Summary Core Econ: The Economy Unit 19 Notes Economic Inequality

ECO2003
ECONOMIC INEQUALITY
Unit 19

Table of contents

A. Introduction.................................................................................................................................... 1
B. Measuring inequality................................................................................................................... 1
C. Types of inequality....................................................................................................................... 3
D. Trends in inequality.................................................................................................................... 4
E. Explaining inequality................................................................................................................... 9
F. Inequality in South Africa........................................................................................................ 14



A. Introduction
o Asymmetric interactions between parties involved can result
in unequal outcomes
o Above 80% of income in SA goes to wealthiest 10%


B. Measuring inequality
o Share of income (or wealth, or other outcomes such as land, tax
payments, assets) held by the Top 1% (of 10%)
- EG: world’s richest 26 people own the same as
poorest 50%
- Problem: does not look at the distribution over the
entire population so doesn’t tell us how rest of
wealth is spread (could be that top 10% has 80%
of wealth but the other 20% is equally distributed)
o Income shares by Deciles or Quintiles




1

, - Can see how
distribution has shifted
- Can compare to other
countries








-Problem: Sometimes just want a single indicator of
inequality
o Dispersion Ratios: E.g. the 90th/10th percentile ratio
o Shows whether the 90% is actually also really low
AND whether the top 10% is high
- Problem: ignores information about incomes in the
middle of the income distribution AND Doesn’t
show the distribution within top decile (SA’s 1%
controls 20%)




o Lorenz curves
- Shows extent of inequality and allows comparison of
distributions

Inequality is a relative 85%
measure – it’s the
income of the poor
relative to the rich
If the income of the
poor grows more rapidly 15%
than the income of the POOR RICH
rich, then the graph will
o Gini coefficient


2

, - Measure of inequality, approximated as the deviation of
the Lorenz curve from the perfect equality line.
- Uses info from the Lorenz curve
- Gini = A/(A+B)
- Ranges from 0 (perfect equality) to 1 (maximum
inequality)
- Problems:
1. Gini strongly influenced by measure used
 Market income: Income from wages, businesses,
and investments
 Disposable income: Market income minus taxes
and transfers
 Wealth
South Africa: Gini for market income inequality = 0.77, Gini after
direct taxes and transfers = 0.69, Gini after indirect taxes and
public services = 0.6
2. Rising inequality can be associated with falling or
rising poverty
(relative, not absolute)
3. Choice of data affects outcomes
 Wealthy don’t respond to household surveys,
but middle and low-income don’t provide
income tax data
4. Not accurate in small economies (Gini = 0.5 when it
should = 1)




C. Types of inequality
Categorical inequality (group inequality)
o Economic differences among people who are treated as
different categories
o Eg: in SA your race largely determines how wealthy you are
o You would rather be poor in a rich country than rich in a poor
country
o Usually based on ‘accidents of birth’:
- Country of citizenship - Passports and borders limit
access to certain economic opportunities
- Gender or ethnic group
- Example: income disparities between men and women
with the same level of education.


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