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Summary Welfare, inequality and poverty
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Maari juni 2021Welfare, inequality and poverty
Ex.!: Linkage between different lectures, know the concepts and know how it really works
1. Setting the scene
Inequality, welfare and poverty are hot topics (much more than 15 years ago)!
More interests for the topic in:
- Politics: Policy makers also look at the topics of inequality.
- Academic
1. What is inequality?
Look at the questionnaire and think about it (see extra paper).
- Situation 1: Y (black) is more inequal but the average is higher. So it depends on what you give
importance to: the inequality or the average!
- Situation 2: average of the black is even higher. So it’s harder to prefer the gray one.
- Situation 3: here it’s about the more equal society. The gray one is more equal than the black
one. The gray one can be reached by a Pigou Dalton transfer: you take some money from the
rich and you give it to the poor. If you take the money from the rich that you give to the poor,
than the inequality goes down. Inequality is that thing that increases if you take it from the rich
and gives it to the poor. You can do it with the black one to obtain the gray one.
- Situation 4: obtain gray from black if you do a Pigou Dalton transfer (take from the rich and give
it to the poor). The average is the same.
- Situation 5: another Pigou Dalton transfer.
- Situation 6: the black and gray one are equally unequal. The amount of inequality are the same
(the shares of individuals are exactly the same) (1/3 and 2/6). But you can reason in shares OR in
equally demands. If you think that both are equally unequal, then you are a relative person.
- Situation 7: if you think that the black and grey are the same in absolute amount in units, then
you are an absolute person. Then you observe that you both have 2 extra units (absolute gaps).
Difference between situation 6 and 7: a Pigou Dalton transfer from Danny to Ann. You are
relative OR absolute, not both! If you are relative or absolute, that really matters! (see later)
People differ in their ethical (normative) intuitions. You have ethical intuitions about what inequality is,
but your neighbor has different ones. So, there are no “right” or “wrong” answers.
But does anything go? No!
In these lectures we study how ethical principles translate into practical measures and policy advice.
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3 Concepts:
- (Social) welfare: Evaluation of (income) distribution according to its size and inequality! Tells us
how desirable the income distribution is. Higher income distributions have a higher social
welfare. (see lecture 2) → Question 1 and 2 in the questionnaire
- Inequality: Evaluation of (income) distribution according to its inequality. Spread of income in
the income distribution. It doesn’t tell us something about the desirability of the distribution, but
only about the inequality of the distribution. This doesn’t look at the size, it only looks at the
inequality! If we all have nothing, it’s not desirable because the size is very small.
- Poverty: Evaluation of lower part of the (income) distribution
These are different concepts! (think of China nowadays: poverty is falling rapidly and inequality is
increasing. Because the poor people (people under the poverty line) are improving, but the rich people
(above the poverty line) are improving much faster. So the inequality is increasing.
Creating conceptual clarity is one of the main aims of the course.
2. Why should we care about inequality?
Why inequality matters (instrumental and normative reasons):
- Instrumental reasons: because of the consequences of inequality on other outcomes. They care
about inequality because of the consequences inequality might have on other variables they care
about. They don’t care about inequality itself!
We look at epidemiological and economical insights!
1. Epidemiological insights (Wilkinson & Pickett, 2009)
- Policy makers really like it!
- Income inequality vs. index of health and social problems (f.e.: homicides per million): they have
an upward sloping relation between the 2!
- They care about inequality because of the vertical axis, not because inequality itself.
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Guest lecture of Wilkinson & Pickett:
This is a short summary of the ‘Spirit Level’.
We can now look at the evidence and compare societies (more or less equal societies) and see what
inequality does.
Paradox: if you compare life expectancy against gross national income, you see that rich countries are in
the middle. There is no relationship! But if we look within our societies, there are extraordinary social
gradients in health across society. A lot of difference between the richest (high life expectancy) and the
poorest (low life expectancy). So income is very important within our societies, but not in between them!
This is because within our societies, we look at relative income (social position, social status, size of the
gaps between us). We wonder what happens if we widen the differences or compress them (make the
income differences bigger or smaller).
Data from UN in rich developed market economies!
How much richer are the richest 20% in each country than the poorest 20%?: in the more equal
countries, the top richest 20% are 3.5 times richer than the bottom 20%. But on the more unequal hand,
the differences are 2 as big.
What does that do to our societies?: Look at data on problems with social gradients which are more
common at the bottom of the social ladder: life expectancy, math, literacy, infant mortality, homicides,
imprisonment, teenage births, trust, obesity, mental illness (addiction), social mobility, … The countries
are on average. The more unequal countries are doing way worse (not just a bit) on all these kinds of
social problems!! But this correlation is not there when look at it in relation to GDP/capita!
- Child well-being is better in more equal countries, so kids do worse in more unequal societies.
But if you look at it in relation to GDP/capita, the relationship is not there. The average well-
being of our society is not dependent any longer on national income! But the differences
between is now matter vary much!
- People in more unequal countries trust each other less! Repeat it to the 50 American states gave
the same outcome: people in more unequal states of the USA trust each other less. Anything
that is relation to trust internationally is related to trust in these 50 states.
- Mental illness is more common in more unequal societies. Some societies have 3 times the
mental illness of others which is closely related to inequality.
- Violence (homicide rates) are higher in more unequal US states and Canadian provinces. The
more unequal societies are more likely also to retain the death penalty.
- More children drop out of High School in more unequal US states.
- Social mobility is lower in more unequal countries. If fathers’ income is less important, there is
more social mobility.
So: the countries that do worse are more unequal. The ones that do well are the Nordic ones and Japan.
So it’s general social disfunction related to inequality and not just 1 or 2 things that go wrong, it’s most
things! Sweden and Japan are different countries (women, nuclear family, …) and get there greater
equality different: Sweden has huge differences in earnings, and it narrows the gap trough taxation. It is
a typical welfare state. Japan has smaller differences in earnings before taxation and has lower taxes. It is
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a smaller welfare state. So it doesn’t matter how you get your greater equality, it is just important that
you get there somehow.
It’s not just the poor that are affected by inequality: Infant mortality by class: the biggest difference is at
the bottom of the society. But even at the top, there seems to be a small benefit to be in a more equal
society. It’s general that the greater equality makes most difference at the bottom but has some benefits
even at the top.
What is going on: it’s about the psychosocial effects of inequality. It has something to do with feelings of
superiority and inferiority, of being valued and not-valued, respected and disrespected. Those feelings
drives the consumerism in our society. This also leads to status insecurity. We worry more about how we
are judged and seen by others. The fear of those social-evaluative judgments increases.
They measured stressful tasks. Most stressful tasks were threats to self-esteem or social status in which
others can negatively judge your performance. Those kinds of stresses have a particularly effect on the
physiology of stress.
What can be done?
- Income differences before taxes
• Increase company democracy – employee ownership etc
• Promote more directors from withing companies
- Taxes and benefits
• Stop tax avoidance
• End tax havens
• Make taxation progressive again
Sustainability needs greater equality!!
We can improve the real quality of human life by reducing the differences in income between us.
Some people were against this book because it minds the distinction between correlation and causation.
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