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Understanding Inequality in Income and Opportunity

Summary

The chapter highlights two forms of inequality and the associated consequences. The authors first discuss elements of economic disparity. Economic inequality is linked to the differences in levels of income and property ownership. Earnings generated from employment or investments are referred to as market income whereas disposable incomes consider taxes and government transfers (Francisco, Ernesto, and Haijing). Both concepts provide a basis for determining income disparity and the government’s contribution to the imbalance. Initially, statistical tools were employed to calculate economic distribution. However, the procedure was rendered ineffectual because of its inability to accommodate economic variables such as inflation. Economists suggested the Gini coefficient in place of the standard deviation to account for potential changes in the economic distribution.

The article suggests that socio-economic family background has a profound effect on one's future economic status. It affects how much opportunity one is entitled to by birth. The intergenerational transmission of income (IGTI) is used to estimate the degree at which parents’ earnings impacts the children's financial status in their adulthood. Intergenerational elasticity compares the logarithmic incomes of parents to that of their child. A low constant suggests that a child's future income is less likely to be affected by that of his parent. Therefore, the probability of the child fitting in a higher income class is high. Income mobility is essential as it enables the government to efficiently distribute its resources to ensure that children from poor financial backgrounds are not left out.

Main Points

The article describes inequality in the market earning as a measure of capital invested, degree of utilization and percentage returns of investments (Francisco, Ernesto, and Haijing). The difference in market income may be influenced by the size or value of capital possessed by an individual. The size is reflected by one's inheritance sum while value refers to the level of education attained. Degree of utilization is a measure of how much effort put into action for one to earn more. Percentage returns may be influenced by geographical factors and the type of investment made. For instance, individual working in a metropolitan city is likely to earn more than one employed in rural areas despite possessing the same qualifications. Therefore, inequality of opportunity contributes to income inequality.

Quotes

Poverty measures, while not directly metrics of inequality, capture the deprivation at the bottom of the distribution (p.4).

Progressive taxes reduce inequality but may also reduce incentives to work or invest, which can create inefficiencies and a potential decrease in aggregate income (p.6)

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Works Cited Francisco, Perez-Arce, et al. Inequality and Opportunity. Santa Monica: RAND Corporation, 2016.