Frank Cowell: TU Lisbon – Inequality & Poverty Inequality and Poverty: Agenda July 2006 Inequality and Poverty Measurement Technical University of Lisbon.

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Inequality and Poverty: Agenda

July 2006 July 2006

Inequality and Poverty Measurement Inequality and Poverty Measurement

Technical University of LisbonTechnical University of Lisbon

Frank CowellFrank Cowellhttp://darp.lse.ac.uk/lisbon2006http://darp.lse.ac.uk/lisbon2006

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Introduction

The course focuses on inequality and poverty analysisThe course focuses on inequality and poverty analysis develop theoretical approachesdevelop theoretical approaches prfactical applications as illustrationprfactical applications as illustration

Begin with something very simple indeed…Begin with something very simple indeed… What do we know?What do we know?

DataData ToolsTools ComparisonsComparisons

Then to some questionsThen to some questions Methods Methods The way forwardThe way forward

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Overview...

Income distribution

Inequality

Poverty

Methods


What we know about the US…

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What do we know? – data

Try a simple thought experiment Try a simple thought experiment Use the Current Population Survey dataUse the Current Population Survey data

See See DeNavas-Walt et al (2005) Data, descriptions and computationsData, descriptions and computations

Just take standard definitionsJust take standard definitions Do everything in 2004 dollarsDo everything in 2004 dollars Focus on income of householdsFocus on income of households

What do the data tell us?What do the data tell us? Key tablesKey tables Begin with Table A-1Begin with Table A-1

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What is income? (1) 1. Earnings1. Earnings 2. Unemployment compensation2. Unemployment compensation 3. Workers’ compensation3. Workers’ compensation 4. Social security4. Social security 5. Supplemental security income5. Supplemental security income 6. Public assistance6. Public assistance 7. Veterans’ payments7. Veterans’ payments 8. Survivor benefits8. Survivor benefits 9. Disability benefits9. Disability benefits 10. Pension or retirement income10. Pension or retirement income

11. Interest11. Interest 12. Dividends12. Dividends 13. Rents, royalties, estates & trusts13. Rents, royalties, estates & trusts 14. Educational assistance14. Educational assistance 15. Alimony15. Alimony 16. Child support16. Child support 17. Financial assistance from outside 17. Financial assistance from outside

the householdthe household 18. Other income18. Other income

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What is income? (2) Covers money income received Covers money income received

exclusive of certain money receipts such as capital gainsexclusive of certain money receipts such as capital gains

Before deductionsBefore deductions personal income taxespersonal income taxes social security, union duessocial security, union dues Medicare deductionsMedicare deductions

Does not include noncash benefitsDoes not include noncash benefits food stampsfood stamps health benefitshealth benefits subsidized housingsubsidized housing goods produced and consumed on the farmgoods produced and consumed on the farm business transportation and facilities,business transportation and facilities, payments by business for retirement programs.payments by business for retirement programs.

Let’s look at the standard CPS presentation…Let’s look at the standard CPS presentation…

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A snapshot viewunder

$5,000$5,000 -$9,999

$10,000 -$14,999

$15,000-$24,999

$25,000-$34,999

$35,000-$49,999

$50,000 -$74,999

$75,000-$99,999

$100,000 and over

1967 5.1 8.5 7.6 14.7 16 21.9 17.3 5.2 3.7

1974 2.7 7.7 7.8 14.4 14.3 19 20.7 7.9 5.5

1984 3 7.2 7.9 14.1 13.5 17 19.4 9.6 8.4

1994 3.1 6.6 7.4 13.8 12.7 15.8 18.2 10.7 11.7

2004 3.5 5.2 6.7 12.9 11.9 14.8 18.3 11 15.7

Gives proportions of households in each income category, Gives proportions of households in each income category, year by yearyear by year

Straight from the official tableStraight from the official table Cut down to manageable number of yearsCut down to manageable number of years omitted population totalsomitted population totals

But, check in a diagramBut, check in a diagram standard frequency polygon….standard frequency polygon….

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Representing the distribution?

