Sunday, 23 April 2017

Is inequality increasing?

My post a couple of days ago pointed out that people are more concerned about unfairness, than about inequality. However, in case any of you are concerned about inequality, it pays to know a little more about it.

The Australian Economic Review has an excellent section in each issue titled "For the student". In a 2015 issue, Richard Pomfret (University of Adelaide) wrote an excellent article for that section with the same title as this post. He didn't really answer the question with data, but nevertheless it is an excellent review that outlines two main theories about the sources of inequality: (1) Thomas Piketty's assertion that inequality arises because the returns on capital are exceeding the growth rate of the economy; and (2) as a result of technological change and globalisation. I encourage you to read it (if you have access - I can't see an ungated version anywhere). I found it the most accessible summary of Piketty's work I have read (noting that I haven't read Piketty's Capital in the Twenty-First Century myself).

Pomfret might not have answered his question for Australia, but in a recent paper published in the journal New Zealand Economic Papers (also unfortunately no ungated version I can see), Christopher Ball (Treasury) and John Creedy (Treasury, and Victoria University) do so for New Zealand. They use the Gini coefficient as their measure of inequality, and measure inequality based on market incomes (before taxes and transfers), disposable incomes (after taxes and transfers), and consumption expenditure. They find:
The Gini measure of market incomes saw a steady rise through the second half of the 1980s to the early 1990s, from about 0.4 to around 0.5. Subsequently, there has been a steady though less marked decline, with the exception of ‘spikes’ around 2001 and 2011. For disposable incomes, the systematic increase in the Gini measure does not appear to have started until the late 1980s, rising from about 0.27 to about 0.33 in the mid- 1990s.
Nothing too surprising there for anyone who is also a reader of Eric Crampton's excellent blog (see here and here and here) - inequality increased during the reform period in the late 1980s and early 1990s, and then has remained fairly steady or declined since then. Here's their Figure 1, which shows the results over time in more detail:

The changes in taxes and benefits have interesting incentive effects, as Ball and Creedy note:
It appears that the 1980s reforms involving cuts in the top income tax rate along with benefit cuts and the ending of centralised wage setting are associated with increasing inequality. The spikes in the market and disposable income profiles from 2000 may also be associated with changes in top income tax rates. In the first case of an increase from 33 to 39 per announced in 2000 but effective in 2001, the anticipation of the rate increase could have led to a certain amount of income shifting into the year before the increase. Much of the shifting is likely to have been by those in higher income groups, and hence this contributes to the sudden increase in inequality, followed by a reduction. In the case of the 2010 reduction in the top rate, the opposite incentive effect operated.
The changes in inequality over time in New Zealand are interesting, and you can tell a plausible story about the relationship between those and changes in taxes and benefits based on the results of this paper (and especially the figure above). However, Ball and Creedy don't do so, instead concluding that:
...interesting questions about the precise causes of those changes remain a challenge for future research.
I'd say they have gotten us about 90% of the way there already.

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