Inequality and Opportunity: Papers from the Second ECINEQ Society Meeting: Volume 16

Volume 16 of Research on Economic Inequality contains a selection of papers from the Second Biannual Meeting of the Society for the Study of Economic Inequality, Berlin, July 2007. The volume opens with an essay on equal liberties by Serge-Christophe Kolm and is followed by papers on the equality of opportunity, inequality measurement issues, and an applications section.

The relevant basic principle for overall distribution in macrojustice turns out to be the relevant equality of liberties. This study shows the consequence of this fact for the optimum distribution, taxation, and transfers of income. The liberties in question are social liberty (freedom from forceful interference, basic rights), and the possibilities offered by domains of choice which can provide equal liberty while being different for individuals with different productivities.

The method is deductive from the basic relevant concepts.

The result is that this distribution consists of an equal sharing of the proceeds of the same labour for all individuals (with their different productivities). The individuals choose freely their total labour (with no other tax). This redistributive structure is Equal-Labour Income Equalization or ELIE. It also has a number of other important meanings, such as: general balanced labour reciprocity (each yields to each other the proceeds of the same labour); equal basic universal income financed by an equal labour of all; and uniform linear concentration to the mean of the distribution of total incomes (including the value of leisure).

This result extends to multidimensional labour (duration, education, intensity, etc.), and to partial labour including unemployments.

The practical application relies on exemption of overtime labour from the income tax, and a tax credit. This is successfully applied in some countries.

This constitutes a new paradigm of optimum income distribution and taxation. The old paradigm was based on welfarism not found relevant by society for this application, and it has therefore never been applied.

Our purpose is to examine the “envy” within the context of income inequality measurement.

We use a simple axiomatic structure that takes into account “envy” in the income distribution. The concept of envy incorporated here concerns the distance of each person's income from his or her immediately richer neighbour.

We derive two classes of inequality indices – absolute and relative. The envy concept is shown to be similar to justice concepts based on income relativities.

This is the first time a complete characterisation has been provided for envy-related inequality.

We study mechanisms to construct equal-opportunity policies for resource allocation. In our model, agents enjoy welfare as a function of the effort they expend and the amount of a socially provided resource they consume. Nevertheless, agents have interdependent preferences, that is, they not only care about their own allocation, but also about their peers’ allocations. As in the standard approach to equality of opportunity, the aim is to allocate the social resource so that welfare across individuals at the same relative effort level is as equal as possible. We show how pursuing this same aim while assuming that agents have interdependent preferences might crucially alter the results.

Purpose: This paper aims at studying the degree of equality of educational opportunity in the Italian university system.

Methodology: We build on the approaches developed by Peragine (2004, 2005) and Lefranc et al. (2006a, 2006b) and focus on the equality of educational opportunities for individuals of different social background. We propose different definitions of equality of opportunity in education. Then, we provide testable conditions with the aim of (i) testing for the existence of equality of opportunity (EOp) in a given distribution and (ii) ranking distributions on the basis of EOp. Definitions and conditions resort to standard stochastic conditions that are tested by using nonparametric tests developed by Beach and Davidson (1983) and Davidson and Duclos (2000).

Findings: Our empirical results show a strong family effect on the performances of students in the higher education and on the transition of graduates in the labor market. Moreover the inequality of opportunity turns out to be more severe in the South than in the regions of the North-Center.

Originality: This work contributes to the literature in three ways: first, it proposes a definition of equality of educational opportunities. Second, the paper develops a methodology in order to test for the existence of equality of opportunity in a given distribution and to rank distributions according to equality of opportunity. Third, we present empirical evidence on the degree of equality of educational opportunity in the Italian university system.

Purpose: This paper examines for the first time inequality of opportunity for income in Africa, by analyzing large-sample surveys, all providing information on individuals’ parental background, in five comparable Sub-Saharan countries: Ivory Coast, Ghana, Guinea, Madagascar, and Uganda.

Methodology/approach: We compute inequality of opportunity indexes in keeping with the main proposals in the literature, and propose a decomposition of between-country differences that distinguishes the respective impacts of intergenerational mobility between social origins and positions, of the distribution of education and occupations, and of the earnings structure.

Findings: Among our five countries, Ghana in 1988 has by far the lowest income inequality between individuals of different social origins, while Madagascar in 1993 displays the highest. Ghana in 1998, Ivory Coast in 1985–1988, Guinea in 1994, and Uganda in 1992 stand in-between. Decompositions reveal that the two former British colonies (Ghana and Uganda) share a much higher intergenerational educational and occupational mobility than the three former French colonies. Further, Ghana distinguishes itself from the four other countries, because of the combination of widespread secondary schooling, low returns to education, and low income dualism against agriculture. Nevertheless, it displays marked regional inequality insofar as being born in the Northern part of this country produces a significant restriction of income opportunities.

