The Political And Economic Causes Of Inequality
Most studies of inequality focus on income, but inequality can also be calculated
based on wealth, consumption, or any other reasonable proxy for well-being.
Wealth or consumption have the advantage that they are less subject to shortterm
income shocks, and the inequality of lifetime earnings is probably more
important than the inequality of transitory earnings. However, because wealth and
consumption data are not available in enough circumstances, most of the empirical
work focuses on inequality of annual income. Consequently, I focus my empirical
discussion on that variable. Nevertheless, improving inequality measures by
improving the measurement of permanent well-being is certainly one research
frontier.
Measuring income inequality also requires transforming the distribution of
income or wealth or consumption into a single measure that can be used in standard
empirical workThe literature on this issue parallels the industrial organization literature
on market concentration. The most popular measure of income inequality is
the Gini coefficient, which is the difference between the 45-degree line and the Lorenz
curve that shows the cumulative distribution of income. A second measure is the
share of total national income possessed by various sub-groups of the population, e.g.
the share of total wealth owned by the richest 5 per cent of the population. In some
cases, these variables will actually revealmuch more than a Gini coefficient, especially
if we are interested in knowing whether inequality matters because the rich are
particularly rich or because the poor are particularly poor. As different measures are
usually highly correlated, different empirical studies that use these different measures often produce quite similar results (e.g. compare Persson and Tabellini 1994 with
Alesina and Rodrik 1994)..
These empirical measures are then used by empirical researchers, who have provided
a series of facts about the correlates of inequality. Perhaps the most famous
relationship is the Kuznets (1955) curve shown in Figure 34.1. Income inequality first
rises and then falls as countries get richer. This c...
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If changes in inequality within the USA and other countries are primarily the result
of changing returns to skills and government responses to those changing returns to
skill, then differences in inequality across countries reflect differences in the distribution
of skills. In particularly egalitari...
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Inequality might impact political outcomes in three different ways. First, rising
economic inequality should impact the level of post-tax inequality because of an
increased preference for redistribution by themedian voter. Second, higher inequality
might reduce redistribution and public good provisi...
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Few topics in the political economy of inequality have as rich a heritage as the study of
American exceptionalism, which in the context of inequality means why the USA is
less equal than Europe and why the USA never developed a full-fledged European
welfare state. Although de Tocqueville (1835) is r...
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This discussion still leaves one final puzzle: why do Americans and European have
such different beliefs about the nature of inequality in their countries? One thing
is clear. Differences across countries in beliefs about the nature of inequality don’t
reflect reality. As mentioned above, the avai...
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