole and for important sub-groups within the sample (developed countries, developing countries, democracies, and non-democracies). The effect is economically important, with a magnitude about half as high as the magnitude of an increase in the investment share.     

Inequality of opportunity in adult health in Colombia

This paper measures inequality of opportunity in adult health in Colombia using the 2010 Living Standards and Social Mobility Survey, a rich dataset that provides unique information about individual childhood circumstances in that country. Dissimilarity and Gini-opportunity indexes are calculated to provide different measures of inequality of opportunity using a self-reported variable for health status. The Shapley-value decomposition is then used to estimate the contribution of early-life circumstances such as parental background, region of origin and ethnicity to inequality of opportunity. The findings suggest that 8 % to 10 % of the circumstance-driven opportunities distinctively enjoyed by those who are healthier should be redistributed or otherwise compensated in order to achieve equality of opportunity. Differences in household socio-economic status during childhood and parental educational attainment appear to be the most salient dimensions of inequality of opportunity in adult health.     

Improving the Measurement of the Relationship between Opportunities and Income: Evidence from Longitudinal Data from Chile

The relationship between exogenous circumstances faced in early childhood (opportunities) and earnings has been increasingly studied in the past decade. In this article we assess the sensitivity of this relationship to different income measures. Typically the empirical evidence is based on short‐term income measures that suffer from variability and measurement error. Using longitudinal data from Chile, we find that when four‐ and seven‐year earnings are used, the relationship between inequality of opportunity and income inequality is significantly higher than that obtained with yearly measures. Monte Carlo simulations with several data‐generating processes confirm this result. This supports policies targeted to reduce long‐term income inequality via providing equal opportunity to individuals at early stages in life.     

PIECE‐RATE CONTRACTS FOR OTHER‐REGARDING WORKERS

When workers are paid with piece rates, inequality arises naturally. We consider workers who care about income comparisons and are either status seeking or inequality averse. We identify circumstances under which inequality attitudes lead workers to exert more effort than they would otherwise, and also circumstances under which workers’ inequality attitudes lead firms to set lower piece rates than they would otherwise. The key behavioral assumption for both of these results to hold when workers are identical is behindness aversion, the property that changes in inequality matter more to the worker when he is behind than when he is ahead. (JEL D01, J33, M52)     

Measuring inequality of opportunity through between-group inequality components

Opportunity egalitarians support rich-to-poor redistribution whenever this allows for the compensation of income disparities due to non-responsible choices (circumstances). In this paper we focus on the measurement of opportunity inequality within Roemer’s (Philos Public Aff 22:146–166, 1993) pragmatic theory where a disjoint and exhaustive partition rule is assumed such that individuals within the same population can be grouped depending on the sole circumstances. Given entropy-based, deprivation-based and welfaristic inequality decomposition procedures, we show that the between-group Gini component from Dagum’s decomposition is the only well known between-group inequality index satisfying the Pigou-Dalton principle of transfer as reformulated for opportunity egalitarianism.     

Dynastic inequality,mobility and equality of opportunity

One often heard counter to the concern about rising income and wealth inequality is that it is wrong to focus on inequality of outcomes in a “snapshot”. Intergenerational mobility and “equality of opportunity”, so the argument goes, is what matters for normative evaluation. In response to this counter, we ask what pattern of intergenerational mobility leads to lower inequality not between individuals but between the dynasties to which they belong? And how does this pattern in turn relate to commonly held views on what constitutes equality of opportunity? We revive and revisit here our earlier contributions which were in the form of working papers (Kanbur and Stiglitz 1982, 1986) in order to engage with the current debate. Focusing on bistochastic transition matrices in order to hold constant the steady state snapshot income distribution, we develop an explicit partial ordering which ranks matrices on the criterion of inequality between infinitely lived dynasties. A general interpretation of our result is that when comparing two transition matrices, if one matrix is “further away” from the identity matrix then it will lead to lower dynastic inequality. More specifically, the result presents a computational procedure to check if one matrix dominates another on dynastic inequality. We can also assess “equality of opportunity”, defined as identical prospects irrespective of starting position. We find that this is not necessarily the mobility pattern which minimizes dynastic inequality.     

