Eco 100 Outline Inequality by Gazelle

8/9/2019 Eco 100 Outline Inequality by Gazelle

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ECO100: Introductory Economics

inequality and redistribution

Robert Gazzale, PhD

Department of EconomicsUniversity of Toronto

[email protected]

Gazzale (University of Toronto) ECO100: inequality and redistribution 1 / 20


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overview

income inequality in Canada

According to the OECD1 and the CIA World Factbook:

Across countries:Canadian incomes distributed relatively equallycompared to other rich countries

Worse than Sweden, Norway, and GermanyAbout the same as France and ItalyBetter than Russia, the U.S., and Hong KongClose to midway between Sweden and the U.S.

Across time:Some evidence that distribution becoming moreunequal in Canada

much evidence that it is worsening in U.S., China.

1Organization for Economic Cooperation and DevelopmentGazzale (University of Toronto) ECO100: inequality and redistribution 2 / 20


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overview

inequality is an economic goodhow to make yourself unpopular with your non-econ friends

Inequality is an economic good: The proofImagine a world in which your income in no way depended on yourchoices.

Gazzale (University of Toronto) ECO100: inequality and redistribution 3 / 20Text


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overview

inequality is an economic badJohn Rawls Veil of Ignorance thought experiment

The assertionHolding everything else constant, and beforeit is determinedwho gets how much of the economic pie, most people prefer arelatively evenly divided pie (of total income) over a slightly

larger pie that is less evenly divided

Of course, it depends on the extent to which redistributionshrinks the pie!

The proof


john rolls: holding everything constant, before anything is

determined we decide the distribution


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overview

inequality and economic growth

What is the relationship between the size of the economic pie and

how evenly it is divided?

some recent empirical evidence

International Monetary Fund (2014)

higher inequality seems to lower growthredistributing income no effect on growth

Organization for Economic Co-operation and Development (2014)

income inequality economic growthmechanism: human capital investments of least well off

duration of any particular growth spell

the traditional microeconomic analysis

redistribution of income DWL


redistrbution may caseu totalpie to decrease: taxing

labour creates more

deadweight loss. createspotential moral hazard

problems.


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overview

the redistribution problemredistribution expected to be costly in terms of efficiency

take from the well off

deadweight loss and taxes

societal benefits from those seeking to get ahead

give to the not-so well off

moral hazard problem: difficult to design redistribution programs

maintaining incentives to fully participate in labour market

Costly redistribution does not necessarily mean undesirable . . .


mark twain: there are lies, damn lies and statisticsstatistics in inequality:


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overview

Roadmap

1 overview

2 measuring inequality

some standard measuresdifficulties interpreting the measures

3 reducing inequality: policy tools

4 philosophical views on inequality


i i li d d


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measuring inequality some standard measures

measures

1 Poverty Rate

loosely defined in Canada as percent below the low-income cutoff

2 top-bottom ratios

e.g.,ratio20 = Average household income, top 20 %

Average household income, bottom 20 %

3 Lorenz curve Gini coefficient


missing info..therefore best way to measure inequaity is by the ginicoefficient

i i lit t d d


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measuring inequality some standard measures

Lorenz curve Gini coefficient

the trick:sort households from lowest income/wealth to highest


canada is 2000

quintilelowest 20%

(20%-40%) second 20%(40%-60%) third 20%(60-80%) fourth 20%

(80-100%) fifth 20%

% of total income22%12.7%17.2%23.0%

39.9%

cumulative %7.2%19.9%37.1%60.1%

100%


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measuring inequality difficulties interpreting the measures


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interpreting inequality IWhat are we measuring?

Consider Canada in 2007:

ratio20 = Average household income, top 20 %

Average household income, bottom 20 %

beforetaxes andmoneytransfersratio25

aftertaxes andmoneytransfersratio8.8




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interpreting inequality IaWhat are we measuring?

King Bobs proposal to reduce income inequality in Canada:


assume: top 20 %divided by bottom 20% = $150k/$80=5after tax $ transfers

1) abolish universal healthcare2)give each HH $10000

3) force all HH to purchase insurance $10000

$160K/$40K=4

on average universal healthcare is more beneficial for poorthan rich



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interpreting inequality IIWhat are we measuring?

the absolute versus relative problem

utility versus income

some choose money over leisure; some choose leisure over money

(consider leisure time inequality . . . )

in-kind transfers generally not included

food and housing vouchersuniversal healthcare and education

changes in household composition issues

dual income families and positive assortative matchingchildren not leaving the nest


income inequality increasing in china. in

terms of absolute ability to purchasegoods and serices. the income of bottom

chinese society increase. increase ofbottom not been as rapid as increase of

top.

US : 1) increase income inequality2) incrase in leisure time



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interpreting inequality IIIinequality is a static measure

the extreme example: choose the society you preferSociety Ceveryone gets $50,000 per year

Society Dhalf in group D1; half in group D2Odd years: D1 = $100, 000; D2 = $20, 000Even years: D1 = $20, 000; D2 = $100, 000

real world issues

transitory income shocks (see above)

the economic life cycle

mobility


the extend of luck determines good years and bad years.

reducing inequality: policy tools


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g q y p y

reducing inequalitywhile the line between 1 and 2 is not always clear . . .

1 increase the earnings of the poor

ensuring equality of opportunity (e.g., high quality public schools)

2 redistribute

minimum-wage laws

unemployment insurancewelfare and in-kind transfersprogressive taxationthe negative income tax

cash grant or subsidize wages at low incomesphase-out grant/subsidy as overall incomes increase

Ideally, we implement redistribution programs that do not destroy

incentives to participate in the labour force . . .




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The incentive problem in traditional social assistance

a typical programIf your income Iis less than $1000 per month, the governmentgives you $1000 Iper month. If your income is greater than

$1000 per month, the government gives you nothing.

Assume you are currently not working and thus receiving $1000 permonth from the government.

scenario IDo you accept a job where you receive $800per month for 80

hours of work?scenario II

Do you accept a job where you receive $1100per month for 80hours of work?




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negative income tax versus traditional welfare


philosophical views on inequality


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The Gazzale Conjectureluck versus skill

ConjectureYour beliefs on the desirability of income redistribution

is highly correlated with whether you believe inequality mostly dueto luck or mostly due to skill and choices

There appears to be a subjective/cultural component to this belief




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Should we care about inequality?Other Normative Approaches

Utilitarianism (Jeremy Bentham, John Stuart Mill)

Assumption:Government ought to maximize the sum of utilityacross all individuals

Diminishing marginal utility desirability of redistribution

Liberalism (John Rawls)

Assumption:Society ought to be just.

What allocation would you choose under veil of ignorance?

Maximin criterion: improve the well-being of the worse off

Libertarianism

Society owns no income

Role of government: ensure property rights; level playing field




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Some thoughts on redistribution and Utilitarianism

While we cannot compare utility across individuals . . .

It is rather plausible that taking $1000 from Bill Gates and giving itto the stereotypical cashier at WalMart will increase the sum of

utility.

Not all cases are as straightforward . . .




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A more complicated case

Upon entrance to the UofT, Miwa and Wilson seemed exactly the

same . . .

MiwaStudied 12 hours/day at the UofT. Spent the next 10 years

working 12 hours per day for BMO. Earns an annual income of

$250,000.WilsonDropped out of UofT. Currently works part-time in aHawaiian surf shop, spending all of his free time surfing.

Question 1What do their choices tell us about what brings them

utility?Question 2How confident are you that taking $1000 from Miwaand giving it to Wilson will increase the sum of utility?


Eco 100 Outline Inequality by Gazelle

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