The role of income inequality on fiscal multipliers

A Work Project, presented as part of the requirements for the Award of a Masters Double Degree in Economics from the Nova School of Business and Economics and University of Maastricht

Recent trends in Spanish income distribution: a robust picture of falling income inequality

Income distribution in Spain has experienced a substantial improvement towards equalisation during the second half of the seventies and the eighties; a period during which most OECD countries experienced the opposite trend. In spite of the many recent papers on the Spanish income distribution, the period covered by those stops in 1990. The aim of this paper is to extent the analysis to 1996 employing the same methodology and the same data set (ECPF). Our results not only corroborate the (decreasing inequality) trend found by others during the second half of the eighties, but also suggest that this trend extends over the first half of the nineties. We also show that our main conclusions are robust to changes in the equivalence scale, to changes in the definition of income and to potential data contamination. Finally, we analyse some of the causes which may be driving the overall picture of income inequality using two decomposition techniques. From this analyses three variables emerge as the major responsible factors for the observed improvement in the income distribution: education, household composition and socioeconomic situation of the household head.

Factor decomposition of spatial income inequality: a revision

Duro and Esteban (1998) proposed an additive decomposition of Theil populationweighted index by four income multiplicative factors (in spatial contexts). This note makes some additional methodological points: first, it argues that interaction effects are taken into account in the factoral indexes although only in a fairly restrictive way. As a consequence, we suggest to rewrite the decomposition formula as a sum of strict Theil indexes plus the interactive terms; second, it might be instructive to aggregate some of the initial factors; third, this decomposition can be immediately extended to the between- and within-group components.

Inequality in CO2 emissions across countries and its relationship with income inequality: a distributive approach

This paper analyses the inequality in CO2 emissions across countries (and groups of countries) and the relationship of this inequality with income inequality across countries for the period (1971-1999). The research employs the tools that are usually applied in income distribution analysis. The methodology used here gives qualitative and quantitative information on some of the features of the inequalities across countries that are considered most relevant for the design and discussion of policies aimed at mitigating climate change. The paper studies the relationship between CO2 emissions and GDP and shows that income inequality across countries has been followed by an important inequality in the distribution of emissions. This inequality has diminished mildly, although the inequality in emissions across countries ordered in the increasing value of income (inequality between rich and poor countries) has diminished less than the “simple” inequality in emissions. Lastly, the paper shows that the inequality in CO2 emissions is mostly explained by the inequality between groups with different per capita income level. The importance of the inequality within groups of similar per capita income is much lower and has diminished during the period, especially in the low-middle income group.

Investor protection, risk sharing and inequality

This paper studies the relationship between investor protection, financial risk sharing and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk while lending to firms. This implies lower cost of external finance and better risk sharing between financiers and entrepreneurs. Investor protection, by boosting the market for risk sharing plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between the size of the market for risk sharing and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty-eight countries, and a panel of fifty countries over the period 1976-2000, supports the predictions of the model.

Inequality and a repeated joint project

Agents voluntarily contribute to an infinitely repeated joint project. We investigate the conditions for cooperation to be a renegotiation-proof and coalition-proof equilibrium before examining the influence of output share inequality on the sustainability of cooperation. When shares are not equally distributed, cooperation requires agents to be more patient than under perfect equality. Beyond a certain degree of share inequality, full efficiency cannot be reached without redistribution. This model also explains the coexistence of one cooperating and one free-riding coalition. In this case, increasing inequality can have a positive or negative impact on the aggregate level of effort.

