Improving International Comparisons of Prices at Basic Heading Level: An Application to the Asia‐Pacific Region

The International Comparisons Program (ICP) run by the World Bank compares prices and real incomes across countries, and plays a pivotal role in the Penn World Table. Using a unique dataset consisting of over 600,000 price quotes from nine countries in the Asia‐Pacific region, we consider ways of improving the basic heading price indexes that form the building blocks of ICP. Current ICP methodology computes these price indexes using the country–product–dummy (CPD) method applied to the country average prices. We contrast this approach with: (i) a weighted version of CPD; (ii) CPD applied directly to the individual price quotes; and (iii) extended versions of CPD that include adjustments for unrepresentative products, urban–rural price differences, and different outlet‐types. Also considered are new CPD‐based methods for measuring urban–rural price differences, and the implications of our findings for the downward revision in China's GDP in ICP 2005.     

Global and regional inequality in the distribution of income: Estimation with limited and incomplete data

The paper examines the nature and extent of global and regional inequality using the most recent country level data on inequality drawn from World Bank studies, and real per capita income from the Penn World Tables, for the period 1980–1990. The methodology employed in the paper is based on a mixture of parametric and non-parametric approaches to inequality measurement. It is designed to handle the limited and incomplete nature of income distribution data from different countries. Empirical results show a very high degree of global inequality, but with some evidence of catch-up and convergence between regions.     

IMPROVED INTERNATIONAL COMPARISONS OF REAL PRODUCT AND ITS COMPOSITION: 1950–1980

A set of international comparisons is developed for 124 countries over the three post World War II decades, 1950-80. A Data Table is presented which gives, for most countries and most years, real product estimates for three different national income concepts and for the major subaggregates consumption, investment, and government. Detailed comparative price level estimates are provided as well.     

BARRIERS TO ENTRY AND DEVELOPMENT*

We ask whether barriers to entry are a quantitatively important reason for the income gap between developing countries and the United States. We develop a tractable general equilibrium model that captures the effects of barriers to entry and the other main distortions typically considered in the development literature. We carry our model to the data and ask it to match the main development facts from the Penn World Table. We find that this requires large barriers to entry in developing countries, which account for about half of the income gap with the United States.     

The impact of education expansion on wage inequality

The findings on education expansion and income inequality have important implications for policymakers to implement effective policies to reduce income inequality. This study attempts to explain how education expansion affects income inequality by education distribution and the rate of return to education. We decompose the effect of education expansion on wage gaps into price effect and structure effect. We compare the income inequality from 2002 to 2013 using the Chinese Household Income Project (CHIP) 2002 and CHIP2013 survey data and employ FFL decomposition method. Our findings suggest that income inequality increased in 2013 and that income inequality among the high-income groups increased even more significantly. The structure effect of education expansion on income inequality is negative, when average education increases one year, the income gap between 80th and 20th will decrease 1.2%, in other words, education expansion decreases income inequality by allowing a wide range of individuals to attend college. However, this effect is offset by the price effect, which is positive and much more significant in magnitude. One extra year of average education will increase income gap by 29% which means that the demand for high-skilled labour is increasing faster than the supply and thus lead to the increasing premium for higher education return.     

Can social spending cushion the inequality effect of globalization?

This paper examines whether social spending cushions the effect of globalization on within‐country inequality. Using information on disposable and market income inequality and data on overall social spending, and health and education spending from the ILO and the World Bank/WHO, we analyze whether social spending moderates the association between economic globalization and inequality. The results confirm that economic globalization—especially economic flows—associates with higher income inequality, an effect driven by non‐OECD countries. Health spending is strongly associated with lower inequality, but we find no robust evidence that any kind of social spending negatively moderates the association between economic globalization and inequality.     

INTERNATIONAL AND INTERTEMPORAL COMPARISONS OF REAL PRODUCT IN OECD COUNTRIES A GROWTH SENSITIVITY ANALYSIS

This paper provides two new data sets for comparisons of real income in OECD countries. The first set provides adjusted real series for GDP and its components from 1960 to 1993 based on OECD 1990 purchasing power parities. The second set uses OECD PPP of different benchmark years, and interpolates these applying national price indices. Comparisons between both alternatives, Penn World Tahle Mark 5 (PWT 5) and its new version (PWT 5.6), in terms of economic growth and convergence, reveal some remarkable differences. Moreover, there are wider differences concerning the relative countries' position in GDP per capita ranking. Estimations of convergence equations based on OECD data yield a better fit than those obtained using PWT data, although there are also some significant differences between PWT 5 and PWT 5.6. Nevertheless, a very positive result is that other parameters of interest in these equations are not affected by the use of these different data sources.     

