Income inequality games

The paper explores different applications of the Shapley value for either inequality or poverty measures. We first investigate the problem of source decomposition of inequality measures, the so-called additive income sources inequality games, based on the Shapley value, introduced by Chantreuil and Trannoy (1999) and Shorrocks (1999). We show that multiplicative inequality games provide dual results compared with Chantreuil and Trannoy’s ones. We also investigate the case of multiplicative poverty games for which indices are non additively decomposable in order to capture contributions of sub-indices, which are multiplicatively connected with, as in the Sen-Shorrocks-Thon poverty index. We finally show, in the case of additive poverty indices, that the Shapley value may be equivalent to traditional methods of decomposition such as subgroup consistency and additive decomposition.     

TAX POLICY AND INCOME INEQUALITY IN THE UNITED STATES, 1979–2007

This paper assesses the effects of U.S. tax policy reforms on inequality over around three decades, from 1979 to 2007. It applies a new method for decomposing changes in government redistribution into (1) a direct policy effect resulting from policy changes and (2) the effects of changing market incomes. Over the period as a whole, the tax policy changes increased income inequality by pushing up the income share of high‐income earners (the top 20%). (JEL H23, H31, H53, P16)     

Learning from your neighbor: tax-benefit systems swaps in Latin America

Over the last decades, Latin American countries have experienced a noticeable decrease in income inequality. While this trend is mainly associated with a decline in wage inequality, progressive reforms of the tax-benefit systems of the region may have played a role. While redistributive systems in Latin America are still in their infancy, they are constantly expanding and do so at different pace in the region. To investigate this point in a comparative way, the present study exploits newly developed tax-benefit microsimulation models for Ecuador and Colombia. These two neighboring countries show contrasted situations in terms of income distribution and we characterize the extent to which this difference is explained by different tax-benefit systems. The comparative nature of our microsimulation models allows us to swap tax-benefit systems between countries to produce counterfactual simulations whereby the system of a country is applied to the population of the other. In this way, we can decompose the total country difference in income distribution to extract the role of different tax-benefit policies. We confirm that the Ecuadorean system is more redistributive and quantify the difference: if the Ecuadorean system was applied to the Colombian population, the Gini coefficient would be reduced by 1.7 points in Colombia. Headcount poverty would decrease by around 10% and the intensity of poverty by up to 14.7%. This analysis contributes to the recent literature on the redistributive role of tax-benefit systems in Latin America and highlights the role of microsimulation techniques to show how countries in the region can learn from each other in order to improve social protection and reduce income inequality.     

A general class of inequality elasticities of poverty

Many authors have recently emphasized the crucial role of income inequalities in the design of efficient policies aimed at reducing poverty. However, the link between variations in the degree of inequality and variations in poverty is not well documented. The literature, for instance, does not provide any satisfying tool for predicting how a small relative variation in the Gini index may be associated with a variation in the headcount index. In the present paper, we define a family of Lorenz curve transformations that can directly be interpreted in terms of relative variations of known inequality measures. Then, we extend Kakwani’s (Rev Income Wealth 39(2):121–139, 1993) methodology for the calculation of inequality elasticities of poverty. Improvements are threefold with respect to Kakwani’s work. First, our formulas are not confined to the sole Gini index. Secondly, they embrace the uncertainty and the complexity of the mechanical link between inequality and poverty. Third, using some flexible functional form, one can easily perform an accurate estimation of the point inequality elasticities of poverty corresponding to observed variations of a given income distribution. We also propose a simple measure that may be helpful to assess how “pro-poor” are inequality variations by comparing the observed elasticities with the set of theoretical elasticities that could be obtained from the initial income distribution.     

Welfare analysis and redistributive policies

Applied welfare analyses of redistributive systems nowadays benefit from powerful tax-benefit microsimulation programs combined with administrative data. Arguably, most of the distributional studies of that kind focus on social welfare defined as a function – typically inequality or poverty indices – of household equivalized income. In parallel, economic research has made considerable progress in the measurement of welfare along several dimensions. Distinct but related branches of the literature have attempted (i) to model different behavior (in a way that matter for incidence and redistribution of tax-benefit policies), (ii) to go beyond income, (iii) to better define and estimate equivalence scales, (iv) to open the household black box and measure welfare at the individual level. I suggest a general framework to critically review these streams of literatures and to discuss whether recent advances in each of these fields have been or could be readily operationalized in welfare analyses and policy simulations.     