The spatial inequality of wage income in Barcelona Metropolitan Area

ABSTRACT The measure and estimation of income levels in Barcelona Metropolitan Area (BMA) goes back a long way. Using different approaches and focusing on different municipalities, there is a lot of work in the field. The majority of the literature has focused on the estimation of income levels using variables related to consumption. The empirical evidence on wage differentials has shown an important growth during 80’s and 90’s especially in United Kingdom and USA. Less is known on spatial distribution of inequality. This paper presents a new data set for analyzing spatial distribution of wage income. This data is obtained by matching Wage Structure Survey (WSS) with data from Census disaggregated by census tracts. In this way we have a unique data set with wage incomes for every census track for 36 municipalities belonging to BMA. We develop a descriptive analysis of spatial distribution, testing for spatial autocorrelation and use the family of Generalised Entropy Indices to measure inequality. Properties of the index allow us to decompose inequality into inter and intra-municipality measures. Since we have two cross-sectional data for WSS (1995-2002) we can also analyze the evolution of the inequality in this period of economic growth. Key words: spatial distribution of wages, spatial autocorrelation, inequality indices.

Inequality, Happiness and Relative Concerns: What Actually is their Relationship?

This paper briefly and informally surveys different theoretical models of relative concerns and their relation to inequality. Models of inequity aversion in common use in experimental economics imply a negative relation between inequality and happiness. In contrast, empirical studies on happiness typically employ models of relative concerns that assume that increases in others’ income always have a negative effect on own happiness. However, in these latter models, the relation between inequality and happiness can be positive. One possible solution is a rivalry model where a distinction is made between endowment and reward inequality which have respectively a negative and positive effect on happiness. These different models and their contrasting results may clarify why the empirical relationship between inequality and happiness has been difficult to establish.

Which Inequality? The Inequality of Endowments Versus the Inequality of Rewards

Society often allocates valuable resources - such as prestigious positions, salaries, or marriage partners - via tournament-like institutions. In such situations, inequality affects incentives to compete and hence has a direct effect on equilibrium choices and hence material outcomes. We introduce a new distinction between inequality in initial endowments (e.g. ability, inherited wealth) and inequality of what one can obtain as rewards (e.g. prestigious positions, money). We show that these two types of inequality have opposing effects on equilibrium behavior and wellbeing. Greater inequality of rewards tends to hurt most people — both the middle class and the poor, — who are forced into greater effort. In contrast, greater inequality of endowments tends to benefit the middle class. Thus, which type of inequality is considered hugely affects the correctness of our intuitions about the implications of inequality.

Longitudinal analysis of income-related health inequality

This paper considers the characterisation and measurement of income-related health inequality using longitudinal data. The paper elucidates the nature of the Jones and Lopez Nicholas (2004) index of “health-related income mobility” and explains the negative values of the index that have been reported in all the empirical applications to date. The paper further questions the value of their index to health policymakers and proposes an alternative index of “income-related health mobility” that measures whether the pattern of health changes is biased in favour of those with initially high or low incomes. We illustrate our work by investigating mobility in the General Health Questionnaire measure of psychological well-being over the first nine waves of the British Household Panel Survey from 1991 to 1999.

Measuring Avoidable Health Inequality with Realization of Conditional Potential Life Years (RCPLY)

In a series of papers (Tang, Chin and Rao, 2008; and Tang, Petrie and Rao 2006 & 2007), we have tried to improve on a mortality-based health status indicator, namely age-at-death (AAD), and its associated health inequality indicators that measure the distribution of AAD. The main contribution of these papers is to propose a frontier method to separate avoidable and unavoidable mortality risks. This has facilitated the development of a new indicator of health status, namely the Realization of Potential Life Years (RePLY). The RePLY measure is based on the concept of a “frontier country” that, by construction, has the lowest mortality risks for each age-sex group amongst all countries. The mortality rates of the frontier country are used as a proxy for the unavoidable mortality rates, and the residual between the observed mortality rates and the unavoidable mortality rates are considered as avoidable morality rates. In this approach, however, countries at different levels of development are benchmarked against the same frontier country without considering their heterogeneity. The main objective of the current paper is to control for national resources in estimating (conditional) unavoidable and avoidable mortality risks for individual countries. This allows us to construct a new indicator of health status – Realization of Conditional Potential Life Years (RCPLY). The paper presents empirical results from a dataset of life tables for 167 countries from the year 2000, compiled and updated by the World Health Organization. Measures of national average health status and health inequality based on RePLY and RCPLY are presented and compared.

