lecture7h

Page 2: Defining and Measuring Inequality

  • Definition of Inequality:

    • Occurs when individuals or households have unequal incomes.

    • If everyone has the same income, there is no income inequality.

  • Measurement approach:

    • Households are ordered based on income levels.

Page 3: Graph of Income Inequality

  • Visualization of income inequality across households

  • Definitions:

    • Households are sorted from lowest to highest income.

    • In a perfectly equal income distribution, the bottom 20% of households would have the same income as the top 20%.

Page 4: Income Inequality in Ireland

  • Method of measuring income inequality:

    • Order households from lowest to highest income and divide them into five groups of equal size (20% each).

    • Analyze the share of total income each group receives.

  • Key question:

    • Does the richest 20% possess more, the same, or less income than the poorest 20%?

Page 5: Graph of Income Inequality (80/20)

  • Model representation:

    • Households ordered by income (Wo)

  • Ratios:

    • B = Total income for the richest 20%

    • A = Total income for the poorest 20%

    • 80/20 Ratio: B/A shows the disparity in income distribution between these two groups.

Page 6: 80/20 Ratio

  • Definition of the 80/20 Ratio:

    • Compares income between the top 20% and bottom 20% of households.

    • Ratio is 1 if there is no inequality and greater than 1 if there is.

  • Recent figures:

    • Ireland: 2.9 (2023)

    • EU27: 3.4 (2023)

    • Source: Eurostat

Page 7: 90/10 Ratio

  • Overview:

    • Measures income share of the richest 10% versus the poorest 10% of households.

  • Findings:

    • Higher than the 80/20 ratio; Ireland: 5.8 and EU27: 7.8.

Page 8: Distribution of Income Curve

  • Concept of Lorenz Curve:

    • A represents the deviation from absolute equality.

    • The green line indicates complete equality.

    • If all households had equal income, the Lorenz curve would match the green line.

Page 9: Gini Coefficient

  • Description:

    • Gini coefficient calculated as A/(A+B): a popular measure of inequality.

  • Interpretation:

    • 100% = complete inequality

    • 0% = complete equality

Page 10: Gini Coefficients in Europe (2023)

  • Presentation of Gini Coefficients across European countries:

    • Important values ranging from 0–40%, with most EU countries ranging 0.24 to 0.32.

    • Source: McGraw-Hill Education, 2024

Page 11: Gini Coefficient Comparisons

  • Characteristics:

    • Purely relative measure, does not account for average incomes.

    • Independent of population size.

  • Range of values:

    • Slovakia: 0.22 to South Africa: 0.63.

Page 12: Gini Coefficient and Transfers

  • Principle of transfers:

    • Transfer from richer to poorer reduces overall Gini coefficient.

  • Important distinction:

    • Pre-tax vs. post-tax Gini coefficients; post-tax Gini is generally lower.

Page 13: Gini Coefficient Observations

  • Limitations:

    • Does not measure inequality within households.

    • Lack of clear global trend in Gini values across countries.

    • Reference trends in some countries.

Page 14: Challenges in Measuring Inequality

  • Broader perspective:

    • Inequality encompasses areas beyond just income, e.g. wealth, health, education.

  • Income fluctuation over life cycle:

    • For example, retirees may have low incomes but substantial assets.

  • Redistribution policy distinctions:

    • May address "temporarily" versus "permanently" poor individuals.

Page 15: Pre- vs Post-Tax Gini Coefficient

  • Visual representation of Gini coefficients before and after tax (2022).

  • Insights about income inequality across regions (Africa, Europe, North America).

  • Specific metrics cited for countries (e.g., South Africa, Chile, and the United States).

Page 16: Reduction in Income Inequality

  • Measurement of percentage reduction in Gini coefficient before and after taxes and benefits.

  • Key countries showing varied reductions:

    • Belgium, Ireland, Germany, United Kingdom, and others.

Page 17: Rising Global Inequality?

  • Reference to Thomas Piketty’s work, "Capital in the Twenty-First Century" (2013), which suggests recent increases in global inequality.

  • Contrasting views:

    • 2024 paper by Auten and Splinter questions this trend in the US.

Page 18: U-Shaped Long-run Inequality Trend

  • Visualization of before-tax income share of the richest 1% across the years for selected countries.

    • Notable countries: United States, Italy, Canada, and the United Kingdom.

Page 19: L-Shaped Long-run Inequality Trend

  • Similar visualization for countries like Sweden, Japan, and France, showing the income share of the richest 1%.

Page 20: Divergence in Long-run Inequality Patterns

  • Examination of income share of the richest 1% from 1960 to 2022 across various nations, highlighting differences.

    • Key countries: Ireland, United States, Sweden.

Page 21: Expectations for This Lecture

  • Learning Objectives:

    • Understand measurements of inequality (ratios and Gini coefficients).

    • Compare Ireland’s inequality level with other countries.

    • Analyze tax system impacts on inequality, especially in Ireland.

    • Recognize differing long-run inequality patterns across countries.