Income Inequality, Poverty, and Economic Welfare

Economists, philosophers and public policy analysts have been concerned with income inequality issues for a century. In the beginning the attention this topic garnered was small, although a steady stream of interest was maintained. Beginning in the middle of the 1980’s, a shift in interest occurred, and a large number of economists began writing about issues involving the size distribution of income and poverty.¹ The magnitude of the writing became significant and continues unabated. As a consequence, so many articles have appeared on the subject in the last ten years that several survey pieces were needed to review and assess the state of the research. New journals have been launched dealing solely with income inequality. One might ask, what caused this sudden ubiquitous interest in questions of income distribution? One possible explanation is that a perceived increase in the level of income inequality over the past two decades has taken place. Bishop, Formby and Smith (1991) used statistical Lorenz curves to argue that inequality increased for most of the 1970s and 1980s and unambiguously did so from 1978 to 1982. The apparent trend towards increased income inequality continued into the 1990s and the Gini coefficient for family income for 1993 as reported by the U.S. government was at the highest level in 25 years. It has now leveled off.

Trends in real national income are typically assessed using aggregate indicators such as GDP per capita, or mean household income, whereas the income distribution literature focuses on trends in income inequality. By contrast this paper takes an integrated approach to real national income measurement; it uses methods incorporating both size and distributional considerations, and applies them to household income microdata in order to measure changes in real income in the U.K. during the 1980s. A parametric class of decomposable real income indices is proposed which complements quasi-ordering methods such as rank and generalised dominance criteria by telling us how much real income increased over the period (if at all). The indices are also additively decomposable by population subgroup, a property which helps reveal who the gainers and losers were. The analysis also draws attention to the normative and statistical issues raised by the presence of a few very small incomes.

Recent increases in earnings inequality have been described as “enormous.” Is it that we are experiencing a unique shift toward greater inequality or are we returning to a more normal state of affairs for the American economy? The recent availability of six decades of data together with important new developments in the theory and measurement of inequality invite a renewed look at the changes in earnings inequality over the past half century. Our findings for male earnings suggest a dramatic contraction in inequality after 1939 followed by a steady rise in earnings inequality through 1989. Focusing on per capita incomes as opposed to earnings eliminates much of the trend toward rising inequality.

The purpose of this research is to introduce a new approach to the decomposition of the Gini ratio into three components, supporting them with economic and statistical rigorous interpretations. The three components are: (i) the Gini inequality within subpopulations; (ii) the net contribution of the extended Gini inequality between subpopulations; and (iii) the contribution of the intensity of transvariation between subpopulations. These components are weighted by the product of the population shares times the income shares of the corresponding subpopulations where the weights add to one.

The decomposition introduced in this research is applied to the 1990 U.S. family income distribution. The population of families is disaggregated by types into the following subpopulations: (a) married-couple families; (b) male householder, no wife present; and (c) female householder, no husband present.

The paper examines the nature and extent of global and regional inequality using the most recent country level data on inequality drawn from World Bank studies, and real per capita income from the Perm World Tables, for the period 1980–1990. The methodology employed in the paper is based on a mixture of parametric and non-parametric approaches to inequality measurement. It is designed to handle the limited and incomplete nature of income distribution data from different countries. Empirical results show a very high degree of global inequality, but with some evidence of catch-up and convergence between regions.

This paper notes that Gini’s concept of “Transvariazione” corresponds to the idea of overlapping of distributions. It shows that this concept is implicit in some measures of income inequality such as the Pietra and Gini Index and is at the basis of various measures of distance between distributions. An empirical illustration is provided, based on Israeli data for the period 1978–1994.

The U.S. poverty rate, like many other aggregate economic time series, shows considerable persistence. It is logical to consider the model involving a unit root to provide a good description of the data generation process for the poverty rate. We pretest for unit roots in annual U.S. poverty rate data for the postwar period to examine its long-run features given the importance of a unit root for economic forecasting, macroeconometric cointegration modeling and Granger causality testing. Applying a number of available test procedures for pretesting on U.S. postwar poverty rate data, we find results that both support and contradict the claim that the poverty rate is a difference stationary process. The poverty rate data are found to be consistent with a unit root hypothesis when the alternative is I(0) with a linear trend. But the null hypothesis of a unit root is convincingly rejected when the alternative of I(0) with a broken trend line for a break at an endogenous point in time is considered. The estimate of the break in the trend corresponds to an information technology shock during the early 1970s.

We re-examine some of the standard axioms used in the literature on poverty measurement. Using a sample of 486 students from Australia, Israel and the USA we investigate the extent to which individuals’ perceptions of poverty correspond to the axioms. We find that axioms such as anonymity, growth of the poor and monotonicity are resonably well supported. However there is very little support for the focus axiom and the principle of transfers was the least well supported of the eight specific criteria for poverty measurement that we examined.

This paper explores the use of a parametric approach to the measurement of compensating and equivalent variations resulting from price changes. The approach is based on the application of the Linear Expenditure System (LES) to each of a range of household income groups, rather than being based on a ‘representative’ consumer. The method is then used to examine the distributional effects of a carbon tax, designed to reduce carbon dioxide emissions. The price changes resulting from a carbon tax depend on the ‘carbon intensities’ of each good, which depend in turn on the nature of inter-industry transactions (the input-output matrix). The use of transfer payments to compensate for adverse distributional effects of a carbon tax is investigated, using social welfare functions based on equivalent incomes.