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Explaining Inequality the World Round: Cohort Size, Kuznets Curves, and Openness.

Explaining Inequality the World Round: Cohort Size, Kuznets Curves, and Openness. By Matthew Higgins and Jeffrey G. Williamson. The three hypothesis. Inequality and cohort size Inequality and openness Kuznet curve hypothesis. Cohort size hypothesis.

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Explaining Inequality the World Round: Cohort Size, Kuznets Curves, and Openness.

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  1. Explaining Inequality the World Round: Cohort Size, Kuznets Curves, and Openness. By Matthew Higgins and Jeffrey G. Williamson

  2. The threehypothesis • Inequalityandcohortsize • Inequalityandopenness • Kuznetcurvehypothesis

  3. Cohortsizehypothesis • „Fatagecohortstendtogetlowrewards“ • Importantwherethefatcohortslie in thedemographicstructure • Cohortsizevarianceacross countries vs. within countries over time

  4. Inequalityandopenness • Risinginequalitycorrelatedwithincreasingglobalization • Trade (Heckscher- Ohlin argument) • Immigration • Labor supplyshiftsimportant • Globalizationascauseforfallinginequality in developing countries andincreasinginequality in developed countries?

  5. Kuznets curvehypothesis I – Strong version • Inequalityfirstdecreasesandthendeclinesduringeconomicdevelopment • Demand for different skilllevelscausestheinequalitydevelopment

  6. Kuznets curvehypothesis II – Weakversion • Demand forces not necessarilythereasonforKuznet movements • Other forces possible • Forces of some demographic transition (cohort size) • Different policies (attitude towards liberal policies, schooling,…) • Natural resource endowments

  7. EMPIRICS • Pooleddatasetof 111 countries, 1960-1990ies • Variables: • Decadalaverageof Real GDP per worker (RGDPW) • RGDPW2 • GINI-coefficent • Log of (Q5/Q1) incomeratio (GAP) • 8 dummies, includingdecadaldummies

  8. Problems • Simultaneitybias- Instrumental variables? • Omitted variable bias • Heteroskedasticity- heteroskedasticity-robust-estimators

  9. Monotonicallydeclining Inverted U, but impreciseestimations

  10. Extension ofthemodel • MATURE: shareofpopulationwithagebetween 40-59 • OPEN: Sachs-Warner index • a blackmarket premium of 20 percentormoreforforeignexchange • an exportmarketingboardwhichappropriatesmostforeignexchangeearnings • a socialisteconomicsystem • extensive non-tariffbarriers on importsof intermediate andcapitalgoods.

  11. Quite high

  12. Lacks degreesoffreedom!

  13. M3/GDP is a measureforfinancialdepth (howsophisticatedarefinancialinstitutions in a country, howmanyhaveaccesstothese…) • FREEDOM geometric average of two indices, one measuring civil liberties and one measuring political rights

  14. Alternative measuresforopenness: • quantitative andtariffrestrictions on imports, • theshareofimports plus exports in GDP • Natural levelofopenness: thelogsofcountrysize, population, per capitaincome, per capitacrudeprovenoilreserves, theaveragedistancefromtradingpartners, andtwodummy variables describing, respectively, whether a countryis an islandorislandlocked

  15. GlobalizationandInequality • Milanovic (2005) proxies openness by the ratio of trade to GDP, finds negative effect of openness on inequality in poor countries • Ravallion (2001) as well • Dollar and Kraay (2000, 2002) find that openness has no impact on inequality

  16. Alternative demographicmeasures: • total fertility rate • population growth rate • labor-force growth rate • the infant mortality rate • life expectancy at birth

  17. Fertility rate • De La Croix and Doepke (2003) find negative correlation between high fertility and growth, via education • Barro (2000): High correlation between inequality and fertility

  18. Fixed countryeffects • Dummy variable foreverycountry • Unbiasedandconsistentundertheassumptionthatunobservedeffectsarecorrelatedwiththeexplanatory variables • Loss in efficiency • Serial correlation-> LDV

  19. Explainingcohortsizeeffect on inequality • Threechannels • 1) alteredagestructure, leavingage-earningsprofileconstant (+) • 2) different agegroupswith different withininequalitylevels (+) • 3) age-earningsstructurechanging, different experience premium (-)

  20. Simulations - I • Threekeysetsofparameters • 1) Age profileoflaborproductivityoverthelifecylce • 2) Age profileofthevarianceofearningsoverthelifecylce • 3) Elasticityofsubstitutionbetween different agegroups

  21. Simulations - II • Treatestimatedmeanage-incomeasrepresentingtheage-profile oflaborproductivity • Select variousvaluesfortheelasticityofsubstitutionacrossagegroups • Evaluateinequalityindexesassociatedwithvarioussteady-statepopulationgrowthrates

  22. Simulations - III • Perfectsubstitutability • Small effectbychanging mix betweenolderandyoungerworkerscausedby different wage levels (32.5 to 32.1) • Larger effectcausedby different variancewithinagegroups (43.1 to 39.7) • Takingmean-earningsandvarianceeffectstogether: similareffect

  23. Simulations - IV • Imperfect elasticityofsubstitutionnecessaryforcohortsizeeffecttobetrue • 3.0 : offsetsfirsttwochannels • suggestslowerelasticityofsubstitution

  24. Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of economic growth, 5(1), 5-32. • De La Croix, D., & Doepke, M. (2003). Inequality and growth: why differential fertility matters. The American Economic Review, 93(4), 1091-1113. • Dollar, D., & Kraay, A. (2002). Growth is Good for the Poor. Journal of economic growth, 7(3), 195-225. • Milanovic, B. (2005). Can we discern the effect of globalization on income distribution? Evidence from household surveys. The World Bank Economic Review, 19(1), 21-44. • Ravallion, M. (2001). Growth, inequality and poverty: looking beyond averages. World development, 29(11), 1803-1815.

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