Pareto and the upper tail of the income distribution in the UK: 1799 to the present

October 25, 2016


By: A.B. Atkinson
The Pareto distribution has long been a source of fascination to economists, and the Pareto coefficient is widely used, in theoretical and empirical studies, as a summary of the degree of concentration of top incomes. This paper examines the empirical evidence from income tax data concerning top incomes in the UK, contrasting the dramatic changes that took place in the twentieth century, after 1918, with the much more modest changes in the preceding nineteenth century. Probing beneath the surface, it identifies a number of features of the evolution of the UK income inequality that warrant closer attention. These include the changing shape of the upper tail, where there is a link with Pareto’s theory of elites, the need for a richer functional form to describe top incomes, and the limited evidence at the top of the distribution for a Kuznets curve in nineteenth century Britain.
Keywords: Pareto, income, distribution, tail
JEL: D63 I31 N33



Education Quality and Teaching Practices

October 25, 2016


By: Marina Bassi ; Costas Meghir ; Ana Reynoso
This paper uses a RCT to estimate the effectiveness of guided instruction methods as implemented in under-performing schools in Chile. The intervention improved performance substantially for the first cohort of students, but not the second. The effect is mainly accounted for by children from relatively higher income backgrounds. Based on the CLASS instrument we document that quality of teacher-student interactions is positively correlated with the performance of low income students; however, the intervention did not affect these interactions. Guided instruction can improve outcomes, but it is a challenge to sustain the impacts and to reach the most deprived children.
JEL: I21 I24 I25 I3


Coping with change: International differences in returns to skills

October 25, 2016


By: Eric A. Hanushek (Hoover Institution, Standford University, USA) ; Guido Schwerdt (Department of Economics, University of Konstanz, Germany) ; Simon Wiederhold (ifo Institute, Germany) ; Ludger Woessmann (ifo Institute, Germany)
Expanded international data from the PIAAC survey of adult skills allow us to analyze potential sources of the cross-country variation of comparably estimated labor-market returns to skills in a more diverse set of 32 countries. Returns to skills are systematically larger in countries that have grown faster in the recent past, consistent with models where skills are particularly important for adaptation to dynamic economic change.
Keywords: cognitive skills; returns to education; economic growth; international comparisons
JEL: J31 I20 O15


Transfers to Households with Children and Child Development

October 25, 2016


By: Del Boca, Daniela ; Flinn, Christopher J ; Wiswall, Matthew
In this paper we utilize a model of household investments in the development of children to explore the impact of various transfer policies on the distribution of child outcomes. We develop a cost criterion that can be used to compare the cost effectiveness of unrestricted, restricted, and conditional cash transfer systems, and find that an optimally chosen conditional cash transfer program is the most cost efficient way to attain any given gain in average child quality. We explore several design elements for the conditional cash transfer system and discuss the role of production function uncertainty and measurement error.
Keywords: child development; conditional cash transfers; Income Transfers; Time allocation
JEL: D1 J13

The Richness of Giving: Charity Selection and Charitable Gifts in a Large Field Experiment

October 19, 2016


By: Daniel Lee ; John List ; Michael Price ; Shachar Kariv
We build on previous work in the charitable giving literature by examining not only how much subjects give to charity, but also which charities subjects prefer. We operationalize this choice in an artefactual field experiment with a representative sample of respondents. We then use these data to structurally model motives for giving. The novelty of this design allows us to ask several interesting questions regarding the choices one undertakes when deciding both whether and how much to give to charity. Further, we ask these questions in the context of a standard utility framework. Given the unique set up of this experiment, we also explore how these distributional preference parameters differ by charity choice and from what we have observed in the past. We find that there is more variation within demographics and charity types than across distributions.


Earnings among Nine Ethnic Minorities and the Han Majority in China’s Cities

October 19, 2016


By: Gustafsson, Björn Anders (University of Gothenburg) ; Yang, Xiuna (China Development Research Foundation)
This paper asks if economic growth and steps towards a market economy have affected earnings gaps between the Han and nine large urban ethnic minorities: Zhuang, Hui, Manchurian, Tujia, Uighur, Miao, Tibetan, Mongol and Korean. It also asks how earnings premiums and earnings penalties have changed for the nine ethnic minorities. For the analysis we use a subsample of the 2005 China’s Inter-Census Survey. We find examples of three different changes over time in earnings premiums and earnings penalties: One ethnic minority for whom the development has been more favourable than for the Han majority; a second category in which development has been similar; and a third category for which development has been unfavourable. We conclude from the analysis that it can be misleading to infer the experience of one ethnic minority from that of another.
Keywords: earnings, ethnic minorities, Uighur, Tibetan, Korean
JEL: J15 J31 J71 P23


