What’s this unit about?
Looking at economic inequality
Market income is the sum of:
- all income received as earnings
- All income received from businesses owned by the household or from investments
Disposable income is
income family can spend:
- after taxes
- After transfer payment
Final income is
- after taxes on good and services counted
- Add in total value of public services used
Greta divergence in unit 1 occurred because
the kink in the hockey stick for per capita income has varied in which point in time it has hit countries. The result of the uneven timing of the capitalist revolution around the world was a widening of inequalities among the people of the world.
Accidents of birth impact
Much of inequality can be down to accidents of birth: race, sex, nation, parents, etc.
Categorical inequality
inequality between social groups - race, gender, nationality, caste, religion, etc.
Intergenerational elasticity
when comparing parents and grown offspring, % difference in 2nd gen’s status associated with a 1% difference in the adult generations status
Intergenerational elasticity example
- Elasticity of 0.5, means if father is 10% richer, child will be 5% richer than the other child
- In a society with high intergenerational elasticity, intergenerational mobility is low
- A measure of intergenerational transmission of economic differences.
When is inequality considered unfair?
- People differ on views on redistribution policies depending on their own wealth levels, believes on why poor are poor and vice.
- Procedural theories, which are ideas of fairness based on how the inequality came to be, focus not on how poor or rich someone is but why - many think unfair if income depend on accidents of birth but not if due to harder working people
Endowments =
facts about an individual which may affect their income
- can help understand reasons behind income inequality.
- assets, accidents of birth, etc
Principal agent relationships in labour markets:
- Consider an economy with wealthy individuals and employees
- Credit market excluded, those without wealth or insufficient wealth are exclude from credit market.
- Wealthy individuals and successful borrowers can purchase capital goods so as to become employers
- Employers hire employees on the labour market
When looking at the labour market, consider how will changes to the labour market affect:
- low income
- Middle income
- High income
Governments influence degree of inequality in economy in two ways:
- Redistribution: by taxes and transfers that result in distribution of disposable income that différents from distribution of market income
- Predistribution: by affecting endowments people have, leading to a change in the inequality in market income
Cross sectional inequality
How close are we to perfect inequality across all adults in society
Redistribution/pre
- redistribute tax revenue to reduce inequality
- predistribution is government policies to make sure market income is similar so redistribution isn’t even as necessary, like investment into education of poorer areas.
- predistribution is to affect endowments people have
Gini coefficient
A/A+B, from a mathematical standpoint, if the size of area A increases, then G rises, so closer to perfect inequality.
If you dont care about intergenerational inequality
Indifference curves are horizontal
If udc about cross sectional, only intergenerational inequality - indifference curves are vertical.
Why do curved indifference for inequality not rly make sense
For them to get a lower level of intergenerational inequality which is already low, huge fall in cross sectional inequality - doesnt make sense.
Now sad face curve makes sense.
Feasible sets
- 45 degree line - set of incomes which are same - complete equality
- red curve are feasible incomes of poor and rich - MRT
- F is the maximum feasible income of rich, top
- E is equality point maximised, not PE like D as can move up
- point R - Rawl’s Ideal, furthest to the right, maximising income of poor - is PE
- point B - MRS = MRT point, highest IC of inequality averse citizen.
- point D - minimum feasible income of poor, top left
- A - max average income slope = -1, maximised expected income as one more unit for poor is one more unit lost for poor, so equal opportunity cost.
