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

Frank Cowell: TU Lisbon – Inequality & Poverty Introduction The course focuses on inequality and poverty analysis The course focuses on inequality and poverty analysis  develop theoretical approaches  prfactical applications as illustration Begin with something very simple indeed… Begin with something very simple indeed… What do we know? What do we know?  Data  Tools  Comparisons Then to some questions Then to some questions  Methods  The way forward

Frank Cowell: TU Lisbon – Inequality & Poverty Overview... Income distribution Inequality Poverty Methods Inequality and Poverty: Agenda What we know about the US…

Frank Cowell: TU Lisbon – Inequality & Poverty What do we know? – data Try a simple thought experiment Try a simple thought experiment Use the Current Population Survey data Use the Current Population Survey data  See  See DeNavas-Walt et al (2005)DeNavas-Walt et al (2005)  Data, descriptions and computations Just take standard definitions Just take standard definitions  Do everything in 2004 dollars  Focus on income of households What do the data tell us? What do the data tell us?  Key tables  Begin with Table A-1

Frank Cowell: TU Lisbon – Inequality & Poverty What is income? (1) 1. Earnings 1. Earnings 2. Unemployment compensation 2. Unemployment compensation 3. Workers’ compensation 3. Workers’ compensation 4. Social security 4. Social security 5. Supplemental security income 5. Supplemental security income 6. Public assistance 6. Public assistance 7. Veterans’ payments 7. Veterans’ payments 8. Survivor benefits 8. Survivor benefits 9. Disability benefits 9. Disability benefits 10. Pension or retirement income 10. Pension or retirement income 11. Interest 12. Dividends 13. Rents, royalties, estates & trusts 14. Educational assistance 15. Alimony 16. Child support 17. Financial assistance from outside the household 18. Other income

Frank Cowell: TU Lisbon – Inequality & Poverty What is income? (2) Covers money income received Covers money income received  exclusive of certain money receipts such as capital gains Before deductions Before deductions  personal income taxes  social security, union dues  Medicare deductions Does not include noncash benefits Does not include noncash benefits  food stamps  health benefits  subsidized housing  goods produced and consumed on the farm  business transportation and facilities,  payments by business for retirement programs. Let’s look at the standard CPS presentation… Let’s look at the standard CPS presentation…

Frank Cowell: TU Lisbon – Inequality & Poverty A snapshot view under $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 Gives proportions of households in each income category, year by year Gives proportions of households in each income category, year by year Straight from the official table Straight from the official table  Cut down to manageable number of years  omitted population totals But, check in a diagram But, check in a diagram  standard frequency polygon….

Frank Cowell: TU Lisbon – Inequality & Poverty Representing the distribution?

Frank Cowell: TU Lisbon – Inequality & Poverty Questions Mixed messages from this illustration Mixed messages from this illustration  Shifts over time make sense…  …income growth  But weird stuff on the right…  …arises from arbitrary grouping Get more insight from a better representation Get more insight from a better representation Use the concept of quantile Use the concept of quantile  includes well-known concepts  median, quartiles etc  a “boundary” income Examine Table A-3 Examine DeNavas-Walt et al (2005) Table A-3DeNavas-Walt et al (2005)  Do this for 1974, 2004  Check out the growth

Frank Cowell: TU Lisbon – Inequality & Poverty Quantile Incomes by Households %$9,741 20%$16,285 50%$37,519 80%$64,781 90%$83,532 95%$102, $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.

Frank Cowell: TU Lisbon – Inequality & Poverty Quantiles: 1967 – 2004

Frank Cowell: TU Lisbon – Inequality & Poverty The Parade: quantiles vs population

Frank Cowell: TU Lisbon – Inequality & Poverty Inequality from quantiles? But does this way of representing distributions tell us about inequality? But does this way of representing distributions tell us about inequality? Clear that growth is lopsided Clear 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 measures We can also use quantiles to derive simple inequality measures  eg “90/10” ratio   (increased from 8.6 to 11.1)  or ratios to medians… Have a look at path of these ratios… Have a look at path of these ratios… … and then think again … and then think again

Frank Cowell: TU Lisbon – Inequality & Poverty Quantile ratios: US 1967 – 2004

Frank Cowell: TU Lisbon – Inequality & Poverty Overview... Income distribution Inequality Poverty Methods Inequality and Poverty: Agenda More of what we know about the US… and elsewhere

Frank Cowell: TU Lisbon – Inequality & Poverty Fuller income information Focus on additional income from same source Focus on additional income from same source  Table A-3  DeNavas-Walt et al (2005) Table A-3DeNavas-Walt et al (2005) Again, we don’t question the definitions Again, we don’t question the definitions  household income before deduction  income receiver: household Divide distribution up into five equal slices Divide distribution up into five equal slices Compute mean income of each 20% slice Compute mean income of each 20% slice

Frank Cowell: TU Lisbon – Inequality & Poverty st 20%$9,324 2 nd 20%$23,176 3 rd 20%$37,353 4 th 20%$53,944 5 th 20%$95,576 Overall$43, $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.

