Inequality of Income & Inequality of Opportunity in Spain

1. Inequality of Income & Inequality of Opportunity in Spain Christelle Sapata Autonomous University Of Barcelona 01/2009

2. Purpose • Evidence of Inequality of Opportunity in Spain Inequality of Income vs Inequality of Opportunity • Determinants of Inequality of Opportunity Magnitude and Variation over the Life Cycle • Impact on Inequality of Income Reduction of Inequality of Income in the case of Equality of Opportunity

3. Methodology • A Definition Of inequality Of opportunity John Roemer (1998) • A Measure Of Inequality Of Opportunity Bourguignon et al (2003) • A Method Of Estimation Instrumental Variables Method. • The Impact Of The Inequality Of Opportunity On The Inequality Of Income Decomposition of some inequality indices.

4. Concepts Why Should Individuals Be Equal In Some Dimensions and Why Should They Face Inequalities In Some Others? • What Is The Basis For Equality? Welfare Vs Resources Arneson, Dworkin, Rawls, Sen • What Is The Basis For Inequality? Individual Responsibility Cohen, Roemer, Fleurbaey

5. The Economic Framework: John Roemer’s proposal • 2 Kinds of Determinants:Effort vs Circumstances • Equality of Opportunity Requirements: Compensation for the inequalities due to circumstances. No compensation for the inequalities due to effort. • Access To Outcomes (health, education, income): Only depends on factors for which the person is responsible

6. Literature Review • Different Ways Of Estimating Inequality Of Opportunity. i. Which Factors Are Responsible For Inequality Of Opportunity? ii. How To Reduce Inequality Of Opportunity? • The Selection Of The Right Econometric Method i. Luck => Effort Or Circumstance? Solution: Treated As A Residual ii. Ability Or Personal Talent => Endogeneity Bias Solutions: Proxy, Twins, Instrumental Variables.

7. Estimation • Data SLC 2005, working people, 25-65 years old, gross labor income, 5 age cohorts. • Equation F(w) = iEi + iCi + u F(w) = 1educ + 2region + 3urb +4exper +5exper2 + 6cnowhite +7emp + 1educfather + 2cnofather + 3man + 4country + u (1) The IV method : F (Ei) = ii + iXi+ (2) Then: F(w) = άÊ + τiXi+ μ(3)

8. Results A. Effort Variables. • Returns To Schooling: not constant but increasing • Experience: Positive return - constant return by cohort - decreasing return in the general model • White Collar Vs Blue Collar • Labor Market Status: Employees vs Employers

9. Results B. Circumstances Variables. • Gender: Strong inequality of opportunity, maximal for the cohort 33-40 years old. • Migration:Europeans/Natives. Non-Europeans/Natives • Region and Urbanization Degree: Significant impact but effort or circumstance? • Parental Education: Decreasing impact.

10. Results C. Decomposition Methodology • Counter-factual Function Of Income(Bourguignon,Ferreira, Menéndez, 2003, 2005) The model: y = wC +sE + u OLS: ln ŷ = ŵC + ŝE + û ln ỹ = Ċŵ + ŝE + û where Ċ is a vector of circumstances, equal for all the individuals. • Mean Income Ratios(Peragine, Checchi, 1998)

11. Results Results • Gini Index: reduction of 50% • Hierarchy of Circumstances: 1. Gender 2. Parental Background 3. Urbanization, Region of Residence 4. Country of Origin. => Are geographical variables beyond the control of the individual ?

12. Conclusions • A Strong Inequality of Opportunity in Spain • The Most Impacting Circumstances: Gender, Parental Background, Country of Birth. • Ambigous Status Of Urbanization Degree and Region • Compare Inequality Of Opportunity In Spain Before And After Tax Schedules With Panel Data. • Different Theories=Different Stories About Welfare State Role? • What About Equality Of Opportunity And Economic Growth?