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Social Choice and Welfare

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29-03-2017 | Original Paper

Inequality of income acquisition: the role of childhood circumstances

Authors: Paul Hufe, Andreas Peichl, John Roemer, Martin Ungerer

Published in: Social Choice and Welfare | Issue 3-4/2017

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Abstract

Many studies have estimated the effect of circumstances on income acquisition. Perhaps surprisingly, the fraction of inequality attributable to circumstances is usually quite small—in the advanced democracies, approximately 20%. One reason for this is the lack of data on circumstance variables in empirical research. Here, we argue that all behaviors and accomplishments of children should be considered the consequence of circumstances: that is, an individual should not be considered to be responsible for her choices before an age of consent is reached. Using two data sets that contain data on childhood accomplishments, other environmental circumstances and the income as an adult, we calculate that the fraction of income inequality due to circumstances in the US rises from 27 to 43% when accounting for childhood circumstances. In the UK it rises from 18 to 27%.

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See also the recent ‘The Equality of Opportunity Project’ for the US: http://www.equality-of-opportunity.org/.

For recent survey articles on both the theoretical and empirical literature, see Fleurbaey and Peragine (2013), Roemer and Trannoy (2016), Ferreira and Peragine (2016), or Ramos and Van de gaer (2016).

Notably, the share of inequality explained by circumstances appears to be higher in developing as opposed to industrialized countries (see Brunori et al. 2013). Furthermore, relative measures of IOp are higher for consumption expenditures than for income measures. Yet as discussed by Ferreira and Gignoux (2011) this difference is attributable to the larger transitory component of the latter measure of economic advantage.

Richard Arneson writes that one can simplify the true process of the development of responsibility in a person by thinking of a canonical moment at which children become responsible for their choices. The “canonical moment” simplifying abstraction of the equal opportunity principle is motivated by the thought that there is a non-arbitrary and morally significant line between childhood and adulthood and that children are not morally responsible for their preferences in the way that adults are deemed to be (Arneson 1990).

Note that these baseline estimates would increase further when allowing for heterogeneous effects of circumstances on income. See Hufe and Peichl (2015) for a discussion.

Note that this methodology is reminiscent of the inequality decomposition suggested by Cowell and Jenkins (1995). However, their decomposition does not strictly rely on the division between circumstances and effort.

The same question has been studied by Elbers et al. (2008). Their solution, however, does not generalize to continuous distributions.

See Assaad et al. (2015) for an example calculation using Egyptian data.

Recall that the sample is not representative for the entire US population in the respective year, but nationally representative for the subpopulation of children born to mothers aged 14–21 on December 31, 1978. See Appendix Table 4 for a change in summary statistics when restricting the sample to the age range 25-30 and applying the respective sample weights.

Specifically, we use the following set of NLSY79 (BCS70) circumstances: sex, country of birth, ethnic identity, cohort, academic achievement mother, occupation code mother, rural/urban, height, family income, play w/ parents, perceived quantity of time w/ mother, parents split, smoking habits mother, drinking habits mother, school absence due to health, age mother at birth, standardized math and reading assessment.

See Appendix Table 6 in which we decompose the differences between the NLSY-specific and the comparable results into changes due to variable exclusions/inclusions and the respective sample size adjustments.

Comparing the central bar of Fig. 2 with our baseline estimate, we hold the number of circumstances constant while varying the permissible age of consent. To the contrary, when comparing the rightmost bar of Fig. 2 with our baseline estimate, we hold the age of consent constant, while varying the number of circumstances.

The reason is that the data provides only few respondents whose circumstance information is available both at age 12 and at age 16. When accounting for circumstances measured at both ages the sample is almost cut in half (Table 2). Therefore, we only consider circumstances measured at age 16 in our baseline estimations.

Generally, we find lower income inequality (in terms of the MLD) in net income when compared to gross income. At the same time, the level of IOp is higher in gross income. However, IOp as a percentage of total inequality is higher in net income. One interpretation of these findings is that the tax and transfer system in the UK is equalizing in terms of income inequalities rather than opportunities.

See footnote 10 for the precise set of circumstances.

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Title: Inequality of income acquisition: the role of childhood circumstances
Authors: Paul Hufe
Andreas Peichl
John Roemer
Martin Ungerer
Publication date: 29-03-2017
Publisher: Springer Berlin Heidelberg
Published in: Social Choice and Welfare / Issue 3-4/2017
Print ISSN: 0176-1714
Electronic ISSN: 1432-217X
DOI: https://doi.org/10.1007/s00355-017-1044-x

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