Originality/value of paper: By providing the first figures for five countries of Sub-Saharan Africa, this paper allows enlarging the sample of international comparisons in the study of inequality of opportunity. It also reveals some suggestive evidence regarding the long-term origin of intergenerational mobility differences, and in particular the colonial legacy of school extension and of dualism against agriculture.

Germany has lower posttax income inequality than the United States and hence is doing better according to a strict egalitarian fairness ideal. On the other hand, the United States is doing better than Germany according to a libertarian fairness ideal, which states that people should be held fully responsible for their income. However, most people hold intermediate (responsibility-sensitive) positions, and this paper studies fairness of the income distributions in Germany and the United States according to these positions.

We find that only if peoples’ preferences are characterized by substantial degree of individual responsibility, the United States is considered less unfair than Germany. If we hold people responsible for the unexplained variation, the United States is considered fairer than Germany for all levels of responsibility sensitiveness. If we, on the other hand, demand compensation for the unexplained variation, Germany is fairer than the United States for all levels of responsibility. The latter may be seen as the preferred approach as it follows a “benefit of the doubt” strategy. To the best of our knowledge, this paper presents the first cross-country fairness comparison based on responsibility-sensitive ideals.

Purpose: Using GSOEP-PSID the study analyzes the effects of redistribution policy on intergenerational income inequality, poverty intensity, intergenerational income mobility, and dynastic poverty persistence in Germany and the United States.

Methodology: To evaluate the extent and the intensity of dynastic inequality and poverty the paper employs inequality measures and poverty indices. The contribution of a set of human capital and labor market variables on intergenerational income mobility and the risk of dynastic poverty persistence is analyzed with linear and nonlinear regression approaches and a binomial logit model.

Findings: The empirical results partly corroborate that countries with a forced redistribution scheme succeed in reducing income inequality and poverty intensity, but at the expense of intergenerational income persistence and the relative risk of dynastic poverty persistence. In Germany, redistribution policy reduces income inequality and poverty intensity to a greater extent than in the United States, and the equalizing effect of public transfers increases with age. In the United States intergenerational income persistence and the relative risk of dynastic poverty persistence are more pronounced than in Germany. The contribution of gender, educational attainment, and labor market engagement to the intergenerational income mobility and the relative risk of dynastic poverty persistence is country specific and differ by age group.

Research implications: The results call for further research of the interaction of family-life, labor market settings, and social policy in determining the degree of intergenerational income mobility and dynastic poverty persistence.

This note formally investigates the applicability of stochastic dominance (Lorenz dominance) to ordinal data such as self-reported health status. We confirm that for ordinal data distributions, stochastic dominance has limited applicability in ranking social welfare, while it has no applicability in ranking inequality.

Purpose: Most of the characterizations of inequality or poverty indices assume some invariance condition, be that scale, translation, or intermediate, which imposes value judgments on the measurement. In the unidimensional approach, Zheng (2007a, 2007b) suggests replacing all these properties with the unit-consistency axiom, which requires that the inequality or poverty rankings, rather than their cardinal values, are not altered when income is measured in different monetary units. The aim of this paper is to introduce a multidimensional generalization of this axiom and characterize classes of multidimensional inequality and poverty measures that are unit consistent.

Design/methodology/approach: Zheng (2007a, 2007b) characterizes families of inequality and poverty measures that fulfil the unit-consistency axiom. Tsui (1999, 2002), in turn, derives families of the multidimensional relative inequality and poverty measures. Both of these contributions are the background taken to achieve our characterization results.

Findings: This paper merges these two generalizations to identify the canonical forms of all the multidimensional subgroup- and unit-consistent inequality and poverty measures. The inequality families we derive are generalizations of both the Zheng and Tsui inequality families. The poverty indices presented are generalizations of Tsui's relative poverty families as well as the families identified by Zheng.

Originality/value: The inequality and poverty families characterized in this paper are unit and subgroup consistent, both of them being appropriate requirements in empirical applications in which inequality or poverty in a population split into groups is measured. Then, in empirical applications, it makes sense to choose measures from the families we derive.

The purpose of this paper is to analyze the advantages and disadvantages of several intermediate inequality measures, paying special attention to the unit-consistency axiom proposed by Zheng (2007). First, we demonstrate why one of the most referenced intermediate indices, proposed by Bossert and Pfingsten (1990), is not unit-consistent. Second, we explain why the invariance criterion proposed by Del Río and Ruiz-Castillo (2000), recently generalized by Del Río and Alonso-Villar (2008), leads instead to inequality measures that are unaffected by the currency unit. Third, we show that the intermediate measures proposed by Kolm (1976) may also violate unit-consistency. Finally, we reflect on the concept of intermediateness behind the above notions together with that proposed by Krtscha (1994). Special attention is paid to the geometric interpretations of our results.