Inequality Aversion and Marginal Income Taxation

October 19, 2016


By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics, Umeå University) ; Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
This paper deals with tax policy responses to inequality aversion by examining the first-best Pareto-efficient marginal tax structure when people are inequality averse. In doing so, we distinguish between four different and widely used models of inequality aversion. The results show that empirically and experimentally quantified degrees of inequality aversion have potentially very strong implications for Pareto-efficient marginal income taxation. It also turns out that the exact type of inequality aversion (self-centered vs. non-self-centered), and the measures of inequality used, matter a great deal. For example, based on simulation results mimicking the disposable income distribution in the US in 2013, the preferences suggested by Fehr and Schmidt (1999) imply monotonically increasing marginal income taxes, with large negative marginal tax rates for low-income individuals and large positive marginal tax rates for high-income individuals. In contrast, the often considered similar model by Bolton and Ockenfels (2000) implies close to zero marginal income tax rates for all.
Keywords: Pareto-efficient taxation; Inequality aversion; Inequity aversion; Self-centered inequality aversion; Non-self-centered inequality aversion; Fehr and Schmidt preferences; Bolton and Ockenfels preferences
JEL: D03 D62 H23


On the measurement of long-run income inequality. Empirical evidence from Norway, 1875-2013

October 19, 2016


By: Rolf Aaberge ; Anthony B Atkinson ; Jørgen Modalsli (Statistics Norway)
In seeking to understand inequality today, a great deal can be learned from history. However, there are few countries for which the long-run development of income inequality has been charted. Many countries have records of incomes, taxes and social support. This paper presents a new methodology constructing income inequality indices from such tabular data. The methodology is applied to Norway, for which rich historical data sources exist covering the period 1875 to 2013. Taking careful account of the definition of income and population and the availability of micro data starting in 1967, an upper and lower bound for the pre-tax income Gini coefficient for core households is produced. Our findings cast doubt on the idea that Norway in the nineteenth century was an egalitarian society, supporting the view of de Tocqueville that the young United States exhibited less inequality than the states of Europe. We show that overall inequality of gross family incomes is lower today than a hundred years ago. At the same time, there has not been a consistent downward trend over time in inequality; rather, the fall in inequality took place in a series of episodes. Comparison to existing data for Denmark and the United States reveals remarkable commonalities, as well as distinct periods of difference. This supports the view that the evolution of income inequality is best studied, not in terms of an over-arching theory, but by studying episodes of rising and falling inequality, and the manifold forces in operation
Keywords: income; inequality; distribution; Norway; long-run changes
JEL: D31 D63 N33 N34


Fiscal Policy, Inequality and the Poor in the Developing World

October 19, 2016


By: Nora Lustig (Department of Economics, Tulane University)
Using comparable fiscal incidence analysis, this paper examines the impact of fiscal policy on inequality and poverty in twenty-five countries for around 2010. Success in fiscal redistribution is driven primarily by redistributive effort (share of social spending to GDP in each country) and the extent to which transfers/subsidies are targeted to the poor and direct taxes targeted to the rich. While fiscal policy always reduces inequality, this is not the case with poverty. Fiscal policy increases poverty in four countries using US$1.25/day PPP poverty line, in 8 countries using US$2.50/day line, and 15 countries using the US$4/day line (over and above market income poverty). While spending on pre-school and primary school is pro-poor (i.e., the per capita transfer declines with income) in almost all countries, pro-poor secondary school spending is less prevalent, and tertiary education spending tends to be progressive only in relative terms (i.e., equalizing but not pro-poor). Health spending is always equalizing except for Jordan.
Keywords: Fiscal Incidence, Social Spending, Inequality, Poverty, Developing Countries.
JEL: H22 H5 D31 I3

Do People Shape Cities, or Do Cities Shape People? THe Co-evolution of Physical, Social and Economic Change in Five Major U.S. Cities

October 5, 2016


By: Naik, Nikhil (MIT) ; Kominers, Scott Duke (Harvard University) ; Raskar, Ramesh (MIT) ; Glaeser, Edward L. (Harvard University) ; Hidalgo, Cesar A. (MIT)
Urban change involves transformations in the physical appearance and the social composition of neighborhoods. Yet, the relationship between the physical and social components of urban change is not well understood due to the lack of comprehensive measures of neighborhood appearance. Here, we introduce a computer vision method to quantify change in physical appearance of streetscapes and generate a dataset of physical change for five large American cities. We combine this dataset with socioeconomic indicators to explore whether demographic and economic changes precede, follow, or co-occur with changes in physical appearance. We find that the strongest predictors of improvement in a neighborhood’s physical appearance are population density and share of college-educated adults. Other socioeconomic characteristics, like median income, share of vacant homes, and monthly rent, do not predict improvement in physical appearance. We also find that neighborhood appearances converge to the initial appearances of bordering areas, supporting the Burgess “invasion” theory. In addition, physical appearance is more likely to improve in neighborhoods proximal to the central business district. Finally, we find modest support for “tipping” and “filtering” theories of urban change.