0

5

10

15

20

25

$2,500

$7,500

$12,500

$20,000

$30,000

$42,500

$62,500

$87,500

$550,000

1967

1974

1984

1994

2004

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Questions Mixed messages from this illustrationMixed messages from this illustration

Shifts over time make sense…Shifts over time make sense… ……income growthincome growth But weird stuff on the right…But weird stuff on the right… ……arises from arbitrary groupingarises from arbitrary grouping

Get more insight from a better representation Get more insight from a better representation Use the concept of quantileUse the concept of quantile

includes well-known conceptsincludes well-known concepts median, quartiles etcmedian, quartiles etc a “boundary” incomea “boundary” income

Examine Examine DeNavas-Walt et al (2005) Table A-3Table A-3 Do this for 1974, 2004Do this for 1974, 2004 Check out the growthCheck out the growth

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Quantile Incomes by Households

1974

10% $9,741

20% $16,285

50% $37,519

80% $64,781

90% $83,532

95% $102,534

2004

$10,927

$18,500

$44,389

$88,029

$120,924

$157,185

Growth

12.2%

13.6%

18.3%

35.9%

44.8%

53.3%

More detail.More detail.

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Quantiles: 1967 – 2004

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

1965 1970 1975 1980 1985 1990 1995 2000 2005

q.10

q.20

q.50

q.80

q.90

q.95

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The Parade: quantiles vs population

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

0 0.2 0.4 0.6 0.8 1proportion of population

in

com

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1974

2004

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Inequality from quantiles? But does this way of representing distributions tell us But does this way of representing distributions tell us

about inequality?about inequality? Clear that growth is lopsidedClear 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 We can also use quantiles to derive simple inequality measuresmeasures eg “90/10” ratioeg “90/10” ratio (increased from 8.6 to 11.1) or ratios to medians…or ratios to medians…

Have a look at path of these ratios…Have a look at path of these ratios… … … and then think againand then think again

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Quantile ratios: US 1967 – 2004

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1965 1970 1975 1980 1985 1990 1995 2000 2005

q.95/q.50

q.90/q.50

q.80/q.50

q.20/q.50

q.10/q.50

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Overview...

Income distribution

Inequality

Poverty

Methods


More of what we know about the US… and elsewhere

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Fuller income information

Focus on additional income from same Focus on additional income from same sourcesource DeNavas-Walt et al (2005) Table A-3Table A-3

Again, we don’t question the definitionsAgain, we don’t question the definitions household income before deductionhousehold income before deduction income receiver: household income receiver: household

Divide distribution up into five equal slicesDivide distribution up into five equal slices Compute mean income of each 20% sliceCompute mean income of each 20% slice

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1974

1st 20% $9,324

2nd 20% $23,176

3rd 20% $37,353

4th 20% $53,944

5th 20% $95,576

Overall $43,875

2004

$10,264

$26,241

$44,455

$70,085

$151,593

$60,528

Growth

10.1%

13.2%

19.0%

29.9%

58.6%

38.0%

Mean incomes by groups of households

More detail.More detail.

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Differential growth of mean incomesMean Incomes US

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

1965 1970 1975 1980 1985 1990 1995 2000 2005

Lowest 20%Second 20%Third 20%Fourth 20%Highest 20%

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Three alternative views

First, plot these mean incomes cumulativelyFirst, plot these mean incomes cumulatively Plot against population sharesPlot against population shares Do this for any given yearDo this for any given year Get a powerful toolGet a powerful tool

Second, plot income shares against timeSecond, plot income shares against time Divide each group mean by overall meanDivide each group mean by overall mean Graph these for whole periodGraph these for whole period Lopsided growth?Lopsided growth?

