INCOME DISTRIBUTION THEORY

This paper introduces two special issues of the Review devoted to income distribution theory and its empirical implementation. Most of the papers that will appear in these two issues were prepared for a special session on income distribution held during the Eleventh General Conference of the International Association for Research in Income and Wealth, held at Nathanya, Israel, in August 1969. The present issue contains theoretical papers; the following one will present more empirical work. This introductory paper is intended to indicate the relationships among the papers that follow, and to suggest possible future directions for work in this area. In the latter connection, the author discusses the use of microanalytic models applied to microdata sets dealing with individuals and households.     

THE INCOME UNIT AND THE ANATOMY OF INCOME DISTRIBUTION*

This paper focuses on a neglected aspect of the treatment of the income unit in the construction of size distributions of income. If the size distribution is to be an indicator of the distribution of economic welfare, and if the economic welfare of each individual in society is to count equally, then conventional distributions are inconsistent with individualistic welfare functions. We estimate size distributions with each person's welfare weighted equally, and contrast these results with those weighting each household unit's welfare equally. The choice of weights is shown to affect both the level and the trend in income inequality.     

VERTICAL DIFFERENTIATION AND THE DISTRIBUTION OF INCOME

The paper analyses the effects of income concentration on the behaviour of a duopoly with vertical product differentiation and uncovered market. By using a trapezoid distribution, we solve explicitly for market equilibrium as a function of a mean preserving spread of the income distribution. We show that overall more concentrated incomes imply stronger product differentiation, as the presence of a large share of middle‐income consumers stimulates a price competition, whose effects are dampened through an enlargement of the quality spread. While the high‐quality advantage and market coverage increase unambiguously in the degree of income concentration, the behaviour of prices is non‐monotone in the distribution parameter.     

A POSITIVE THEORY OF GEOGRAPHIC MOBILITY AND SOCIAL INSURANCE*

This article presents a tractable dynamic general equilibrium model explaining cross‐country data on geographical mobility, unemployment, and labor market institutions. Rational forward‐looking agents vote on unemployment insurance (UI). Agents with higher moving costs (larger attachment to their location) prefer more generous UI. Attachment is assumed to increase with the duration of residence. UI mitigates incentives for moving and increases, therefore, the fraction of attached agents and the political support for UI. This self‐reinforcing mechanism can yield two steady‐states: one “European” and one “American.” The former (latter) features high (low) unemployment, low (high) geographical mobility, and high (low) UI.     

THE DISTRIBUTION OF INCOME AND WEALTH IN JAPAN

This paper reviews research on the distribution of income and wealth in Japan, identifies sources of data on income and wealth, and describes limitations of these data. Evidence that Japan's poorest income groups are relatively well-off is convincing, but there is less evidence that the overall distribution of income in Japan is more equal than in other OECD countries. Agricultural policy, social welfare policy, the tax system, trends in earnings differentials, and the role of the Japanese family are among the many factors that have shaped Japan's income distribution. The rapid appreciation of the stock market and land prices during the late 1980s led to greater inequality in the distribution of wealth. Rapid population aging is expected to lead to an increase in total national wealth relative to national income which may have an adverse impact on the distribution of income.     

NATIONAL ACCOUNTING AND INCOME DISTRIBUTION

Conventional national accounts are often seen as concentrating on the production process, on how goods and services are produced, rather than on consumption, or who the products serve. Production finances consumption via income generation, distribution and re-distribution. This paper demonstrates this inter-action by elaborating a full economic accounting matrix, and takes both theoretical and practical considerations into account. The aim is to explore how far the revised SNA can and should give emphasis to issues of income distribution and consumption.     

IMPUTED RENT AND INCOME DISTRIBUTION

This paper uses unit record survey data to implement a 1977 United Nations recommendation that imputed rent from owner-occupied housing be included in household income in statistics collected for income distribution purposes. The conceptual difficulties associated with employing the recommended National Accounts approach are highlighted by a comparison of the methodologies used to impute housing income for National Accounts purposes, for use in income distribution analyses and for income taxation purposes. The empirical difficulties associated with implementing the preferred approach are also discussed. The results reinforce the significant impact owner-occupation has on the well-being of many households and point to the importance of a disaggregate analysis of its distributional impact.     

