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Inequality and Poverty: Agenda

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Title: Inequality and Poverty: Agenda


1
Inequality and Poverty Agenda
  • Inequality and Poverty Measurement
  • Universitat Autònoma de Barcelona
  • Frank Cowell
  • http//darp.lse.ac.uk/uab2006

December 2006
2
Introduction
  • The course focuses on inequality and poverty
    analysis
  • develop theoretical approaches
  • practical applications as illustration
  • Begin with something very simple indeed
  • What do we know?
  • Data
  • Tools
  • Comparisons
  • Then to some questions
  • Methods
  • The way forward

3
Overview...
Inequality and Poverty Agenda
Income distribution
What we know about the US
Inequality
Poverty
Methods
4
What do we know? data
  • Try a simple thought experiment
  • Use the Current Population Survey data
  • See DeNavas-Walt et al (2005)
  • Data, descriptions and computations
  • Just take standard definitions
  • Do everything in 2004 dollars
  • Focus on income of households
  • What do the data tell us?
  • Key tables
  • Begin with Table A-1

5
What is income? (1)
  • 1. Earnings
  • 2. Unemployment compensation
  • 3. Workers compensation
  • 4. Social security
  • 5. Supplemental security income
  • 6. Public assistance
  • 7. Veterans payments
  • 8. Survivor benefits
  • 9. Disability benefits
  • 10. Pension or retirement income
  • 11. Interest
  • 12. Dividends
  • 13. Rents, royalties, estates trusts
  • 14. Educational assistance
  • 15. Alimony
  • 16. Child support
  • 17. Financial assistance from outside the
    household
  • 18. Other income

6
What is income? (2)
  • Covers money income received
  • exclusive of certain money receipts such as
    capital gains
  • Before deductions
  • personal income taxes
  • social security, union dues
  • Medicare deductions
  • Does not include noncash benefits
  • food stamps
  • health benefits
  • subsidized housing
  • goods produced and consumed on the farm
  • business transportation and facilities,
  • payments by business for retirement programs.
  • Lets look at the standard CPS presentation

7
A snapshot view
  • Gives proportions of households in each income
    category, year by year
  • Straight from the official table
  • Cut down to manageable number of years
  • omitted population totals
  • But, check in a diagram
  • standard frequency polygon.

8
Representing the distribution?
9
Questions
  • Mixed messages from this illustration
  • Shifts over time make sense
  • income growth
  • But weird stuff on the right
  • arises from arbitrary grouping
  • Get more insight from a better representation
  • Use the concept of quantile
  • includes well-known concepts
  • median, quartiles etc
  • a boundary income
  • Examine DeNavas-Walt et al (2005) Table A-3
  • Do this for 1974, 2004
  • Check out the growth

10
Quantile Incomes by Households
More detail.
11
Quantiles 1967 2004
12
The Parade quantiles vs population
13
Inequality from quantiles?
  • But does this way of representing distributions
    tell us about inequality?
  • Clear that growth is lopsided
  • top decile grew by almost four times as much
    four times as much as bottom
  • Suggests increase in inequality?
  • (whatever that may be)
  • We can also use quantiles to derive simple
    inequality measures
  • eg 90/10 ratio
  • (increased from 8.6 to 11.1)
  • or ratios to medians
  • Have a look at path of these ratios
  • and then think again

14
Quantile ratios US 1967 2004
15
Overview...
Inequality and Poverty Agenda
Income distribution
More of what we know about the US and elsewhere
Inequality
Poverty
Methods
16
Fuller income information
  • Focus on additional income from same source
  • DeNavas-Walt et al (2005) Table A-3
  • Again, we dont question the definitions
  • household income before deduction
  • income receiver household
  • Divide distribution up into five equal slices
  • Compute mean income of each 20 slice

17
Mean incomes by groups of households
More detail.
18
Differential growth of mean incomes
19
Three alternative views
  • First, plot these mean incomes cumulatively
  • Plot against population shares
  • Do this for any given year
  • Get a powerful tool
  • Second, plot income shares against time
  • Divide each group mean by overall mean
  • Graph these for whole period
  • Lopsided growth?
  • Third plot income shares against population
    shares
  • Do this for any given year
  • Get a very powerful tool