Equality of opportunity in educational achievement in the Middle East and North Africa

This paper is an empirical investigation of inequality of education opportunities in the Middle East and North Africa (MENA). We use student scores from tests administered by the international consortium Trends in Mathematics and Science Study (TIMSS) for a number of MENA countries and over time since 1999 to estimate the effect of circumstances children are born into on their academic achievement in science and mathematics. We find that inequality of opportunities explains a significant part of the inequality in educational achievements in most MENA countries, but there is ample heterogeneity. Family background variables are the most important determinants of inequality in achievement, followed by community characteristics. The results show that, despite great efforts in past decades to invest in free public education, most MENA countries are less opportunity equal in educational achievement than European countries, and several are less so than Latin America and the United States. From the variation in inequality of education opportunities across countries and over time we draw lessons on the influence of different education systems or changes in policy on equality of opportunity.     

INEQUALITY AND GROWTH IN THE UNITED STATES: EVIDENCE FROM A NEW STATE-LEVEL PANEL OF INCOME INEQUALITY MEASURES

This paper introduces a new comprehensive panel of annual state-level income inequality measures spanning the postwar period 1945–2004. For many states, the share of income held by the top decile experienced a prolonged period of stability after World War II, followed by a substantial increase in inequality during the 1980s and 1990s. This paper also presents an examination of the long-run relationship between income inequality and economic growth. Our findings indicate that the long-run relationship between inequality and growth is positive in nature and driven principally by the concentration of income in the upper end of the income distribution. ( JEL D31, O40)     

The Effect of Family Background on Individual Wages and an Examination of Inequality of Opportunity in India

The paper attempts to explore the role of family background in contributing to the overall economic inequality in Indian society. Drawing on the recent work on equality of opportunity, and using the Indian Human Development Survey (IHDS, 2004–05), paper finds that the opportunity share of inequality in wage earnings in India ranges from 11% to 17% across different age based cohorts. Given the conservative view of what constitutes responsibility, the analysis is likely to identify only the lower bound of opportunity inequality. The paper also calls for redistributive policies favoring those who suffer from inferior circumstances.     

IQ IN THE PRODUCTION FUNCTION: EVIDENCE FROM IMMIGRANT EARNINGS

We show that a country’s average IQ score is a useful predictor of the wages that immigrants from that country earn in the United States, whether or not one adjusts for immigrant education. Just as in numerous microeconomic studies, 1 IQ point predicts 1% higher wages, suggesting that IQ tests capture an important difference in cross‐country worker productivity. In a cross‐country development accounting exercise, about one‐sixth of the global inequality in log income can be explained by the effect of large, persistent differences in national average IQ on the private marginal product of labor. This suggests that cognitive skills matter more for groups than for individuals. (JEL J24, J61, O47)     

Trade Liberalization and Child Labor: A Case Study of Pakistan

The boom in industrial sector has lead to many problems and child labor is no exception. This study explores the linkages between trade liberalization and child labor both in short and long-run. The results suggest that GDP per capita and income inequality increase the child labor in the long-run but these results disappear in short-run. The study also finds that income inequality has positive and significant impact on child labor. Our findings also support that trade openness along with trade sanctions (imposed by the developed countries) are associated with the reduction in child labor in Pakistan.     

