Inequality and Redistribution

Question 1

Case study- Johannesburg

Answer 1

A highly unequal city. South Africa is one of the most unequal countries in the world vying with Brazil. Can see the contrast between neighbourhoods which reflects the legacies of segregation and inequalities in opportunities/outcomes, which fall along racial lines. However high levels of economic inequality persist, generally to a lesser extent, in wealthy countries

Question 2

Case study- Inequality in OECD countries

Answer 2

Across OECD countries, we see that even at the set of relatively wealthier, advanced democracies, there’s a lot of variation.
Northern European and Eastern European countries tend to be more equal. The US is considered to be an outlier in terms of wealthy, advanced democracies in its high level of economic inequality.

Variation over time. In most OECD countries, the gap between the rich and poor, as reflected by the Gini coefficient, is at its highest level in 30 years. Has been trending upward.

In the late 1970s and early 80s inequality kind of first started to take off in English speaking countries. And the growth has accelerated from the 1980s onwards

Question 3

Case study- Inequality over time, by type of country

Answer 3

Advanced economies have generally been on an upward trajectory since about 1970.

Emerging market economies have had much more mixed trajectories. Some even appear to be becoming more equal in the last few decades.

Data limitations particularly in non democracies which can keep us from understanding the true extent of economic inequality. E.g. Russia there’s research that official survey based measures vastly underestimate the rise of inequality in Russia- wealth offshore

Question 4

Why is economic inequality rising

Answer 4

1. The rich is getting richer- income and accumulated wealth (assessts prices e.g. houses)
2. Role of globlisation/international trade
3. Declining power of TU’s
4. Growth of the financial sector/ privitisation/deregulation- Jacob Hacker & Paul Pearson argued this is what explains the rise of inequality in the US. Others noted something similar in the UK, beginning with Thatcher.
5. Tecnological- rise in automation, AI led to a loss of skilled manual and some non-manual jobs
6. Redistribution policies- explains variation between countries predominatley the size of welfare state. There are both cultural & institutional factors that contribute to its size. Welfare state is often operationalised as the proportion of GDP that’s spent on social welfare programs.

Question 5

Case study- Why does the US look so different to Europe

Why does Eastern Europe have low levels of economic ineuqality pre-tax

Answer 5

Related to political institutions that limit the role of the state. The US has a majoritarian electoral system with extensive checks & balances so we often end up with divided govs which are factors that contribute to keeping the welfare state small

Especially non-EU Eastern Europe, tend to have low levels of economic inequality when measured pre-tax as the legacy of communism, means these countries have strong gov intervention in markets. Though there is an overall trend towards less gov intervention in markets.

Question 6

How does ethnic heterogeneity impact redistribution policies?

Answer 6

Proposed there are both direct and indirect effects of ethnic heterogeneity

Idea that govs tend to redistribute less when their populations are ethnically diverse, and the US is far more diverse than any European nation.

Some of the wealthy countries that we tend to see, have lower levels of economic inequality, like the Scandinavian countries, tend to be more ethnically homogeneous.

Question 7

Correlates of economic equality- the individual level of behaviour

Answer 7

Lower generosity and cooperation (Cote et al 2015)- less likely to redistribute the money they’re given

Increases status anxiety and risk-taking (Payne et al 2017)

Suppresses trust in gov (Kuziemko et al 2015)

Increases the belief in the legitimacy of inequality (Trump 2018)- self-reinforcing dynamic to inequality, where in conditions of inequality, people become more accepting of inequality, or they believe that it’s deserved. It’s because some people are hard workers and others aren’t.

Shapes beliefs about inequality and economic opportunity (McCall et al 2017)- reduces people’s optimism about economic opportunities.

Question 8

Correlates of economic equality- the aggregate level of behaviour

Answer 8

Worse mental and physical health (Pickett & Wilkinson 2015)

Lower perceived social mobility (Buttrick & Oishi 2017)

More crime & vigilantism- (Phillips 2017)- people are more likely to take the law into their own hands in conditions of high economic inequality

Lower self-reported happiness- (Alesina et al 2004)- evidence that happiness depends on your income relative to some reference group typically. Less about absolute levels of wealth/income and more about relative income (how much you make in comparison to friends and family)

Lower levels of economic growth- (De Dominicis 2008)- possible explanation is that inequality tends to lead to underinvestment in education by lower income households then lowers the accumulation of physical and human capital which can lower economic growth.

