Income Inequality

Data
• United States, United Kingdom, India, Ceylon, and Puerto Rico
• Data show that income distribution in these underdeveloped
countries is somewhat more unequal than in the developed countries
during the period after the second world war.
Causes
• The widening of income inequality in the initial stages of growth is due to the
structural changes an economy goes through as the growth takes place.
• The urban sector receives more weight during that time so the economic activity
takes place in favor of the urban sector characterized by higher productivity.
• As a country industrializes, the center of the economy shifts from rural areas to
the cities as rural laborers, such as farmers, begin to migrate seeking better-
paying jobs.
• Due to the influx of rural migrants to the urban areas, the rate of growth in urban
labour becomes high.
• But this stage may never be achieved by the nations which experience high rate
of population growth.
Causes
• Education
• Skilled workers get a premium
• But the supply of the educated workforce will grow and inequality will
come down.
What he found?
• What is particularly important is that the inequality in distribution of
savings is greater than that in the distribution of property incomes,
and hence of assets.
• Factors counteracting the concentration of savings?
• Government interference: legislative interference and "political"
decisions.
• Demographic
• The very nature of a dynamic economy.
• Service income
Shift from agricultural to non-agricultural
sectors
• What about the trend toward greater inequality due to the shift from
the agricultural to the nonagricultural sectors?
• We know that per capita income is greater in sector B than in sector
A.
• During the last 50 to 75 years there has been no widening in income
inequality in the developed countries but, on the contrary, some
narrowing within the last two to four decades.
• The shares of the lower income groups in sectors A and/or B must
have increased sufficiently to offset the decline.
What is offsetting the inequality?

• The major offset to the widening of income inequality associated with

the shift from agriculture and the countryside to industry and the city
must have been a rise in the income share of the lower groups within
the nonagricultural sector of the population.
Income inequality
Shares of the lower 3 quintiles
• 28 per cent in India
• 30 per cent in Ceylon
• 24 per cent in Puerto Rico
• 34 per cent in the United States
• 36 per cent in the United
Kingdom
Shares of the top quintile
• 55 per cent in India,
• 50 per cent in Ceylon, and
• 56 per cent in Puerto Rico,
• 44 per cent in the United States
• 45 per cent in the United
Kingdom
Middle class
• Let us compare the distributions for India and the United States.
• The first quintile in India receives 8 per cent of total income, more
than the 6 per cent share of the first quintile in the United States.
• But the second quintile in India receives only 9 per cent, the third 11,
and the fourth 16.
• Whereas in the United States, the shares of these quintiles are 12, 16,
and 22 respectively.
• No middle class
Gradual rise
• The developed countries, on the other hand, are characterized by a
much more gradual rise from low to high shares.
• Substantial groups receiving more than the high countrywide income
average, and the top groups securing smaller shares than the
comparable ordinal groups in underdeveloped countries.
• Shares of the very top groups would be higher and those of the
groups below the top would all be significantly lower.
Implications
• Income structure is somewhat more unequal in underdeveloped
countries than in the more advanced-particularly in those of Western
and Northern Europe :the United States, Canada, Australia, and New
Zealand.
• The wider inequality in the secular income structure of underdeveloped
countries is associated with a much lower level of average income per
capita.
• Unequal income structure presumably coexisted with a low rate of
growth of income per capita.
• Latin America, Africa, Asia, these may have been economic leaders
earlier, but now their rate of growth has been much low.
Gary Fields
• Do the rate and type of growth promote or hinder the distributional
goals?
• GNP as the principal outcome of development, or can it be viewed as
the determinant of changing poverty and inequality.
• Causal linkages from growth to distribution and from distribution to
growth.
More studies
• Inverted U pattern was established in simple tabulations and simple
regressions (Paukert, 1973; Cline, 1975; Deininger and Squire, 1996)
• Oshima (1962)
• There was greater inequality in underdeveloped countries than in
developed ones.
• Undeveloped, underdeveloped, semi-developed and fully developed
• Inequality is generally low at the undeveloped stage and that the
dispersion of incomes increases as countries advance to the next stage.
• Inequality increases during the third (semi-developed) stage, but reaches
its peak there and declines during the fourth (fully developed) stage.
Kuznet (1963)
• 18 countries
• First of all that the share of the upper income groups was distinctly
larger in the underdeveloped than in the developed countries.
• Probably very little difference between developed and developing
countries as regards the share of the lowest 40 or 60 per cent of
families.
• The share of the middle group was lower in the developing than in
the developed countries.
Inverted U to U
• Traditional cross-sectional methodology
• More data available
• Whether middle-income countries have higher inequality than lower
income or higher-income countries do, with no causality implied.
• Fields and Jakubson (1994) first found that the central Kuznets curve
flips from a statistically significant inverted-U estimated by OLS to a
statistically significant U with fixed effects estimation.
Why?
• Why would fixed effects estimation produce such different results from
cross-sectional estimation? It turns out that quite a large number of the
highest inequality observations are from Latin American countries.
• This suggests that it is not being middle-income per se that produces
high inequality but rather the fact that Latin American countries have
highly unequal distributions of land, wealth, and other assets as
compared with other developing countries.
• Consequently, when Latin American dummies have been added to the
cross-country regressions, these terms have been found to have a
significant positive association with inequality.
Deininger and Squire (1998)
• It is no longer necessary to maintain that any particular pattern is
"typical.“
• In 5 of their 48 countries (Brazil, Hungary, Mexico, the Philippines, and
Trinidad and Tobago), the Gini coefficient followed an inverted-U
shape.
• In 4 countries (Costa Rica, India, the United States, and the United
Kingdom), the Gini coefficient followed a U shape.
• In the remaining 80% of the countries, there was no statistically
significant quadratic linking the Gini coefficient to national income.
RESULTS FROM ESTIMATION OF THE KUZNET’S CURVE WITH COUNTRY-SPECIFIC DUMMIES
Varied patterns
• The growth process itself can produce varied inequality patterns. The
key question to ask is why. Is there a pattern to the patterns?
• The answer seems to be: "apparently not."
Asia
• In Asia, the experiences of the rapidly-growing countries of East Asia
have been examined by Oshima (1991).
• He found that inequality was generally falling in the 1970s and rising
in the 1980s, which is the exact opposite of Kuznets's inverted-U.
• The patterns differed across countries – falling inequality in Japan, U-
shaped paths in Hong Kong, Singapore and Taiwan, and an inverted-U
path in Korea -- reflecting "diverse factors and mechanisms" at work
in the different countries.
The opinion is divided
• For Latin American countries:
• In Africa, where the data are most limited, the Deininger-Squire data set (1996)
includes six African countries with data on changes in inequality over time, often
for very short periods.
• Three of these countries had national income growth and three did not.
• Inequality fell in two of those with income growth (Ghana and Mauritius) and rose
in one (Morocco).
• As for those which either stagnated or contracted, inequality rose in two (Nigeria
and Uganda) and fell in one (Côte d'Ivoire).
• Based on this limited body of information, we do not find any tendency for
inequality to change differently in the growing economies of Africa as compared
with the non-growing ones.
Summing up

• Income inequality is no more likely to rise or fall when economic

growth is high than when economic growth is low or negative.
• It is not the rate of economic growth or the stage of economic growth
that determines whether income inequality increases or decreases,
but rather what matters is the kind of economic growth.