Third plot income shares against population sharesThird plot income shares against population shares Do this for any given yearDo this for any given year Get a very powerful toolGet a very powerful tool

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1: The Generalised Lorenz Curve

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000


in

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1974

2004

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0

10

20

30

40

50

60

1965 1970 1975 1980 1985 1990 1995 2000 2005

s1

s2

s3

s4

s5

2: Income shares: US 1967-2004

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2: Top income shares in US

0

5

10

15

20

25

30

35

40

45

50

19

13

19

17

19

21

19

25

19

29

19

33

19

37

19

41

19

45

19

49

19

53

19

57

19

61

19

65

19

69

19

73

19

77

19

81

19

85

19

89

19

93

19

97

P90–100

P99–100CG excl

P99–100CG Incl

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

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3: Lorenz curve

0

0.2

0.4

0.6

0.8

1


prop

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1974

2004

Equality

Natural Natural interpretation in interpretation in terms of sharesterms of shares

Gives a natural Gives a natural definition of the Gini definition of the Gini coefficientcoefficient

Use this to have a Use this to have a quick look at quick look at inequality in inequality in different countries…different countries…

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Lorenz around the world…

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Proportion of population

Pro

po

rtio

n o

f In

com

e

Sweden 2000 inc 25

India 1999–00 exp 32.5

United Kingdom 1999 inc 36

China 2001 exp 44.7

Russia 2000 exp 45.6

Brazil 1998 inc 59.1

Get full versionGet full version

SourceSource World Bank (2004)World Bank (2004)

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Income or consumption?Gini coefficient

Year Consumption IncomeAlbania 1996 0.252 0.392

Bulgaria 1995 0.274 0.392Bangladesh 2000 0.334 0.392

Vietnam 1998 0.362 0.489Nepal 1996 0.366 0.513

Morocco 1998 0.390 0.586Nicaragua 1998 0.417 0.534

Thailand 2000 0.428 0.523Peru 1994 0.446 0.523

Panama 1997 0.468 0.621Russia 1997 0.474 0.478Brazil 1996 0.497 0.596

SeeSee World Bank (2005)

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Overview...

Income distribution

Inequality

Poverty

Methods


Yet more of what we know about the US…

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An approach to poverty Now use standard source to get information on povertyNow use standard source to get information on poverty

DeNavas-Walt et al (2005) Table B-3Table B-3 The official poverty thresholds do not vary geographically,The official poverty thresholds do not vary geographically, Updated annually for inflation using Consumer Price Updated annually for inflation using Consumer Price

Index Index Definition uses money income before taxesDefinition uses money income before taxes Does not include Does not include

Capital gains Capital gains public housingpublic housing MedicaidMedicaid Food stampsFood stamps other noncash benefits other noncash benefits

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Poverty thresholds in 2004

Weighted Average Poverty

Thresholds in 2004, by Size of Family

One person $9,645

Two people $12,334

Three people $15,067

Four people $19,307

Five people $22,831

Six people $25,788

Seven people $29,236

Eight people $32,641

Nine people or more $39,048

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Proportion in poverty1974-2004

0

5

10

15

20

25

30

35

40

45

50

All personsPersons in HouseholdsDitto, female headUnrelated individuals

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Overview...

Income distribution

Inequality

Poverty

Methods


Approaches for these lectures

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Questions to resolve

Theoretical basis for using quantiles and sharesTheoretical basis for using quantiles and shares Theoretical derivation of intuitive conceptsTheoretical derivation of intuitive concepts

Why use Gini?Why use Gini? Why use this simple poverty concept?Why use this simple poverty concept?

Relationships between economics and statistical Relationships between economics and statistical conceptsconcepts

Place of distributional analysis in welfare Place of distributional analysis in welfare economicseconomics

Why be concerned with inequality and poverty?Why be concerned with inequality and poverty?

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Approaches

Start with welfare-economics settingStart with welfare-economics setting Then move to axiomatisationThen move to axiomatisation Use empirical evidence as we goUse empirical evidence as we go

on the performance of indiceson the performance of indices on the structure of valueson the structure of values

But how to get evidence on values?But how to get evidence on values? It’s not like consumer theoryIt’s not like consumer theory Use experimentsUse experiments Or questionnaire experimentsOr questionnaire experiments One coming up…One coming up…

Finally examine statistical problems of implementationFinally examine statistical problems of implementation

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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.

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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

Frank Cowell: TU Lisbon – Inequality & Poverty Inequality and Poverty: Agenda July 2006 Inequality and Poverty Measurement Technical University of Lisbon.

Documents

income slide

income of households

retirement income

income category

poverty analysis

supplemental security

covers money income

us slide