What is income inequality?

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by Matt Nolan1 view·Updated May 29, 2021
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  1. Yeah. Hi, everyone met and I both have done some
  2. research in the past on income and wealth inequality.
  3. So today we thought it would be interesting to talk
  4. about stay to income inequality and introduce the common measure
  5. of it, the gini coefficient.
  6. So we'll talk about that today and I'm here to
  7. run the slides.
  8. So there we go.
  9. So to start, I would like to discuss some of
  10. the reasons why income might be in equal at a
  11. point in time, which I think will help us understand
  12. these measures.
  13. So first experienced versus inexperienced workers, let's think about the
  14. situation where someone is experienced within the industry for 20
  15. years versus someone entering the industry.
  16. The person who's experienced has built up skills and know
  17. how about the job, so he's likely to be paid
  18. more than someone who is completely new.
  19. So if this was the reason why incomes were unequal,
  20. we might we may not be worried about it too
  21. much. The second scenario is risk taking versus non risk
  22. taking individuals, someone who is willing to take a risk
  23. by undertaking uncertain investments and take chances that may end
  24. up with nothing.
  25. Or may they may end up with lots of income.
  26. This could lead to inequality as well.
  27. Furthermore, on average, risk takers have to be rewarded to
  28. do this.
  29. So there may be inequality due to some individuals being
  30. more willing to accept a lower income as long as
  31. they don't have to take on risks.
  32. Again, this would be would be seemed to be okay.
  33. Reason for inequality.
  34. The third scenario is people when people have different opportunities
  35. or there may be discrimination or systemic biases in society
  36. that lead to people who are otherwise the same, receiving
  37. different incomes.
  38. So when this happens, the inequality appears to be a
  39. very fundamentally unjust.
  40. So it would be something that we would want to
  41. redress two, summarizing these pictures.
  42. Uh these different causes matter in very different ways.
  43. So we would like to think about policy very differently
  44. based on the causes.
  45. However, our measure don't, our measures don't always allow us
  46. to separate out these causes.
  47. So today, our goal is not to talk about whether
  48. inequality is good or bad.
  49. We just want to describe what the inequality is.
  50. The issues of the inequality being good or bad are
  51. described more at the T V H.
  52. E link that you're seeing at a top of your
  53. screen. So the parade of dwarfs, we're looking at an
  54. income distribution.
  55. We can consider it by ordering people from those with
  56. the lowest income to those with the highest and popping
  57. them on a graph when we do so we get
  58. the so called the parades parade of dwarfs.
  59. Let's look at it alone.
  60. Oops the wrong parade.
  61. Just a second.
  62. I will fix that now.
  63. Yeah. So This is Queen Kyle's in New Zealand which
  64. is the proportion of income for each 20% of the
  65. population ordered by the income level.
  66. The income measure us here is household equalised income.
  67. Why we equalize the income?
  68. Because we would view a child or non worker in
  69. a high income family as still having a high income
  70. as the family will share the resources.
  71. So we group people in the household together and then
  72. adjust the income for the number of people and how
  73. those people could share the income which is called scale
  74. economies. This shows us the proportion of income rises over
  75. five times, going from the lowest to the highest quintile.
  76. However, having such large groupings missing misses a lot of
  77. inequality. Let's look at the U.
  78. S. Case.
  79. The US figure shows that clearly the very high income
  80. earners tower far above the wrist.
  81. This is why it's termed the parade of dwarfs as
  82. a few high income people earn far more than each
  83. individual other person in the distribution.
  84. So let's imagine a situation where everyone does earn the
  85. same income.
  86. The parade would be fled.
  87. In that case if we have people ordered from lowest
  88. to highest income.
  89. Which doesn't make sense when they are all the same.
  90. But we'll soon we can look at cumulative income in
  91. the following way.
  92. So let's draw the line.
  93. The idea is that we start with the person with
  94. the lowest income and the second point is their income
  95. plus the income of the second lowest earner.
  96. If we keep adding this up we will get a
  97. straight line At the end.
  98. We will have 100% of the people, the bottom axis
  99. and 100% of the income, the left hand side access.
  100. So the line is straight as the additions to the
  101. cumulative some are always the same number when incomes are
  102. perfectly equal.
  103. But what does it look like when they are unequal?
  104. So the next line is famous.
  105. Lawrence curve, the proportion of total income earned by lower
  106. income individuals will be lower than this perfectly equal line.
  107. As the income rises.
  108. When we go right, The line gradually gets steeper by
  109. the end we will have 100% of the income counted
  110. again. So we end up, we end up at the
  111. same point.
  112. So this is called the Lorenz curve.
  113. So how do we measure inequality from this?
  114. We measure it using the gini coefficient.
  115. The gini coefficient is a measure that refers to the
  116. gap between this completely equal line and unequal line that
  117. is observed in reality.
  118. So the larger the Gini coefficient, the larger the area
  119. between these two lines.
  120. So it is in this way that the gini coefficient
  121. measures inequality in incomes in the population.
  122. Mhm. Right, here we go.
  123. So today we have had a brief chat about how
  124. to measure income inequality and have hopefully clarified what people
  125. mean when they talk about the gini coefficient, questions about
  126. what the right level of inequality is or what inequality
  127. really means, tough.
  128. So um these are not things we are going to
  129. tackle here in this video.
  130. We just wanted to give you some information to help
  131. you make your own informed choices.
  132. So we will thank you here and hopefully we'll see
  133. you next time.