Question 9

Limitation to aggregate and individual behaviour

Answer 9

A limitation of this body of research is that it’s really hard to make causal attributions to a big systemic problem like high economic inequality.

We have a lot of correlational evidence about aggregate effects and then evidence that’s based on sort of relatively artificial or superficial interventions, like when we just tell people that conditions are unequal or we create inequality in a lab.

Question 10

Measuring economic inequality- Gini

Answer 10

Designed to capture income/wealth inequality.

Useful as the distribution of wealth/income in a population is now a single number that we can use for making comparisons.

The larger the Gini coefficient is, the more unequal the distribution is. A Gini coefficient of zero means perfect equality, where everyone has the same income or the same wealth.

Going to depend on what is being measured- wages, before or after tax wages, property wealth.

Easier to measure income than their wealth as it can be illiquid. In settings where we don’t have good information, we don’t have reliable information on people’s income. We might calculate it as an index of goods that people have.

Question 11

Other ways of measuring economic inequality

Answer 11

Can use percentile ratios, most common being the 80:20 ratio or 90:10 ratio.The 90:10 ratio would measure the income level of individuals at the top 10% of the income distribution relative to those in the bottom 90% of the distribution. Also the Palmer ratio.

Income diversity ratio is meant to capture the variability & distribution of income in a given geography

Question 12

Why do indicies vary overtime?

Answer 12

Wealth vs income inequality- income refers to money received/earned on a continuous basis for work/investments. Wealth implies money or valuable possessions, like property that’s accumulated overtime. Wealth inequality tends to be more stark & pronounced than income inequality. Most systems measure income not wealth inequality as it’s much harder to measure especially if illiquid.

Measuring income can be complicated- investment income, pensions etc. because there’s not non-salary sources.

Pre or post gov taxation or redistribution. Also can take into debt or not which will affect a measure of wealth or income

Question 13

Case study- Chile/Korea

Answer 13

Measured in 3 different ways:
Original is unadjusted income.
Gross income from wages & salary plus other forms of income like pensions, interest, dividends, and rental incomes
Disposable income is the amount of money you have for spending and saving after your tax and any money provided by the state.

Impact the taxation- Countries vary in their Gini coefficient but also in the gap between inequality using their pre & post-tax income. Shows how much taxation is contributing to reducing economic inequality in various places.

E.g. in Chile there’s not much difference between the Gini coefficient before and after taxes and redistribution- pretty similar. Same with Korea.

Look at European countries, European taxation is doing a lot to reduce income inequality as measured by the Gini coefficient.

Question 14

Demand for redistribution e.g. the US

Answer 14

US household incomes in 2015.

See the meanness to the left of the median. There’s this long tail which represents the wealthy. Note the distribution is truncated. So this is actually these are $250,000 and over. So this if plotted out it would be much longer if in equal bins. So the tail is actually a whole lot longer than is reflected.

Another one of these measurement things to be aware of. Often when we take sort of official gov data on income it’s truncated. So we’re actually not necessarily getting a full picture of the extremes of inequality as we’re not even, we’re just putting all of those super wealthy people at $250,000 and over. That long tail is pulling the median up relative to the mean.

Question 15

Demand for redistribution e.g. the UK

Answer 15

After redistribution you can see the distribution is positively skewed but is less pronounced in the UK than it is in the US.

But, it’s still relatively unequal.

We still have this median to the left of the mean and this long tail. And I’m sure the data is truncated too, because this is £80,000 which is actually not a lot in the context of wealthy people in the UK so should go out a lot further. This makes the UK look more equal than it actually is

Question 16

Meltzer & Richard 1981 model of redistribution

Answer 16

As income inequality rises, the median income drops in relation to the mean income (what we see in the UK example). And as that happens, the median voter is going to prefer greater redistribution. The median voter to the left of the mean they’re going to demand greater redistribution and vote accordingly. Their voting is going to influence tax and public goods policies and counter these excessive disparities so everything should balance out an equilibrium

Puzzle as in some nations this is not the case. Instead, public opposition to escalating economic inequality and support for redistribution are often surprisingly underwhelming.