The relationship between inequality and labor market performance: Evidence from U.S. states

A central issue facing society is the equity/growth trade-off. Conventional economic theory suggests enhanced incentives associated with income inequality should increase growth, but at the expense of “fairness.” Recent theories challenge this notion by contending that inequality reduces human-capital investment and increases instability. Nevertheless, empirical evidence from U.S. states and across countries suggests an ambiguous relationship between inequality and income growth. Yet, at the state level, because inequality is related to many disamenities including crime, it can lead to lower utility and out-migration. The disamenities may produce compensating differentials that increase income. Given the inconsistencies regarding income, this study extends the literature by instead examining employment growth. Namely, long-run job growth is closely associated with net migration and any utility gains from migration. Thus, examining relative employment growth indicates whether inequality is associated with netutility gains from a vibrant economy or net-losses from disamenities. The results suggest that state-level inequality is associated with greater long-run job growth, or enhanced incentives appear to be the dominant factor.     

What is new with old? What old age teaches us about inequality and stratification

Aging is remarkably unequal. Who survives to grow old in America and the circumstances they face once there reflect durable racial, socioeconomic, and gender inequalities that structure our lives from birth. Yet within the field of social stratification and mainstream sociology proper, examinations of the rapidly growing population of older Americans are often relegated to a “gerontological” periphery. This essay posits that the failure to place aging as a core concern in stratification and inequality is a missed opportunity. We argue for the importance of reintegrating studies on the stratification of aging and explain why such a move is necessary. Specifically, we posit that (a) examining the aging population is necessary for understanding American inequality because aging is an outcome that is ubiquitous yet highly stratified; (b) aging and being seen as “old” in a youth‐focused society are stratifying processes in their own right; and (c) later life provides for analytical comparisons that are illustrative of how key mechanisms of inequality structure and stratify. After examining insights provided by a new wave of research on the aging U.S. population, we revisit the implications for understanding inequality and stratification in a graying and unequal America.     

Does income inequality contribute to credit cycles?

Recent literature presented arguments linking income inequality to the financial crash of 2007–2008. One proposed channel is expected to work through bank credit. I analyze the relationship between income inequality and bank credit in a panel cointegration framework and find that they have a long-run dependency relationship. Results show that income inequality contributed to the increase of bank credit in developed economies after the Second World War.     

Inequality of opportunity in Italy

In this paper we provide a methodology to measure opportunity inequality and to decompose overall income inequality in an “ethically offensive” and an “ethically acceptable” part. Moreover, we analyze inequality of opportunity in Italy. According to our results, inequality of opportunity accounts for about 20% of overall income inequality in Italy. Moreover, the regions in the South are characterized by a higher degree of opportunity inequality than the regions in the North, especially when considering population subgroups by gender.     

Remittances and inequality: a dynamic migration model

We develop a model to study the effects of migration and remittances on inequality in the origin communities. While wealth inequality is shown to be monotonically reduced along the time-span, the short- and the long-run impacts on income inequality may be of opposite signs, suggesting that the dynamic relationship between migration/remittances and inequality may well be characterized by an inverse U-shaped pattern. This is consistent with the findings of the empirical literature, yet offers a different interpretation from the usually assumed migration network effects. With no need to endogenize migration costs through the role of migration networks, we generate the same results via intergenerational wealth accumulation.     

Intersecting Lorenz Curves, the Degree of Downside Inequality Aversion, and Tax Reforms

This paper clarifies the conceptual distinction of downside inequality aversion (or transfer sensitivity) as a normative criterion for judging income distributions from the Pigou-Dalton principle of transfers. We show that when the Lorenz curves of two income distributions intersect, how the change from one distribution to the other is judged by an inequality index exhibiting downside inequality aversion often depends on the relative strengths of its downside inequality aversion and inequality aversion. For additive inequality indices or their monotonic transformations, a measure characterizing the strength of an index’s downside inequality aversion against its inequality aversion is shown to determine the ranking by the index of two distributions whose Lorenz curves cross once. The precise condition under which the same result generalizes to the case of multiple-crossing Lorenz curves is also identified. The results are particularly useful in understanding the distributional impact of tax reforms. I received exceptionally helpful comments from Mike Hoy, Peter Lambert, the Editor, Buhong Zheng, and an anonymous referee. The remaining errors and shortcomings are my own – W.H. Chiu