Purpose: This paper studies the Bonferroni (B) and De Vergottini (V) inequality measures, evaluating their differences and similarities, both normatively and statistically.

Design: We highlight the similarities of these two indices with the well-known Gini index (G) and use the AKS [Atkinson (1970), Kolm (1976), Sen (1973)] approach to relate social welfare functions and inequalities indices. In addition, we propose two formulations for relative deprivation, alternative to Yitzhaki (1979) and Hey and Lambert (1980) approach.

Findings: The three indices belong to the same family and introduce different and, in some sense, complementary value judgments in the measurement of inequality and welfare; each of them evaluates in a different way the local inequality in the income distribution. The three indices present inequality aversion (satisfy the Pigou-Dalton Principle of Transfers). But only B satisfies the Principle of Positional Transfer Sensitivity. The three absolute indices are interpreted as measures of the mean social deprivation starting from different definitions of individual deprivation.

Originality: The originality of this paper lies in the joint use of the three indices in the measurement of inequality, welfare, and deprivation. We apply these indices to obtain rankings of the European Union countries, using the European Community Household Panel data (2000). A sensitivity analysis of the rankings to different equivalence scales is also included.

This paper discusses first various ways of measuring unemployment and, borrowing ideas from the poverty measurement literature, proposes four more general unemployment indices which are parallel to Sen poverty index, to its generalization by Shorrocks, to the FGT, and to the Watts poverty indices.

It then presents an empirical illustration based on Swiss data at the level of the “canton.” More precisely, using the so-called Shapley decomposition, it computes the contribution to the difference between the value of each of these four unemployment indices in a given “canton” and in Switzerland as a whole, of three components measuring, respectively, the impact of differences in the traditional unemployment rate, in the average unemployment duration, and in the inequality in the unemployment durations. The paper ends by discussing the impact on the results obtained of assumptions made concerning the maximum unemployment duration.

Purpose: The paper analyzes the variability of labor incomes in Argentina from mid-1980s to 2005. The magnitude of income instability and its determinants are evaluated under different macroeconomic contexts. It also analyzes how income fluctuations have influenced income distribution. Finally, the income convergence hypothesis is explored.

Methodology/approach: Different quantitative procedures are employed to measure mobility from dynamic information coming from the regular household survey. Four periods are distinguished that are relatively homogeneous. Dynamic pseudo-panels are also considered.

Findings: The growth in occupational instability registered since the mid-1990s led to a high variability of incomes despite the macroeconomic stability enjoyed throughout the nineties. Moreover, the panorama of growing inequality in the distribution of monthly income (the usual measure employed in Argentina) is also appropriate to describe what happened with the changes in the distribution of more permanent incomes. Finally, long-term income mobility in Argentina is scarce, indicating that the income path does not converge to the general mean.

Research limitations/implications (if applicable): Data refer only to Greater Buenos Aires since microdata are not available for the other areas covered by survey for the entire period under analysis. However, results are reasonably representative of the whole urban areas of the country.

Originality/value of paper: This research identifies the relative importance of labor market and macroeconomic factors in explaining income mobility. Moreover, it is for the first time in Argentina that dynamic information coming from panel data and pseudo-panels are analyzed together.

Purpose: The purpose of this paper is to investigate whether inequality aversion is influenced by the risk level. Recently empirical evidence points to deviations from selfish behavior of Homo economicus. Thus, people are not motivated solely by their own monetary payoffs, but are also concerned about issues of equality and fairness. This paper distinguishes between inequality aversion and risk aversion and discusses whether the level of risk affects these motivations.

Design: In an experimental framework the attitude toward inequality is separated from the attitude toward risk. A risky environment is generated by a set of lotteries. The subjects had to determine the method for payment, equally (CG) or nonequally (IG), for three lotteries with different levels of risk. The inequality preferences are measured by the level of the selected probability for CG.

Findings: The main finding of this paper is that preferences for inequality are influenced by level of risk. We found that aversion to inequality was stronger when the level of risk was higher. In the low and medium risk lotteries participants preferred the individual gamble – the nonegalitarian method. Only in the high-risk lottery the participants preferred the common gamble that assured them equal payments.

Originality/value: The paper distinguishes between inequality aversion and risk aversion and subjects are allowed to trade one off against the other. Thus, it contributes to the understanding of the interrelationship between income inequality and risk.