The impact of household capital income on income inequality��a factor decomposition analysis for the UK, Germany and the USA

This paper analyses the contribution of capital income to income inequality in a cross-national comparison. Using micro-data from the Cross-National Equivalent File (CNEF) for three prominent panel studies, namely the BHPS for the UK, the SOEP for West Germany, and the PSID for the USA, we use the factor decomposition method described by Shorrocks (Econometrica 50:193–211, 1982). The factor decomposition of disposable income into single income components shows that capital income is exceedingly volatile and that its share in disposable income has risen recent years. Moreover, capital income makes a disproportionately high contribution to overall inequality in relation to its share in disposable income. This applies to Germany and the USA in particular. Thus capital income accounts for a large part of disparity in all three countries.     

ACCOUNTING FOR URBAN CHINA'S RISING INCOME INEQUALITY: THE ROLES OF LABOR MARKET,HUMAN CAPITAL,AND MARRIAGE MARKET FACTORS

This paper analyzes China's rising family income inequality since the early 1990s when the urban labor market started its transformation from a centrally controlled to a market‐driven one. We document the trends in income inequality over the period of 1992–2009 using the Urban Household Survey data, and adopt the approach recently proposed by Eika et al. (2014) to decompose changes in income inequality. We find that labor market factors accounted for about three‐quarters of the overall increases in income inequality while falling marriage rate contributed the other quarter. Changes in human capital levels and marital assortativeness have not contributed to the rising inequality. (JEL D31, I26, J12)     

Inequality decomposition values: the trade-off between marginality and efficiency

This paper presents a general procedure for decomposing income inequality measures by income sources. The methods of decomposition proposed are based on the Shapley value and extensions of the Shapley value of transferable utility cooperative games. In particular, we find that Owen’s value can find an interesting application in this context.We show that the axiomatization by the potential of Hart and Mas-Colell remains valid in the presence of the domain restriction of inequality indices. We also examine the properties of these decomposition rules and perform a comparison with Shorrocks’ decomposition rule properties.     

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.     

Reducing poverty and inequality through tax-benefit reform and the minimum wage: the UK as a case-study

Atkinson’s book Inequality: What Can Be Done? (Harvard University Press, 2015) sets out a range of concrete proposals aimed at reducing income inequality, which cover a very broad span but include major changes to the income tax and social transfers system and the minimum wage. These are framed with specific reference to the UK but have much broader relevance in demonstrating how substantial the impact on inequality of such measures could be. This paper assesses the first-round effects of these tax, transfer and minimum wage reforms on income inequality and poverty based on a microsimulation approach using EUROMOD. The reforms involve a significantly more progressive income tax structure, a major increase in the minimum wage to the level which is estimated to represent the ‘Living Wage’, and alternative routes to reforming social transfers – either to strengthen the social insurance element or to restructure the entire system as a Participation Income (a variant of Basic/Citizen’s Income). The results show how the first-round effects of either set of tax and transfer proposals would be to substantially reduce the extent of income inequality and relative income poverty and the paper draws out how the two approaches differ in their effects. The additional impact of raising the minimum wage to the Living Wage is modest, reflecting in particular the position of beneficiaries in the household income distribution and the offsetting effects on household income of the withdrawal of means-tested cash transfers.     

Tracing out the effects of demographic changes on the income distribution

During the 1980s and 1990s fertility decisions varied significantly and not uniformly along the income distribution in Argentina. In this paper we study the effects of these demographic changes on income poverty and inequality by applying microeconometric decomposition techniques. In particular, we simulate the equivalized household income distribution that would emerge if individuals observed in a given base year had taken fertility decisions as they did in another different year. The results suggest that these demographic factors have contributed considerably to the changes in poverty and inequality experienced by Argentina since the 1980s.     

Inequality and the time structure of earnings: evidence from Germany

This paper studies the relationships between annual and subannual inequality and mobility during the course of the year. We apply an exact decomposition framework as outlined in Wodon and Yitzhaki (Econ Bull 4:1–8, 2003), and in Yitzhaki and Wodon (Research on Economic Inequality 12:179–199, 2004). Earnings records of pension insurants in Germany serve as the database. The long time horizon of our database allows us to investigate the stability and robustness of the parameters of the decomposition over time. Specifically, we show that the mobility component of the decomposition, as measured by Gini correlation coefficients, changes over the observation period. This makes it difficult to predict the impact of the income accounting period on inequality in a more general context. Thus, it is of paramount importance to use income data from a uniform accounting period in distributional analyses.     

A New Poverty Decomposition

This note proposes a new poverty decomposition that can be used to explain changes in poverty over time. The change in poverty is derived as the exact sum of four elements: (i) the overall growth effect, assuming inequality in the distribution does not change; (ii) the impact of differences in growth rates between the groups; (iii) the effect of the change in inequality within the different groups; (iv) the impact of changes in the population shares of the various groups.     

