Dynamics of Inequality and Poverty: Volume 13

This volume brings together a number of papers related to the theme of the dynamics of inequality and poverty.

In this paper, we examine the concept of “vulnerability” within the context of income mobility of the poor. We test for the dynamics of vulnerable households in the UK using waves 1–12 of the British Household Panel Survey and find that, of three different types of risks that we test for, household-specific shocks and economy-wide aggregate shocks have the greatest impact on consumption, in comparison to shocks to the income stream.

Based on a multiple spells approach, this paper studies the extent and the composition of chronic poverty in Germany. The results indicate that about one-third of cross-sectional poverty in a given year is chronic. The characteristics that are most closely associated with long-term poverty are economic inactivity and pensioner status, while the number of children and the gender of the household head do not seem to have a systematic effect. This is in contrast to cross-sectional results where the biggest poverty risk is usually unemployment and a large number of children, while pensioners do not face particularly high poverty risks. Estimates from a multiple spells hazard model further suggest that 6% of the population have unobserved characteristics that lead to low poverty exit and high re-entry rates, making these individuals likely candidates for chronic poverty. A comparison with results for Great Britain and the United States suggests that poverty is less persistent in Germany.

A dynamic microsimulation model of cohort labour earnings based on the Australian population aged between 20 and 55 years is described. Care has been taken to specify the model, subject to the limited data that were available for estimation. Despite the restrictive specifications used, the model closely reflects the data used for calibration, and is shown to bear a close relation to alternatives considered by the literature.

The last 60 years have seen Australia and the United Kingdom diverge, both socially and economically. This paper considers how the widening social gap between the two countries is reflected by their respective redistributive systems. The analysis is based upon two microsimulation procedures – one static and the other dynamic – both of which are used to consider the probable distributional effects that would arise if elements of the Australian and UK tax and benefits systems were exchanged. The static microsimulation analysis presented suggests that comparisons based purely upon cross-sectional survey data are affected by population heterogeneity, which tend to overstate the redistributive effect of the Australian transfer system relative to the UK. Nevertheless, the dynamic microsimulations suggest that, on balance, the Australian transfer system is more redistributive than the UK system, and reflects a greater concern for redistribution between households. The UK system, in contrast, reflects a greater concern for redistribution through the life course.

The distribution of income and wealth are generally regarded as key performance indicators of a society. Cross-sectional analyses of Australian income and wealth distributions at various points in time have found that both are highly unequal. However, lifetime distributions may be quite different. This paper provides some insight into the differences for one of these distributions – wealth.

A dynamic microsimulation model of the Australian population is used to project the cross-sectional and lifetime asset holdings of a 5-year birth cohort over a period of 40 years. The annual personal net worth of this birth cohort are analysed in regard to age and net worth, the changing wealth distribution within the cohort, wealth mobility, and a comparison of lifetime and cross-sectional distributions.

A cross-country comparison of generational earnings mobility is offered, and the reasons for the degree to which the long-run labour market success of children is related to that of their parents is examined. The rich countries differ significantly in the extent to which parental economic status is related to the labour market success of children in adulthood. The strength of these associations should not be interpreted as offering a target or menu for the conduct of policy. A framework for understanding the underlying causal process as well as the conception of equality of opportunity is reviewed as a guide for public policy.

Using data from the British National Childhood Development Study, this paper examines the quality–quantity trade-off in fertility in multiple measures of child achievement. The results exhibit three characteristics: (1) Family-size effects appear very early in child development – as early as age two; (2) the effects are found in a broad array of achievement measures: labor market, cognitive, physical, and social; and (3) by age 16, the effects of family size stop growing (and what little evidence there is of change after that is not consistently in one direction). The paper argues that these results are inconsistent with preference-based explanations of the trade-off and point to some family-resource constraint. However, the relevant constraint appears more likely to be temporal than financial.

This paper examines the link between parental income during adolescent years and higher education choices of the offspring at age 18. This study is the first to use a recent longitudinal data set from New Zealand (Christchurch Health and Development Surveys, CHDS), in the higher education context. The paper examines the impact of family income and other resources throughout adolescent years on later decisions to participate in higher education and the choice of type of tertiary education at age 18. A binary choice model of participation in education, and a multinomial choice model of the broader set of choices faced at age 18, of employment, university, or polytechnic participation are estimated. Among the features of the study are that it incorporates a number of variables, from birth to age 18, which allow us to control further than most earlier studies for ability heterogeneity, academic performance in secondary school, in addition to parental resources (e.g. childhood IQ, nationally comparable high school academic performance, peer effects, family size and family financial information over time). The results highlight useful features of intergenerational participation in higher education, and the effect of parental income on university education, in particular.

Inequality in the distribution of family income in the U.S., which had remained virtually unchanged since the end of World War II until 1968, has increased sharply since then. In contrast, schooling and skill inequality has declined rather steadily over the postwar period. Another notable change over the past 30 years or so has been the widespread diffusion of computers. Using aggregate time-series data for the 1947–2000 period, I find that the largest effects on inequality come from office, computing and accounting equipment (OCA) investment, which accounted for about half of the rise in inequality between 1968 and 2000. The unionization rate is second in importance, and its decline over this period explains about 40 percent of the increase in inequality. The decline in the dispersion of schooling, on the other hand, plays almost no role in explaining the rise in inequality. On the basis of pooled time series, industry regressions for the 1970–2000 period, I also find that investment in OCA is positively related to changes in skill inequality, while changes in the unionization rate are negatively related.

Hypothesis tests for dominance in income distributions has received considerable attention in recent literature. See, for example, Barrett and Donald (2003a, b), Davidson and Duclos (2000) and references therein. Such tests are useful for assessing progress towards eliminating poverty and for evaluating the effectiveness of various policy initiatives directed towards welfare improvement. To date the focus in the literature has been on sampling theory tests. Such tests can be set up in various ways, with dominance as the null or alternative hypothesis, and with dominance in either direction (X dominates Y or Y dominates X). The result of a test is expressed as rejection of, or failure to reject, a null hypothesis. In this paper, we develop and apply Bayesian methods of inference to problems of Lorenz and stochastic dominance. The result from a comparison of two income distributions is reported in terms of the posterior probabilities for each of the three possible outcomes: (a) X dominates Y, (b) Y dominates X, and (c) neither X nor Y is dominant. Reporting results about uncertain outcomes in terms of probabilities has the advantage of being more informative than a simple reject/do-not-reject outcome. Whether a probability is sufficiently high or low for a policy maker to take a particular action is then a decision for that policy maker.

The methodology is applied to data for Canada from the Family Expenditure Survey for the years 1978 and 1986. We assess the likelihood of dominance from one time period to the next. Two alternative assumptions are made about the income distributions – Dagum and Singh-Maddala – and in each case the posterior probability of dominance is given by the proportion of times a relevant parameter inequality is satisfied by the posterior observations generated by Markov chain Monte Carlo.

An axiomatic approach is used to propose a measure of extreme poverty which is not only multidimensional in nature, but also recognizes the fact that there are interaction effects between different deprivations, and that the length of time during which deprivations are felt may also have a negative impact on household well-being. The proposed definition of extreme poverty formalizes an approach developed by Joseph Wresinski, the founder of the International Movement ATD Fourth World.

Theil's approach to the measurement of inequality is set in the context of subsequent developments over recent decades. It is shown that Theil's initial insight leads naturally to a very general class of decomposable inequality measures. It is thus closely related to a number of other commonly used families of inequality measures.