Question 17

What is redistribution?

Answer 17

Refers to the transfer of income/wealth from some to others, usually via some gov mechanism like taxation/social spending. Taking wealth/income from the rich & giving it to the less well-off in some form e.g. direct cash transfers, subsidising universal health care. Money in the UK that goes to the NHS/state schools. All are examples of redistribution.

Question 18

Operationalising the concept of redistributionn

Answer 18

1. Support for redistribution vs the actual implementation of policies- some studies examine how inequality leads to demand for/support for redistribution & that it’s typically measured with, surveys of public opinion. Lots of ways of asking the question
2. Specific vs general- ask about specific policies or more general ways
3. Redistribution to vs redistribution from (Cavialle & Trump 2015)- some scholars have tried to differentiate attitudes between these. Focus on whose benefiting rather than who we’re taking from
4. Direct vs indirect redistribution- studies look at the actual redistribution on the part of govs. Could do this by measuring the extent of social spending e.g. % of GDP spent on social welfare programs. Some policies are more direct others are more like social safety nets/public goods

Question 19

Why don’t the poor soak the rich- Robin Hood paradox

Answer 19

Demand for redistribution will not always map onto actual redistributive policy

The Robin Hood hood paradox refers to why don’t the poor soak the rich (why don’t the poor vote in large numbers to tax the rich?

Ultimately, why don’t we see the predictions of the model come to fruition? Number of potential explanations and why there’s a lot of potential explanations for variation across countries in the level of redistribution and the tolerance for economic inequality.

Question 20

Why don’t the poor soak the rich- explanations

Answer 20

1- Limits to political accountability- parties & politicians may not respond to voters to the median voters preferences for a variety of reasons e.g. it could be lobbying by business interests. So maybe politicians & parties don’t respond to the preferences of median voters because they’re pockets are stuffed with money by big business

2- Future expectation of earnings or mobility beliefs- voters who are relatively low income now but expect to be rich later like students. Have high prospects of upward mobility.

3- Inaccurate perceptions of economic inequality.

4- Unequal political participation- evidence that economic inequality can suppress political participation. If economic inequality/poverty is demobilising, we might see the median voter who actually votes is not representative of the median wealth/ income if we have some sort of systematic disengagement of people at the lower end of the income distribution.

5- Our beliefs about meritocracy & the “just world”- beliefs about deserving this, about the role of luck vs the role of effort in determining your financial success or failure. Just world beliefs refer to the belief that the world is inherently fair so people generally get what they deserve.

Question 21

Social comparison- disconnect between actual and perceived economic inequality

Answer 21

Can think about social comparison & when social status or wealth in 2 ways:

• Downward social comparison- positive self-evaluation (inflates my sense of social status), looking down on others who have a lower status than you
• Upward social comparison- negative self-evaluation (lowers my sense of social status), when you look up at somebody and compare yourself to them- often have similar characteristics to us e.g. age

Due to increasing economic segregation (Reardon & Bischoff 2011) individuals are increasingly less likely to experience upward social comparisons. Meaning we aren’t reminded that we are lower social status than other people. So, when we do encounter inequality, it’s not the type that might motivate us to support redistribution.

Question 22

Case study- study by lecturer

Answer 22

Soweto (a township of +1 million, almost exclusivley black, median household income £5 a day) in South Africa just outside Johannesburg

Treatment- randomised was the presence of a high status car in poor neighbourhoods which costs c.x7 the median annual household income

How the experiment works- pedestrians are randomised into various conditions depending on when they walk down the street. The car is either present or not in 20 minute increments. The outcome of interest is whether the pedestrian who’s approached by this petitioner, signs a petition in support of a wealth tax or not. Also a placebo petition that has nothing to do with wealth as we might be worried that people are less willing to sign any kind of petition in the presence of the fancy car.

Question- can real life reminders of wealth, in a poor setting change restricted redistributive behaviour?

Finding- pedestrians are more likely to sign the wealth tax petition in the presence of the high status car, net of the placebo

Question 23

Theories of redistribution policies

McCarty (READING)

Question 24

Leanne Reading