Income inequality,welfare and poverty in a developing economy with applications to Sri Lanka

This paper explores how the behaviour of welfare, income inequality and poverty changes during the course of a country's economic development. the analysis is based on Kuznet's model of sectorial dualism. The various propositions proved in the paper provide conditions under which the modern sector enlargement and enrichment will lead to higher social welfare and lower income inequality and poverty. It is demonstrated that Kuznet'sU-shaped curve may not exist or even if it does, the turning point may occur at a later stage of development. The paper provides numerical illustrations of the results using Sri Lankan data.This paper was written while I was a Senior Fellow at the World Institute for Development Economics Research, Helsinki, Finland. I am grateful to Juhani Holm for providing me with expert computational assistance. A referee of this Journal made some useful comments which led to considerable improvement in the paper.     

Inequality convergence in a panel of states

This paper empirically tests for convergence in income inequality using a large panel of annual data for 48 states in the U.S. during the 1916–2005 period. By implementing the novel OLS estimator introduced by Bao and Dhongde (Oxf Bull Econ Stat 71:295–302, 2009), we find overwhelming evidence in support of convergence in income distribution. The results are robust to the uses of alternative inequality indicators, regions, and time periods.     

Long-Term Care

This study examines the redistributive effects of public pensions on old-age income inequality, testing whether public pensions function as the “great equalizer.” Unlike the well-known alleviating effect of public pensions on old-age poverty, the effects of public pensions on old-age income inequality more generally have been less examined, particularly outside Western countries. Using repeated cross-sectional data of elderly Koreans between 1998 and 2010, we applied Gini coefficient decomposition to measure the impact of various income sources on old-age inequality, particularly focusing on public pensions. Our findings show that, contrary to expectations, public pension benefits have inequality-intensifying effects on old-age income in Korea, even countervailing the alleviating effects of public assistance. This rather surprising result is due to the specific institutional context of the Korean public pension system and suggests that the “structuring” of welfare policies could be as important as their expansion for the elderly, particularly for developing welfare states.     

On the underestimation of migration’s income and poverty impact

In estimating the impact of migration on income and poverty, most existing studies have overlooked the fact that migration changes the size of the household. The ‘corrected’ impact that accounts for changes in household size is presented analytically and is estimated on the basis of data from nationally representative household surveys in Albania and Ghana. The analysis considers three poverty measures and four groups of migrant households: those with internal, international, internal and international, and internal and/or international migrants. The ratio of the corrected to the uncorrected impact on per capita income for Ghana (Albania) averages from 2.7 to 4.5 (2.5–3.8), and the ratio for the poverty impact averages from 2.6 to 4.4 (2.1–6.4). Thus, abstracting from changes in household size may result in a substantial underestimate of the impact of migration on income and poverty.

Measuring the impact of price changes on poverty

This paper develops a methodology to measure the impact of price changes on poverty measured by an entire class of additive separable poverty measures. This impact is captured by means of the price elasticity of poverty. The total effect of changes in price on poverty is explained in terms of two components, income and distribution effects. The income effect measures the change in poverty when all prices increase uniformly, whereas the distribution effect captures the change in poverty because of changes in relative prices. Using this decomposition, the paper derives an empirically operational index, which reveals whether the price changes have been pro-poor or anti-poor. The paper also derives a new price index for the poor. While this index can be computed for any poverty measures, our empirical analysis applied to Brazil is based on three poverty measures, the head-count ratio, the poverty gap ratio and the severity of poverty. The empirical analysis shows that price changes in Brazil during the 1999–2006 periods have been anti-poor. Nevertheless, during the last 2 to 3 years, the price changes have affected the poor less adversely than the non-poor.     

BETWEEN SCYLLA AND CHARYBDIS: INCOME DISTRIBUTION,CONSUMER CREDIT,AND BUSINESS CYCLES

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy. (JEL C63, D31, E62, G01)     

Income Inequality and Chronic Health Conditions: A Multilevel Analysis of the U.S. States

Recently, scholarly work has examined the effect of rising income inequality on health outcomes. However, this work is somewhat inconclusive. The mechanisms that could produce such an association are still being sorted out. Much of this work focuses on mortality outcomes with little attention to how this process operates for actual health conditions, including chronic health problems—arguably the main public health concerns of the developed world. In a series of multilevel binary logistic regression models using data from the 2005 and 2007 Behavioral Risk Factor Surveillance System, we examine the association between state-level income inequality, poverty, and social welfare measures on spending and policy to examine the association between these factors for three chronic health outcomes: diabetes, hypertension, and coronary heart disease. We find that income inequality is conditionally positively related only to the diagnosis of diabetes and hypertension, and only in 2007. However, absolute poverty is related to the outcome across all three dependent variables. Certain social welfare measures attenuate the effects of both income inequality and absolute poverty, suggesting that some policies reduce this association.