Monday, 11 June 2012

Questions about Income Inequality

IMF’s latest research bulletin deals with 7 Qs on inequality. Qs are answered by Laura Feiveson. She points to graphs showing whether income inequality has risen from mid-1980s to mid-2000s. You see both European and Anglo Saxon economies there. So you see inequality has risen in Finland, Israel, Italy, USA, Norway, UK etc. It has declined in Greece (surprise), Spain (another surprise), Ireland etc. Interesting examples there..

There is also an interesting graphs showing gini coefficient pre and post taxes and transfers. This is important as taxes and transfers help reallocate the wealth created. So if you see countries like Norway and Sweden which show rise in inequality in 2000s have a much lower inequality post taxes/transfers. Where as in US, Israel and Portugal inequality remains high both pre and post tax/transfer calculations…

Why the rise in inequality?
Skilled-based technological change is thought to be one of the leading causes driving the increase in inequality in advanced economies over the past four decades. The middle class has been “hollowed out” as machines have replaced medium-skilled labor (Acemoglu and Autor, 2011). More recently, another economic change that has contributed to the decline of middle-income jobs in developed countries is the increase of globalization. As medium-skilled jobs move off-shore, the replaced workers must face a decision of increasing their education to obtain higher-paying jobs or to move to lower-paying jobs. This effect has become more prominent in the 2000s 

Skilled-based technological change is thought to be one of the leading causes driving the increase in inequality in advanced economies over the past four decades. The middle class has been “hollowed out” as machines have replaced medium-skilled labor (Acemoglu and Autor, 2011). More recently, another economic change that has contributed to the decline of middle-income jobs in developed countries is the increase of globalization. As medium-skilled jobs move off-shore, the replaced workers must face a decision of increasing their education to obtain higher-paying jobs or to move to lower-paying jobs. This effect has become more prominent in the 2000s 

Finally, an important factor in the rise in inequality has been the emergence of a powerful financial sector. A substantial portion of the rise in income inequality has been due to the increase in the share of income accruing to the top 1 percent of the income distribution (Atkinson, Piketty, and Saez, 2011). This rise is at least partially due to a dramatic increase in salaries in the financial sector which, in turn, can be attributed to the structure of the financial system and its associated incentives.

Hmm.. Well known by know..

Apart from this, there is a literature survey on two very  timely topics as well:
  • Public Debt in Advanced Economies and Its Spillover Effects on Long-Term YieldsFollowing the recent financial crisis and the associated rise in the already high levels of public debt,  concerns for fiscal sustainability remain elevated in many advanced economies. This article analyzes the likely effect of the high and rising government debt of large advanced economies (AEs) on the borrowing rates of small open economies, as well as most of the emerging market economies (EMEs). The results indicate that beyond a threshold, a rise in public debt ratio in large AEs increases the long-term rates in EMEs and that depending on the level of public debt in AEs, this effect could be large.
  • Expansionary Fiscal Contractions: The Empirical Evidence
The possibility that fiscal policy may have non- Keynesian effects, and in particular the idea that fiscal consolidation can be expansionary even in the short run, has stimulated interest among academic economists and policymakers since at

least the early 1990s. The sovereign debt crises that have been haunting Europe since early 2010 have brought this subject to   the fore of the debate on fiscal policy once again. Recent studies have re-examined the empirical evidence for expansionary fiscal contractions. 

Good read as always..


Source: http://mostlyeconomics.wordpress.com/2012/06/11/questions-about-income-inequality/

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