Lecture 2: Inequality

Today’s Readings

• Schiller, Ch. 2: Inequality • “Income, Poverty, and Health Insurance Coverage in the United

States,” Current Population Reports, P60-235 or most recent report, pp. 1-11, 29-30; and 31-40 available at http://www.census.gov/hhes/www/income/income07.html

• U.S. Census Bureau, Historical income tables—Income Inequality http://www.census.gov/hhes/www/income/histinc/ineqtoc.html (See especially table IE-1)

• U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Indexes at http://www.bls.gov/cpi/home.htm

Today’s Topic’s

• Schiller’s major points• Introduction to Census data

Schiller’s Major Points

• Questions raised:• Why does economic inequality matter?• What problems do we encounter if we measure economic

inequality with gross income?• How do we summarize income to reflect inequality?• How much inequality is there in the U.S.?• How much inequality is there across nations?• What is income mobility and why is it important?• How much income mobility is there in the U.S.?• How does income mobility in the U.S. compare to other

developed nations?

Why does economic inequality matter?

• Costs of inequality

• Benefits of inequality

• Equity versus efficiency

What problems do we encounter if we measure economic inequality with gross income?

• Ignores fringe benefits• Includes realized capital gains but ignores

unrealized capital gains• Consumption is often greater than income,

particularly for persons receiving non-cash transfers such as poor families and professionals who barter services

• Gross income exceed the amount of disposable income (taxes cannot be consumed)

Is there a better measure than income?

• Other possible candidates:– Wealth?– Consumption?

Is there a better measure than income?

• Other possible candidates:– Wealth: reflects economic power– Consumption: reflects current living

standards

What does income reflect?

Is there a better measure than income?

• Other possible candidates:– Wealth: reflects economic power– Consumption: reflects current living

standards– Income: reflects market participation

• Which concept is superior when measuring inequality conceptually? Practically?

How do we summarize income to reflect inequality?

• Between group averages• Income shares• Lorenz curves and Gini coefficients

– http://en.wikipedia.org/wiki/Gini_coefficient

How much inequality is there in the U.S.?

Between group averages

• See pages 5-11 in Income, Poverty, and Health Insurance Coverage in the United States: 2007 http://www.census.gov/prod/2008pubs/p60-235.pdf – Black household median income ($33,916)

was only 62 percent of the median for non-Hispanic White households ($54,920).

How much inequality is there in the U.S.?

Income Shares

http://www.census.gov/hhes/www/income/histinc/ineqtoc.html

Sources: 1947-79: Analysis of U.S. Census Bureau data in Economic Policy Institute, The State of Working America 1994-95, p. 37. 1979-2001: U.S. Census Bureau, Historical Income Tables, Table F-3: http://www.census.gov/hhes/income/histinc/f03.htmlThresholds: U.S. Census Bureau, Historical Income Tables, Table F-1: http://www.census.gov/hhes/income/histinc/f01.html

Sources: U.S. Census Bureau, Historical Income Tables, Table F-3: http://www.census.gov/hhes/income/histinc/f03.htmlThresholds: U.S. Census Bureau, Historical Income Tables, Table F-1: http://www.census.gov/hhes/income/histinc/f01.html

New evidence on increasing inequality

Source: Emmanuel Saez, Striking it Richer: The Evolution of Top Incomes in the United States, (Update with 2007 estimates), August 5, 2009, http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf

How much inequality is there in the U.S.?

Gini Coefficient Trends

• Gini coefficient increased every year between 1967and 2001

• Gini coefficient increased by 17 percent between 1967 (0.397) and 2001 (0.466)

• Gini coefficient fell to 0.462 in 2002 but rose to 0.470 again in 2006, then declined to 0.463 in 2007.

– Source: P60-229, pp. 40-41, http://www.census.gov/hhes/www/income/histinc/ineqtoc.html

How much inequality is there across nations?

• Income inequality is greater in the U.S. than in other industrialized nation.

• Inequality is generally more severe in developing nations.

• In 1992, the richest top 10 percent of the world’s population received 53 percent of the total world income.

• World inequality increased substantially between 1920 and 1950. No significant change since 1950.