20
1 The Generalised Lorenz Curve
21
2 Income shares US 1967-2004
22
2 Top income shares in US
Piketty, T. and E. Saez (2003) Income inequality
in the United States, 1913-1998, Quarterly
Journal of Economics, 118, 1-39.
23
3 Lorenz curve
  • Natural interpretation in terms of shares
  • Gives a natural definition of the Gini
    coefficient
  • Use this to have a quick look at inequality in
    different countries

24
Lorenz around the world
Get full version
Source World Bank (2004)
25
Income or consumption?
See World Bank (2005)
26
Overview...
Inequality and Poverty Agenda
Income distribution
Yet more of what we know about the US
Inequality
Poverty
Methods
27
An approach to poverty
  • Now use standard source to get information on
    poverty
  • DeNavas-Walt et al (2005) Table B-3
  • The official poverty thresholds do not vary
    geographically,
  • Updated annually for inflation using Consumer
    Price Index
  • Definition uses money income before taxes
  • Does not include
  • Capital gains
  • public housing
  • Medicaid
  • Food stamps
  • other noncash benefits

28
Poverty thresholds in 2004
29
Proportion in poverty1974-2004
30
Overview...
Inequality and Poverty Agenda
Income distribution
Approaches for these lectures
Inequality
Poverty
Methods
31
Questions to resolve
  • Theoretical basis for using quantiles and shares
  • Theoretical derivation of intuitive concepts
  • Why use Gini?
  • Why use this simple poverty concept?
  • Relationships between economics and statistical
    concepts
  • Place of distributional analysis in welfare
    economics
  • Why be concerned with inequality and poverty?

32
Approaches
  • Start with welfare-economics setting
  • Then move to axiomatisation
  • Use empirical evidence as we go
  • on the performance of indices
  • on the structure of values
  • But how to get evidence on values?
  • Its not like consumer theory
  • Use experiments
  • Or questionnaire experiments
  • One coming up

33
References (1)
  • Amiel, Y. and Cowell, F. A. (1999) Thinking about
    Inequality, Cambridge University Press, Cambridge
  • Atkinson, A. B. (1983) The Economics of
    Inequality (Second ed.). Oxford Clarendon Press.
  • Cowell, F. A. (1995) Measuring Inequality (Second
    ed.), Harvester Wheatsheaf, Hemel Hempstead.
  • Cowell, F. A. (2000) Measurement of Inequality,
    in Atkinson, A. B. and Bourguignon, F. (eds)
    Handbook of Income Distribution, North Holland,
    Amsterdam, Chapter 2, 87-166
  • Cowell, F.A. (2007) Inequality measurement,
    The New Palgrave, second edition
  • DeNavas-Walt, C., Proctor, B. D. and Lee, C. H.
    (2005) Income, poverty, and health insurance
    coverage in the United States 2004. Current
    Population Reports P60-229, U.S. Census Bureau,
    U.S. Government Printing Office, Washington, DC.
  • Fisher, G. M. (1992) The Development and History
    of the Poverty Thresholds, Social Security
    Bulletin, 55 (4), 3-14.

34
References (2)
  • Jäntti, M. and Danziger, S. (2000) Income Poverty
    in Advanced Countriesin Atkinson, A. B. and
    Bourguignon, F. (eds) Handbook of Income
    Distribution, North Holland, Amsterdam, Chapter
    10, 309-378
  • Lambert, P. J. (2002) The Distribution and
    Redistribution of Income (Third ed.). Manchester
    Manchester University Press.
  • Piketty, T. and E. Saez (2003) Income inequality
    in the United States, 1913-1998, Quarterly
    Journal of Economics, 118, 1-39.
  • Sen, A. K. and Foster, J. E. (1997) On Economic
    Inequality (Second ed.). Oxford Clarendon Press.
  • The World Bank (2004) 2005 World Development
    Report A Better Investment Climate for Everyone.
    Oxford University Press, New York
  • The World Bank (2005) 2006 World Development
    Report Equity and Development. Oxford University
    Press, New York
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