1. By Matthew Higgins and Jeffrey G. Williamson
Explaining Inequality the World Round: Cohort Size, Kuznets Curves, and Openness.
By Matthew Higgins and Jeffrey G. Williamson

2. The three hypothesis Inequality and cohort size
Inequality and openness
Kuznet curve hypothesis

3. Cohort size hypothesis
„Fat age cohorts tend to get low rewards“
Important where the fat cohorts lie in the demographic structure
Cohort size variance across countries vs. within countries over time

4. Inequality and openness
Rising inequality correlated with increasing globalization
Trade (Heckscher- Ohlin argument)
Immigration
Labor supply shifts important
Globalization as cause for falling inequality in developing countries and increasing inequality in developed countries?

5. Kuznets curve hypothesis I – Strong version
Inequality first decreases and then declines during economic development
Demand for different skill levels causes the inequality development

6. Kuznets curve hypothesis II – Weak version
Demand forces not necessarily the reason for Kuznet movements
Other forces possible
Forces of some demographic transition (cohort size)
Different policies (attitude towards liberal policies, schooling,…)
Natural resource endowments

7. EMPIRICS Pooled dataset of 111 countries, 1960-1990ies Variables:
Decadal average of Real GDP per worker (RGDPW)
RGDPW2
GINI-coefficent
Log of (Q5/Q1) income ratio (GAP)
8 dummies, including decadal dummies

8. Problems Simultaneity bias - Instrumental variables?
Omitted variable bias
Heteroskedasticity - heteroskedasticity-robust-estimators

9. Monotonically declining
Inverted U, but imprecise estimations

10. Extension of the model
MATURE: share of population with age between
OPEN: Sachs-Warner index
a black market premium of 20 percent or more for foreign exchange
an export marketing board which appropriates most foreign exchange earnings
a socialist economic system
extensive non-tariff barriers on imports of intermediate and capital goods.

11. Quite high

12. Lacks degrees of freedom!

13. M3/GDP is a measure for financial depth (how sophisticated are financial institutions in a country, how many have access to these…)
FREEDOM geometric average of two indices, one measuring civil liberties and one measuring political rights

15. Alternative measures for openness:
quantitative and tariff restrictions on imports,
the share of imports plus exports in GDP
Natural level of openness:
the logs of country size, population, per capita income, per capita crude proven oil reserves, the average distance from trading partners, and two dummy variables describing, respectively, whether a country is an island or is landlocked

16. Globalization and Inequality
Milanovic (2005) proxies openness by the ratio of trade to GDP, finds negative effect of openness on inequality in poor countries
Ravallion (2001) as well
Dollar and Kraay (2000, 2002) find that openness has no impact on inequality

17. Alternative demographic measures:
total fertility rate
population growth rate
labor-force growth rate
the infant mortality rate
life expectancy at birth

18. Fertility rate
De La Croix and Doepke (2003) find negative correlation between high fertility and growth, via education
Barro (2000): High correlation between inequality and fertility

19. Fixed country effects Dummy variable for every country
Unbiased and consistent under the assumption that unobserved effects are correlated with the explanatory variables
Loss in efficiency
Serial correlation -> LDV

21. Explaining cohort size effect on inequality
Three channels
1) altered age structure, leaving age-earnings profile constant (+)
2) different age groups with different within inequality levels (+)
3) age-earnings structure changing, different experience premium (-)

22. Simulations - I Three key sets of parameters
1) Age profile of labor productivity over the lifecylce
2) Age profile of the variance of earnings over the lifecylce
3) Elasticity of substitution between different age groups

23. Simulations - II
Treat estimated mean age-income as representing the age-profile of labor productivity
Select various values for the elasticity of substitution across age groups
Evaluate inequality indexes associated with various steady-state population growth rates

24. Simulations - III Perfect substitutability
Small effect by changing mix between older and younger workers caused by different wage levels (32.5 to 32.1)
Larger effect caused by different variance within age groups (43.1 to 39.7)
Taking mean-earnings and variance effects together: similar effect

25. Simulations - IV
Imperfect elasticity of substitution necessary for cohort size effect to be true
3.0 : offsets first two channels
suggests lower elasticity of substitution

26. Barro, R. J. (2000). Inequality and Growth in a Panel of Countries
Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of economic growth, 5(1), 5-32.
De La Croix, D., & Doepke, M. (2003). Inequality and growth: why differential fertility matters. The American Economic Review, 93(4),
Dollar, D., & Kraay, A. (2002). Growth is Good for the Poor. Journal of economic growth, 7(3),
Milanovic, B. (2005). Can we discern the effect of globalization on income distribution? Evidence from household surveys. The World Bank Economic Review, 19(1),
Ravallion, M. (2001). Growth, inequality and poverty: looking beyond averages. World development, 29(11),