MDU Macroeconomics Lecture 1 Inequality

Notes for MDU Macroeconomics Lectures

Lecture 1 Inequality

Read before the lecture: Bowles et al: Chapter 14, The Mosaic of Inequality, pg. 343–374

Plan for today:

• Defining inequality
• Classes
• Stylised facts
• Measuring Well-being and Inequality
• GDP
• Gini
• Unequal Chances

1. What is Inequality?

How do we measure it?

What are the determinants of inequality?

>Gallup 1998: good luck, hard work, inherited money, connections, education, dishonesty, talent, willingness to take risks, race, sex, good looks.

>Is it fair that being ridiculously good looking gives you a higher income than other people?

See http://www.eco.utexas.edu/faculty/Hamermesh/BeautyAER94.pdf for details of this.

>Is it fair that obese women and short men earn less across the board? What about race, sex, and inherited wealth?

>Goldman Sachs at Xmas 2006 paid out $16.5 billion in bonuses (http://www.wsws.org/articles/2006/dec2006/wall-d19.shtml) while their office cleaners earned £5.85 an hour.

>How do you decide what is unfair? In all of our discussion of the macroeconomics of inequality, we’ll always be asking three questions.

2. Inequality of what?

Different philosophical perspectives on social justice provide different foundations for welfare economics:

Utilitarianism

Jeremy Bentham (1789)

Basal Space: utilities. “Focal combination”: Sum.

Libertarianism

John Locke to Robert Nozick.

Basal Space is hierarchical and includes basic rights ahead of U(.)

Rawlsian liberalism

Basal Space: primary goods.

Liberty Principle, Opportunity Principle (incl. Difference Principle)

Sen and the capability approach

Goods  ->        Capabilities      ->        Functionings    ->        Flourishing

3.  How unequal?



There are many, many issues here to talk about.

Severe practical problems with:

• Observing capability (i.e. choice) sets;

• Identifying and collecting data on all relevant ‘functionings’, rights, and/or freedoms;

• Weighting and trading off the non-market components of these vectors against one another;

4. Which unequal?

Do we talk about the distribution of wealth, of income, of living standards or of power, of ownership, etc.

This concept obviously has a very high dimensionality.

5. Classes

Let’s define 3 or 4 `classes’ into which to group people. Class is at the heart of capitalism.

See Capitalism 3.0, chapter 2, for details.

[Download chapter 2 here.]

Ownership profiles between classes—pg. 354.

6. Some stylised facts

1. Living standards are not simply counting piles of material goods.

2. Inequality of Income and Wealth has increased sharply in the last 30 years.

3. The children of families with high incomes are more likely to have high incomes when they grow up, the children of poor families are more likely to have low incomes.

4. Women and Minorities tend to earn less than men.

5. Jobs and access to them remain highly restricted and segmented.

7. Measuring Well-being and Inequality

See http://gapminder.org/.

8. Measuring Living Standards and Inequality

The GDP Measure of Output

Value of all goods and services produced in the economy in a given year. http://www.grossdomesticproduct.info/.

Here’s a nice defintion.

The gross domestic product (GDP) for a country during a specified time period T is defined to be the market value of all final goods and services produced within the borders of the country during period T, regardless of who owns the factors of production.

Let HC denote a home (domestic) country and ROW denote the rest-of-the-world. By definition, the only difference between GNP and GDP for any given HC concerns the treatment of output produced by HC-owned factors of production outside the borders of the HC and the treatment of output produced by ROW-owned factors of production within the borders of the HC. Let NFP denote the net factor payments to the HC from ROW, that is, the payments received by HC-owned factors of production employed in production activities in ROW minus the payments received by ROW-owned factors of production employed in production activities within the borders of the HC. Then, for any given time period T,

              GDP    =    GNP  -  NFP.

The Gini Measure http://william-king.www.drexel.edu/top/prin/txt/factors/dist4.html

9. Unequal Chances

Women

Race

Family Background and Economic Success

10 .Further Reading

Thomas Piketty and Emmanuel Saez (2004), “Income Inequality in the United States, 1913-2002”

Samuel Bowles and Herbert Gintis (2002), “The Inheritance of Inequality”

Lisa Barrow and Cecilia Rouse (2005), “Does College Still Pay?”

Paul Krugman (1993), “The Rich, the Right, and the Facts”

Paul Krugman (1992), “Inequality and Ignorance”

Paul Krugman (1996), “The Spiral of Inequality”

Paul Krugman (2002), “For Richer”

Paul Krugman (2006), “Graduates vs. Oligarchs”

Thomas Lemieux (2004), “Residual Wage Inequality: A Re-Examination”

Orley Ashenfelter and Cecilia Rouse (1998), “Schooling, Intelligence, and Income in America: Cracks in the Bell Curve.” November, 1998.

Cecilia Rouse (1997), “Further Estimates of the Economic Return to Schooling from a New Sample of Twins.” July, 1997.

Claudia Goldin and Ceci Rouse (2000), “Orchestrating Impartiality: The Impact of Blind Auditions on Female Musicians,”American Economic Review, 90, no. 4 (September 2000): 715-741.

Mark Thoma reads Edward Bellamy on inequality: http://economistsview.typepad.com/economistsview/2006/12/how_inequality_.html

Bookmarks on del.icio.us tagged with “inequality” by jbdelong: http://del.icio.us/jbdelong/inequality

Machin, S. (2004) Educational Systems and Intergenerational Mobility. Draft Paper Prepared for CESifo/PEPG Conference, Munich, September 2004

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