The technological determinants of long‐run inequality

I explore the effect of skill‐biased technological change and unbiased technological progress on long‐run inequality using a theoretical model in which the supply of skilled and unskilled workers is endogenous. The main assumption of the model is that young agents can finance their education and become skilled workers by borrowing against their future income on an imperfect credit market. I show that whenever the rate of unbiased technological progress is sufficiently high there is no steady‐state inequality, independent of the degree of skill bias. If instead the rate of unbiased technological progress is low, then the long‐run skill premium increases with the technological skill bias. Therefore, similarly to the short run, in the long run higher technological skill bias may cause higher inequality. However, contrary to the short run, in the long run unbiased technological progress is more important than technological skill bias in determining inequality. I also discuss how the efficiency of the educational technology and the degree of financial development affect long‐run inequality.     

ON THE ROLE OF CAPITAL GAINS IN SWEDISH INCOME INEQUALITY

Realized capital gains are typically disregarded in the study of income inequality. We show that in the case of Sweden this severely underestimates the actual increase in inequality and, in particular, top income shares during recent decades. Using micro panel data to average incomes over longer periods and re‐rank individuals according to income excluding capital gains, we show that capital gains indeed are a reoccurring addition to rather than a transitory component in top incomes. Doing the same for lower income groups, however, makes virtually no difference. We also try to find the roots of the recent surge in capital gains‐driven inequality in Sweden since the 1980s. While there are no evident changes in terms of who earns these gains (high wage earners vs. top capital income earners), the primary driver instead seems to be the drastic asset price increases on the post‐1980 deregulated financial markets.     

Accounting for the "Subnational Penn Effect"—A General Theory of Regional and National Price Levels

As an extension of the neoclassical urban systems theory (Henderson, 1974), we develop a general theory of regional (inter-city) price dispersion which also explains the “subnational Penn effect,” i.e., cross-city correlations among population size, prices, real income and human capital stock. The model is also a theory of international price dispersion that is observationally equivalent to and more appealing than the Balassa-Samuelson theory, implying that the (international) Penn effect may simply be an aggregate result of the “subnational Penn effect.” Furthermore, it shows that, contrary to the popular view, economic integration can increase as well as decrease spatial price variation.     

The Relative Price of Services

Prices of GDP relative to the exchange rate increase with income per capita, which is known as the Penn‐effect. This is generally attributed to services being cheaper relative to goods in poorer countries. In this paper we re‐examine the Penn‐effect based on a new set of PPPs for industry output. These are estimated in an augmented Geary–Khamis approach using prices for final goods, exports, and imports. The resulting multilateral PPPs cover 35 industries in 42 countries for the year 2005. We find large variation in relative prices of various services industries. In particular the Penn‐effect appears to be mostly due to the rapidly rising output prices of non‐market services. This seems related mainly to the high labor intensity of that sector.     

A Proposal to Compare Consistently the Inequality Among the Poor

A poverty index should be sensitive to the number of poor people, the extent of the shortfall of the poor, and the inequality among the poor. A difficulty arises when inequality among the poor needs to be assessed. The inequality may be analyzed in terms of either incomes or gaps. Depending on what side we focus on, the inequality level comparisons may be contradictory. This paper proposes a reinterpretation of the inequality component involved in the decompositions of well‐known poverty indices. The alternative indices we introduce measure equally the income and gap inequality among the poor. The comparisons in inequality as measured by these indices are then independent of the viewpoint. An empirical application illustrates the proposal.     

International inequality in subjective well‐being: An exploration with the Gallup World Poll

In this paper we compute inequality measures over the distribution of a subjective well‐being variable constructed from a life satisfaction question included in the Gallup World Poll in almost all countries in the world. We argue that inequality in subjective well‐being may be a better proxy for the degree of unfairness in a society than income inequality. We find evidence that inequality in subjective well‐being has an inverse‐U relationship with per capita GDP , but it is monotonically decreasing with respect to mean subjective well‐being. We argue that this difference might be associated to inequality aversion in the space of utility.     

Human capital and income inequality in India: is there a non-linear and asymmetric relationship?

