Measuring Inequality: Measuring Inequality A practical workshop On theory and technique San Jose, Costa Rica August 4 -5, 2004


Slide2: Panel Session on: Econometric Analysis Using Inequality Measures


Slide3: by James K. Galbraith and Enrique Garcilazo The University of Texas Inequality Project http://utip.gov.utexas.edu Session 5


A Global Coup?: A Global Coup? Looking Beyond Technology and Trade at the Causes of Rising Inequality in the Age of Globalization


Slide5: With the UTIP data, we can review changes in global inequality both across countries and through time. Nothing comparable can be done with the Deininger and Squire data set, for the measurements are too sparse and too inconsistent.


Slide6: The Scale Brown: Very large decreases in inequality; more than 8 percent per year. Red Moderate decreases in inequality. Pink: Slight Decreases. Light Blue: No Change or Slight increases Medium Blue: Large Increases -- Greater than 3 percent per year. Dark Blue: Very Large Increases -- Greater than 20 percent per year. h


Slide7: 1963 to 1969


Slide8: 1970 to 1976 The oil boom: inequality declines in the producing states, but rises in the industrial oil-consuming countries, led by the United States.


Slide9: 1977 to 1983


Slide10: 1981 to 1987 … the Age of Debt Note the exceptions to rising inequality are mainly India and China, neither affected by the debt crisis…


Slide11: 1984 to 1990


Slide12: 1988 to 1994 The age of globalization… Now the largest increases in inequality in are the post-communist states; an exception is in booming Southeast Asia, before 1997…


Slide13: Simon Kuznets in 1955 argued that while inequality could rise in the early stages of industrialization, in the later stages it should be expected to decline. This is the famous “inverted U” hypothesis. Recent studies based on Deininger & Squire find almost no support for any relationship between inequality and income levels. We believe, however, that in the modern developing world the downward sloping relationship should predominate, particularly in data drawn from the industrial sector.


Slide14: A regression of pay inequality on GDP per capita and time, 1963-1998. The downward sloping income-inequality relation holds, but with an upward shift over time…


Slide15: The time effect from a two-way fixed effects panel data analysis of inequality on GDP per capita, with time and country effects. Milanovic Unweighted Inequality Between Countries


Slide16: This pattern resembles the general pattern we associate, within countries, with the coup d’etat:


Unemployment, Inequality and the Policy of Europe1984-2000: Unemployment, Inequality and the Policy of Europe 1984-2000 A Presentation to the European Commission Lectures Program Brussels June 29, 2004


The Standard View: The Standard View Employment is determined in a labor market. Labor markets are national. Flexibility reduces unemployment. The United States has more jobs than Europe, but only at the expense of more inequality. Is this good or bad? A political question


The U.S. Case: The U.S. Case In the American case, we have measured inequalities of pay (weekly earnings) in the manufacturing sector on a monthly basis going back to January, 1947, for sectors that are continuously measured since that time. The result gives us a time series of pay inequalities in a key part of the American industrial economy.


Wage Inequality and Some Historical Events: JFK LBJ NIXON FORD CARTER REAGAN BUSH CLINTON Wage Inequality and Some Historical Events TRUMAN EISENHOWER Korean War Recession Vietnam War Recession Recession Recession Recession


Wage Inequality and Unemployment: Wage Inequality and Unemployment Open UnemploymentRate A strong positive correlation between the unemployment rate and wage inequality in the US is exhibited here.


The U.S and Europe: The U.S and Europe First, let’s compare U.S. inequality to that in each European country. Then, let’s compare U.S. inequality to that in Europe-as-a-whole Finally, we ask, what is the relationship between unemployment and inequality in Europe?


Slide23: EHII -- Estimated Household Income Inequality for OECD Countries Low High


Slide24: The value for the U.S. on this scale is about 0.29, or roughly the height of the blue bar. Overall European manufacturing pay inequality –including differences between countries – is higher than in the US. Now, is pay inequality in Europe really lower than in the U.S.? It depends on how you count…


Slide25: “Data! Data! Data! I can’t make bricks without clay.” Sherlock Holmes The Adventure of the Copper Beeches


European Regional Panel Data Set: European Regional Panel Data Set Pay across Sectors by European Region From Eurostat’s REGIO Annual 1984-2000, up to 159 Regions Enables us to compute measures of inequality within and between regions. Permits construction of a panel with which we can isolate regional, national and continental effects


Slide28: Contribution of European Provinces in Inequality Across the European continent, late 1990s.


A Simple Theory of European Unemployment: A Simple Theory of European Unemployment Demand Factors: GDP Growth and Investment Wealth and Demand for Services Supply Factors: Inequalities of Pay Transition to Work for Youth


Hypotheses: Hypotheses Growth reduces unemployment. (-) Higher incomes mean fewer unemployed. (-) Inequality increases unemployment (+) More younger workers means more unemployed. (+)


Slide32: Regression analysis of European unemployment


Slide33: Emigration? Centralized wage bargains? Country Fixed Effects Show the Differences Between Countries Not Explained by the Explanatory Variables.


Slide36: Time Fixed Effects Show the Movements of Unemployment Across All Regions, After Taking Account of the Regressors


Conclusions: Conclusions Labor markets are not national. Macroeconomic conditions matter. Youth is a problem. Equality of pay helps. Flexibility does not. Small countries have an advantage. EU policies started off very poorly. But there is hope for the future.


Beating the Bank at its Own Game:Estimating Income Inequalityfrom measures ofpay inequalityand other economic information: Beating the Bank at its Own Game: Estimating Income Inequality from measures of pay inequality and other economic information


Slide39: Estimating the DS Gini Coefficients from Pay Inequality and other variables. Dependent variable is log(DSGini)


Slide40: EHII -- Estimated Household Income Inequality for OECD Countries Low High


Slide41: Mean Value and Confidence Interval of Differences eap: East Asia and Pacific eca: Eastern Europe and Central Asia lac: Latin and Central America mena: Middle East and North Africa na: North America sas: South Asia ssa: Sub Saharan Africa we: Western Europe


Slide42: Major Differences Between D&S Gini and EHII Gini


Slide43: Trends of Inequality in the D&S Data


Slide44: Trends of Inequality in subset of EHII 2.2 Data matched to D&S


Slide45: Trends of Inequality in Full EHII 2.2 Dataset (N=3,179)


Slide46: Income Inequality in North America


Slide49: Type “Inequality” into Google to find us on the Web