The Living Wage: Reducing inequality in the UK?

The revival of support for a living wage has reopened a long-run debate over the extent to which active regulation of labour markets may be necessary to attain desired outcomes. Market failure is suggested to result in lower wages and remuneration for low skilled workers than might otherwise be expected from models of perfect competition. This paper examines the theoretical underpinning of living wage campaigns and demonstrates that once we move away from idealised models of perfect competition to one where employers retain power over the bargaining process, such as monopsony, it is readily understandable that low wages may be endemic in low skilled employment contracts. The paper then examines evidence, derived from the UK Quarterly Labour Force Survey, for the extent to which a living wage will address low pay within the labour force. We highlight the greater incidence of low pay within the private sector and then focus upon the public sector where the Living Wage demand has had most impact. We examine the extent to which addressing low pay within the public sector increases costs. We further highlight the evidence that a predominance of low pay exists among public sector young and women workers (and in particular lone parent women workers) but not, perhaps surprisingly, among workers from ethnic minority backgrounds. The paper then builds upon the results from the Quarterly Labour Force Survey with analysis of the British Household Panel Survey in order to examine the impact the introduction of a living wage, within the public sector, would have in reducing household inequality. The paper concludes that a living wage is indeed an appropriate regulatory response to market failure for low skilled workers and can act to reduce age and gender pay inequality, and reduce household income inequality among in-work households below average earnings.

Longitudinal analysis of income-related health inequality: welfare foundations and alternative measures

This paper elaborates the approach to the longitudinal analysis of income-related health inequalities first proposed in Allanson, Gerdtham and Petrie (2010). In particular, the paper establishes the normative basis of their mobility indices by embedding their decomposition of the change in the health concentration index within a broader analysis of the change in “health achievement” or wellbeing. The paper further shows that their decomposition procedure can also be used to analyse the change in a range of other commonly-used incomerelated health inequality measures, including the generalised concentration index and the relative inequality index. We illustrate our work by extending their investigation of mobility in the General Health Questionnaire measure of psychological well-being over the first nine waves of the British Household Panel Survey from 1991 to 1999.

On decomposing the causes of changes in income-related health inequality with longitudinal data

Regression-based decomposition procedures are used to both standardise the concentration index and to determine the contribution of inequalities in the individual health determinants to the overall value of the index. The main contribution of this paper is to develop analogous procedures to decompose the income-related health mobility and health-related income mobility indices first proposed in Allanson, Gerdtham and Petrie (2010) and subsequently extended in Petrie, Allanson and Gerdtham (2010) to account for deaths. The application of the procedures is illustrated by an empirical study that uses British Household Panel Survey (BHPS) data to analyse the performance of Scotland in tackling income-related health inequalities relative to England & Wales over the five year period 1999 to 2004.

Inequality and Risk-Taking Behaviour

This paper investigates social influences on attitudes to risk and offers an evolutionary explanation of risk-taking by young low-ranked males. Becker, Murphy and Werning (2005) found that individuals about to participate in a status tournament may take fair gambles even though they are risk averse in both wealth and status. Here their model is generalised by use of the insight of Hopkins and Kornienko (2010) that in a tournament or status competition one can consider equality in terms of the status or rewards available as well as in initial endowments. While Becker et al. found that risk-taking is increasing in the equality of initial endowments, it is found here that it is increasing in the inequality of rewards in the tournament. Further, it is shown that the poorest will be risk loving if the lowest level of status awarded is sufficiently low. Thus, the disadvantaged in society rationally engage in risky behavior when social rewards are sufficiently unequal. Finally, as greater inequality in terms of social status induces gambling, it can cause greater inequality of wealth.