The article attempts to provide empirical evidence on the relationship between human capital and income inequality in India in a non-linear and asymmetric framework. To capture both long-run and short-run asymmetries, we have employed the non-linear autoregressive distributed lag approach using the relevant data from 1970 to 2016. Findings of the article suggest that education expansion acts as a major factor in reducing prevailing high income inequality, that is an increase in average years of schooling results in more equal distribution of income. In contrast, high economic growth, inflation and trade openness create unequal distribution of income. The asymmetric causality test results indicate that there is unidirectional causality running from female human capital, economic growth and inflation to income inequality. From a policy perspective, we suggest that education expansion should be used as a powerful tool to mitigate income inequality by emphasizing the quality of education. At the same time, policies geared towards social benefits, inclusive education, training for unskilled workers and price stability should be encouraged to attain fair income distribution in India.     

The eye of the beholder. Reconsidering the notions of pro‐poor growth and progressivity,with an application to Vietnam

Both policymakers and economists have tried to find criteria to assess whether economic growth is pro‐poor. In this paper we reconsider the inequality‐oriented approach originally proposed by Jenkins and Van Kerm. They look at the changes in the whole income distribution, and decompose the change in income inequality, measured by the Gini coefficient, into a progressivity and a reranking component. They define a pro‐poor (or progressive) change as one where the changes in income are more to the benefit of those who are initially poor than to the benefit of those who are initially rich. We challenge this assumption, and maintain that also the point of view of the finally poor and the finally rich should be taken into account when evaluating whether growth is pro‐poor. We suggest a new decomposition method, based on an inequality index of the generalized entropy family, which allows the change in income inequality to be decomposed exactly into a forward‐looking and a backward‐looking progressivity component. Our empirical illustration, using data from household surveys in Vietnam, shows that economic growth in Vietnam has been pro‐poor from a forward‐looking perspective, but not from a backward‐looking perspective.     

The Shape of the Income Distribution and Economic Growth – Evidence from Swedish Labor Market Regions

We analyze the association between income inequality and economic growth using 72 labor market regions in Sweden during the period of 1990–2006. Compared with studies of cross‐country data, the regional set‐up reduces problems with omitted variable bias and endogeneity as regions within a country share the same redistributive policies and institutions. Using population register data, highly accurate measures of growth and inequality (gini, Q3, p9075, p5010) are derived. OLS cross‐section and panel estimates imply that inequality between the 90 and 75th percentiles enhances regional growth and that the share of income falling to the third quintile reduces growth. These results no longer hold when we apply regions specific fixed effects and/or system GMM.     

Income inequality and income bias in voter turnout

In the era of growing income inequality around the world, it remains inconclusive how higher income inequality affects income bias in turnout (i.e., high-income citizens vote more likely than low-income citizens). Using large-scale cross-national survey data, we show that (1) strong income bias in turnout exists in many parts of the world, (2) higher income inequality is related to lower income bias in turnout by demobilizing high-income citizens and mobilizing low-income citizens, and (3) this relationship is partly explained by the pattern that vote buying is more common in societies with higher income inequality and thus mobilizes low-income citizens but decreases political efficacy among high-income citizens. Ultimately, this study suggests that growing income inequality may not exaggerate political inequality, but may challenge the legitimacy of democratic elections.     

INFERENCE FOR DOMINANCE RELATIONS

The use of partial orders has been popularized as a way to conduct social evaluations using only minimal normative assumptions. Generically, this process involves comparing continuously indexed curves that are uniquely determined by the cumulative distributions of the individual attributes under study. In the literature on income poverty and inequality, for example, pairwise comparisons of entire income distributions and their respective Lorenz curves are routinely performed in order to characterize rankings of poverty, inequality, and welfare. In this article, we focus on the inferential problem that arises whenever such comparisons are made in the absence of census data. Statistical inference in these situations is particularly complex due to the fact that comparing curves invariably gives rise to four possibilities: the true population curves are equal, the first curve lies below the second, the second lies below the first, or the curves cross. To address this four‐decision problem, we introduce a two‐stage test that has good power and fine control over misclassification error rates.     

INEQUALITY COMPARISONS IN A MULTI‐PERIOD FRAMEWORK: THE ROLE OF ALTERNATIVE WELFARE METRICS

This paper considers the use of alternative welfare metrics in evaluations of income inequality in a multi‐period context. Using Norwegian longitudinal income data, it is found, as in many studies, that inequality is lower when each individual's annual average income is used as welfare metric, compared with the use of a single‐period accounting framework. However, this result does not necessarily hold when aversion to income fluctuations is introduced. Furthermore, when actual incomes are replaced by expected incomes (conditional on an initial period), using a model of income dynamics, higher values of inequality over longer periods are typically found, although comparisons depend on inequality and variability aversion parameters. The results are strongly influenced by the observed high degree of systematic regression toward the (geometric) mean, combined with a large extent of individual unexpected effects.