Inequality and Poverty: Measurement and Analysis of Income Distribution

1. Inequality and Poverty: Agenda Inequality and Poverty Measurement Technical University of Lisbon Frank Cowell http://darp.lse.ac.uk/lisbon2006 July 2006

2. Introduction • The course focuses on inequality and poverty analysis • develop theoretical approaches • prfactical applications as illustration • Begin with something very simple indeed… • What do we know? • Data • Tools • Comparisons • Then to some questions • Methods • The way forward

3. Overview... Inequality and Poverty: Agenda Income distribution What we know about the US… Inequality Poverty Methods

4. Try a simple thought experiment Use the Current Population Survey data See DeNavas-Walt et al (2005) Data, descriptions and computations Just take standard definitions Do everything in 2004 dollars Focus on income of households What do the data tell us? Key tables Begin with Table A-1 What do we know? – data

5. 1. Earnings 2. Unemployment compensation 3. Workers’ compensation 4. Social security 5. Supplemental security income 6. Public assistance 7. Veterans’ payments 8. Survivor benefits 9. Disability benefits 10. Pension or retirement income 11. Interest 12. Dividends 13. Rents, royalties, estates & trusts 14. Educational assistance 15. Alimony 16. Child support 17. Financial assistance from outside the household 18. Other income What is income? (1)

6. What is income? (2) • Covers money income received • exclusive of certain money receipts such as capital gains • Before deductions • personal income taxes • social security, union dues • Medicare deductions • Does not include noncash benefits • food stamps • health benefits • subsidized housing • goods produced and consumed on the farm • business transportation and facilities, • payments by business for retirement programs. • Let’s look at the standard CPS presentation…

7. A snapshot view • Gives proportions of households in each income category, year by year • Straight from the official table • Cut down to manageable number of years • omitted population totals • But, check in a diagram • standard frequency polygon….

8. Representing the distribution?

9. Questions • Mixed messages from this illustration • Shifts over time make sense… • …income growth • But weird stuff on the right… • …arises from arbitrary grouping • Get more insight from a better representation • Use the concept of quantile • includes well-known concepts • median, quartiles etc • a “boundary” income • Examine DeNavas-Walt et al (2005)Table A-3 • Do this for 1974, 2004 • Check out the growth

10. Quantile Incomes by Households More detail.

11. Quantiles: 1967 – 2004

12. The Parade: quantiles vs population

13. Inequality from quantiles? • But does this way of representing distributions tell us about inequality? • Clear that growth is lopsided • …top decile grew by almost four times as much four times as much as bottom • Suggests increase in inequality? • (whatever that may be) • We can also use quantiles to derive simple inequality measures • eg “90/10” ratio • (increased from 8.6 to 11.1) • or ratios to medians… • Have a look at path of these ratios… • … and then think again

14. Quantile ratios: US 1967 – 2004

15. Overview... Inequality and Poverty: Agenda Income distribution More of what we know about the US… and elsewhere Inequality Poverty Methods

16. Fuller income information • Focus on additional income from same source • DeNavas-Walt et al (2005)Table A-3 • Again, we don’t question the definitions • household income before deduction • income receiver: household • Divide distribution up into five equal slices • Compute mean income of each 20% slice

17. Mean incomes by groups of households More detail.

18. Differential growth of mean incomes

19. Three alternative views • First, plot these mean incomes cumulatively • Plot against population shares • Do this for any given year • Get a powerful tool • Second, plot income shares against time • Divide each group mean by overall mean • Graph these for whole period • Lopsided growth? • Third plot income shares against population shares • Do this for any given year • Get a very powerful tool

20. 1: The Generalised Lorenz Curve

21. 2: Income shares: US 1967-2004

22. 2: Top income shares in US Piketty, T. and E. Saez (2003) “Income inequality in the United States, 1913-1998,” Quarterly Journal of Economics, 118, 1-39.

23. 3: Lorenz curve • Natural interpretation in terms of shares • Gives a natural definition of the Gini coefficient • Use this to have a quick look at inequality in different countries…

24. Lorenz around the world… Get full version SourceWorld Bank (2004)

25. Income or consumption? SeeWorld Bank (2005)

26. Overview... Inequality and Poverty: Agenda Income distribution Yet more of what we know about the US… Inequality Poverty Methods

27. An approach to poverty • Now use standard source to get information on poverty • DeNavas-Walt et al (2005)Table B-3 • The official poverty thresholds do not vary geographically, • Updated annually for inflation using Consumer Price Index • Definition uses money income before taxes • Does not include • Capital gains • public housing • Medicaid • Food stamps • other noncash benefits

28. Poverty thresholds in 2004

29. Proportion in poverty1974-2004

30. Overview... Inequality and Poverty: Agenda Income distribution Approaches for these lectures Inequality Poverty Methods

31. Questions to resolve • Theoretical basis for using quantiles and shares • Theoretical derivation of intuitive concepts • Why use Gini? • Why use this simple poverty concept? • Relationships between economics and statistical concepts • Place of distributional analysis in welfare economics • Why be concerned with inequality and poverty?

32. Approaches • Start with welfare-economics setting • Then move to axiomatisation • Use empirical evidence as we go • on the performance of indices • on the structure of values • But how to get evidence on values? • It’s not like consumer theory • Use experiments • Or questionnaire experiments • One coming up… • Finally examine statistical problems of implementation

33. References (1) • Amiel, Y. and Cowell, F. A. (1999) Thinking about Inequality, Cambridge University Press, Cambridge • Atkinson, A. B. (1983) The Economics of Inequality (Second ed.). Oxford: Clarendon Press. • Cowell, F. A. (1995)Measuring Inequality (Second ed.), Harvester Wheatsheaf, Hemel Hempstead. • Cowell, F. A. (2000) “Measurement of Inequality,” in Atkinson, A. B. and Bourguignon, F. (eds) Handbook of Income Distribution, North Holland, Amsterdam, Chapter 2, 87-166 • Cowell, F. A. (2006) “Inequality: Measurement” forthcoming in The New Palgrave, 2nd edition • DeNavas-Walt, C., Proctor, B. D. and Lee, C. H. (2005) “Income, poverty, and health insurance coverage in the United States: 2004.” Current Population Reports P60-229, U.S. Census Bureau, U.S. Government Printing Office, Washington, DC. • Fisher, G. M. (1992) “The Development and History of the Poverty Thresholds,” Social Security Bulletin, 55 (4), 3-14.

34. References (2) • Jäntti, M. and Danziger, S. (2000) Income Poverty in Advanced Countriesin Atkinson, A. B. and Bourguignon, F. (eds) Handbook of Income Distribution, North Holland, Amsterdam, Chapter 10, 309-378 • Lambert, P. J. (2002) The Distribution and Redistribution of Income (Third ed.). Manchester: Manchester University Press. • Piketty, T. and E. Saez (2003) “Income inequality in the United States, 1913-1998,” Quarterly Journal of Economics, 118, 1-39. • Sen, A. K. and Foster, J. E. (1997) On Economic Inequality (Second ed.). Oxford: Clarendon Press. • The World Bank (2004)2005 World Development Report: A Better Investment Climate for Everyone. Oxford University Press, New York • The World Bank (2005)2006 World Development Report: Equity and Development. Oxford University Press, New York