CAPITALISM, SOCIALISM AND INCOME DISTRIBUTION

A Review of Anthony B. Atkinson and John Micklewright, Economic Transformation in Eastern Europe and the Distribution of Income     

UNCERTAINTY AND THE POSITIVE THEORY OF THE PUBLIC ENTERPRISE*

This paper extends the analysis of Rees (1984a) of a public enterprise pursuing a size-related objective in the face of uncertain demand to a situation where its managers may be risk neutral or risk averse and where the public enterprise may produce more than one output. The optimal pricing policy of the public enterprise is analysed and the importance of not only the expected profit constraint but also the attitude to risk of the public enterprise in determining its relative prices is demonstrated.     

THE DISTRIBUTION OF HOUSEHOLD INCOME AND EXPENDITURE IN PORTUGAL: 1980 AND 1990

From 1980 to 1990 Portugal experienced a generalized liberalization of economic activity, due in large part to its 1986 integration in the European Union. This paper studies the changes in the Portuguese distribution of household income and expenditure during this period, using micro-data on household budgets and applying recent developments in statistical inference for Lorenz curves. We find a significant increase in six measures of welfare and an unambiguous decrease in the inequality of the respective distributions. Different explanations for the findings of decreased inequality are discussed.     

PRIM I: A MODEL OF THE PRICE AND INCOME DISTRIBUTION MECHANISM OF AN OPEN ECONOMY

PRIM I is a numerical model which has been extensively used as a basis for an income policy in Norway in recent years. It is a static, cost-push, input-output model. Wage rates, agricultural prices, productivities and world market prices are treated as exogenous variables, and the model derives short-term changes in income shares and in the national price level from changes in these exogenous variables. A key feature of the model is a distinction between "exposed industries" which are subject to strong foreign price competition, and "sheltered industries" which are relatively free of such competition. These two groups of industries are found to react with very different pricing policies in response to increases in costs; furthermore, possibly for technological reasons, the export industries have greater scope than the majority of the sheltered industries for compensating cost increases through productivity gains. These two facts are shown to have important implications for a price and income policy. It is demonstrated, i.a. that the goal of a stable national price level is, in general, inconsistent with the maintenance of stable income shares when exchange rates are kept constant.     

THE INCOME DISTRIBUTION EFFECTS OF A NATURAL GAS PRICE INCREASE

Deregulation of wellhead natural gas prices will affect individuals as consumers and resource owners. It is shown that higher natural gas prices will be roughly progressive with respect to household and general consumers. The effects on the distribution of resource earnings will be ambiguous because although the oil and gas industry is highly capital intensive, natural gas price deregulation will likely cause reduced spending on other capital-intensive activities, including deep drilling for high cost gas, gas utility distribution, and exports. Overall, no clear case can be made that gas wellhead price deregulation will be regressive     

THE SOCIAL SIGNIFICANCE OF INCOME DISTRIBUTION STATISTICS

In both political discussions and scientific literature the income distribution has come to occupy a central position for the consideration of social welfare and economic equalization. It has been assumed that an individual's income reflects his consumption opportunities and therefore his standard of living or economic welfare. The thesis of this paper is, however, that there are reasons for being quite pessimistic about drawing meaningful conclusions from income distribution data. As illustrated by the use of Swedish data, the distribution of income gives an extremely incomplete picture of the distribution of consumption for a wide variety of definitional and statistical reasons. The distribution of consumption, furthermore, cannot be transformed into a corresponding distribution of welfare, since there is no well defined concept of welfare. The treatment of public consumption in empirical analysis of the distribution of welfare also raises problems. The paper closes with the presentation of the conceptual basis for an alternative to the traditional method of analyzing the distribution of income.     

GLOBAL FINANCE, INCOME DISTRIBUTION AND CAPITAL ACCUMULATION

The appreciation of the consequences of financial globalizationis an important task for contemporary political economy. Thispaper maintains that industrial and macroeconomic instabilityfaced by many developed and developing countries is likely tobe attributed, to an extent, to changes in income distributionin favour of rentiers, financiers and other groups of financialcapitalists. We elaborate on Marx's and Keynes's ideas and arguethat a rise in rentiers' income might have been an obstacleto industry's investment decisions, and detrimental to capitalaccumulation. The econometric analysis conducted provides evidencein line with the paper's major hypothesis for the United Statesand the UK.