Frank Cowell: TU Lisbon – Inequality & Poverty Differential growth of mean incomes

Frank Cowell: TU Lisbon – Inequality & Poverty Three alternative views First, plot these mean incomes cumulatively First, plot these mean incomes cumulatively  Plot against population shares  Do this for any given year  Get a powerful tool Second, plot income shares against time Second, plot income shares against time  Divide each group mean by overall mean  Graph these for whole period  Lopsided growth? Third plot income shares against population shares Third plot income shares against population shares  Do this for any given year  Get a very powerful tool

Frank Cowell: TU Lisbon – Inequality & Poverty 1: The Generalised Lorenz Curve

Frank Cowell: TU Lisbon – Inequality & Poverty 2: Income shares: US

Frank Cowell: TU Lisbon – Inequality & Poverty 2: Top income shares in US Piketty, T. and E. Saez (2003)Piketty, T. and E. Saez (2003) “Income inequality in the United States, ,” Quarterly Journal of Economics, 118, 1-39.

Frank Cowell: TU Lisbon – Inequality & Poverty 3: Lorenz curve Natural interpretation in terms of shares Natural interpretation in terms of shares Gives a natural definition of the Gini coefficient Gives a natural definition of the Gini coefficient Use this to have a quick look at inequality in different countries… Use this to have a quick look at inequality in different countries…

Frank Cowell: TU Lisbon – Inequality & Poverty Lorenz around the world… Get full version Source World Bank (2004) World Bank (2004)World Bank (2004)

Frank Cowell: TU Lisbon – Inequality & Poverty Income or consumption? Gini coefficient YearConsumptionIncome Albania Bulgaria Bangladesh Vietnam Nepal Morocco Nicaragua Thailand Peru Panama Russia Brazil See World Bank (2005) World Bank (2005)World Bank (2005)

Frank Cowell: TU Lisbon – Inequality & Poverty Overview... Income distribution Inequality Poverty Methods Inequality and Poverty: Agenda Yet more of what we know about the US…

Frank Cowell: TU Lisbon – Inequality & Poverty An approach to poverty Now use standard source to get information on poverty Now use standard source to get information on poverty  Table B-3  DeNavas-Walt et al (2005) Table B-3 DeNavas-Walt et al (2005) The official poverty thresholds do not vary geographically, The official poverty thresholds do not vary geographically, Updated annually for inflation using Consumer Price Index Updated annually for inflation using Consumer Price Index Definition uses money income before taxes Definition uses money income before taxes Does not include Does not include  Capital gains  public housing  Medicaid  Food stamps  other noncash benefits

Frank Cowell: TU Lisbon – Inequality & Poverty 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

Frank Cowell: TU Lisbon – Inequality & Poverty Proportion in poverty

Frank Cowell: TU Lisbon – Inequality & Poverty Overview... Income distribution Inequality Poverty Methods Inequality and Poverty: Agenda Approaches for these lectures

Frank Cowell: TU Lisbon – Inequality & Poverty Questions to resolve Theoretical basis for using quantiles and shares Theoretical basis for using quantiles and shares Theoretical derivation of intuitive concepts Theoretical derivation of intuitive concepts  Why use Gini?  Why use this simple poverty concept? Relationships between economics and statistical concepts Relationships between economics and statistical concepts Place of distributional analysis in welfare economics Place of distributional analysis in welfare economics Why be concerned with inequality and poverty? Why be concerned with inequality and poverty?

Frank Cowell: TU Lisbon – Inequality & Poverty Approaches Start with welfare-economics setting Start with welfare-economics setting Then move to axiomatisation Then move to axiomatisation Use empirical evidence as we go Use empirical evidence as we go  on the performance of indices  on the structure of values But how to get evidence on values? But how to get evidence on values?  It’s not like consumer theory  Use experiments  Or questionnaire experiments  One coming up… Finally examine statistical problems of implementation Finally examine statistical problems of implementation

Frank Cowell: TU Lisbon – Inequality & Poverty 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. (1995) Cowell, F. A. (2000) “Measurement of Inequality,” in Atkinson, A. B. and Bourguignon, F. (eds) Handbook of Income Distribution, North Holland, Amsterdam, Chapter 2, Cowell, F. A. (2000) Cowell, F. A. (2006) “Inequality: Measurement” forthcoming in The New Palgrave, 2 nd edition Cowell, F. A. (2006) 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. DeNavas-Walt, C., Proctor, B. D. and Lee, C. H. (2005) Fisher, G. M. (1992) “The Development and History of the Poverty Thresholds,” Social Security Bulletin, 55 (4), 3-14.

Frank Cowell: TU Lisbon – Inequality & Poverty 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, 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, ,” Quarterly Journal of Economics, 118, Piketty, T. and E. Saez (2003) 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 (2004) The World Bank (2005) 2006 World Development Report: Equity and Development. Oxford University Press, New York The World Bank (2005)