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Impacts on Inequality
Donald Low
Vice President,
Economic Society of Singapore
Outline
Trends in inequality
Whats driving it?
Government perspectives on inequality
New perspectives on inequality
Gini Coefficient
Lorenz curve plots the proportion of the
total income of the population (y-axis)
that is cumulatively earned by the
bottom x% of the population
The Gini coefficient (G) is the ratio of
the area between the line of equality
and the Lorenz curve (A) over the total
area under the line of equality (A+B)
i.e. G= A / (A+B)
If G = 0: complete equality
If G= 1: complete inequality
Trends in inequality:
Do we have an inequality problem?
Original Income
Income after taxes
and transfers
Source: Singapore Department of Statistics, Key Household Income Trends (Feb 2010)
Trends in inequality:
What does the income data tell us?
Average annual growth of real monthly incomes by
deciles, 2001-2008
Households
Individuals
All Resident
Households
Employed
Households
Resident
Working Persons
-16.1%
-0.9%
-1.4%
-2.1%
0.3%
-1.1%
0.9%
1.9%
-0.2%
1.6%
1.9%
0.4%
1.9%
2.3%
0.5%
1.9%
2.5%
1.4%
2.7%
2.8%
1.3%
2.3%
2.4%
2.0%
3.1%
3.4%
2.2%
10
4.1%
4.1%
3.2%
Trends in inequality:
What does the income data tell us?
Real Median Monthly Income of Employed Residents, 1996-2009
8000
12.0
7501
7000
7105
10.0
6636
6385
6000
5834
5000
5328
7.5
5536
7.1
7.2
6362
6378
6352
9.4
7278
9.7
8.9
5657
8.1
7.9
8.2
10.0
8.0
8.1
7.2
4000
6.0
3000
4.0
2000
1767
1876
711
775
2025
2262
2270
2260
2267
2234
2328
2465
2420
1968
2.0
1000
809
782
786
804
776
784
743
759
751
749
0.0
1996
1997
1998
Top 20%
1999
Median
2001
2002
2003
2004
Bottom 20%
2006
2007
2008
2009
Trends in inequality:
What does the income data tell us?
City
Amsterdam
Auckland
Barcelona
Frankfurt
Geneva
Hong Kong
Kuala Lumpur
London
Los Angeles
Moscow
New York
Seoul
Shanghai
Singapore
Taipei
Tel Aviv
Tokyo
Toronto
USD/hour
(net)
13.50
8.40
11.60
14.50
20.40
8.00
5.10
13.90
17.40
5.90
19.90
6.10
3.00
5.90
6.70
8.60
15.70
12.80
USD/hour
(gross)*
20.70
10.60
14.40
22.10
29.20
8.80
6.70
18.00
23.90
6.90
26.10
8.00
3.90
7.10
7.70
10.30
19.40
17.10
Trends in inequality:
The experience elsewhere
Distribution of disposable household income, as measured by
Gini coefficient, 1979-2000
Earliest
Most
recent
22.1
25.4
20.9
22.3
19.7
25.2
25.7
24.7
25.1
25.2
.03
.29
.13
.29
25.3
22.7
22.7
24.4
26.0
30.9
29.3
26.7
26.6
27.7
26.4
24.8
30.7
28.8
.39
.33
.11
-.08
-.02
-.03
29.3
28.1
28.4
32.8
27.0
30.1
33.0
31.1
30.2
32.3
34.5
36.8
.23
.09
-.04
.38
.32
Average
annual
change
Trends in inequality:
The rise of the (super) rich in the US
Income growth in the last three decades
has benefitted mainly the rich
Growth of family income by quintile
in the US, 1947-2000
1947-1973
(The Great
Compression)
1973-2000
(The Great
Divergence)
1st
115.3%
10.3%
2nd
97.1%
15.5%
3rd
97.7%
24.1%
4th
102.9%
33.6%
5th
84.0%
61.6%
17.5%
43
23.1
17.0
11.9
5.0
1979
15.5%
41.1
24.0
17.5
11.9
5.5
2001
21.0%
47.7
22.9
15.5
9.7
4.2
Trends in inequality:
The rise of the (super) rich in the US
Household Income, Share of the Top Quintile
2500
Rates
2000
0 20,000
0%
1500
20,001
30,000
3.5%
30,001
40,000
1000
5.5%
40,001 80,000
500
80,001 160,000
0
160,001
320,000
0
100
200 300 400
> 320,000
700
800
8.5%
14%
17%
Wage ($)
20%
In defence of inequality
We dont have an inequality problem
Its a statistical illusion caused by population ageing, smaller household sizes,
the fact that the data is not longitudinal, etc.
Its not a problem as long as we provide (equal) opportunities for
Singaporeans, primarily through education.
Its not a problem as long as incomes across the board are rising.
In defence of inequality
If we were able to choose, we would want to grow incomes without at the
same time incomes becoming more unequal. If we were able to choose, thats
what we would want... The reality of course, is that to create jobs and
opportunities for those with lower skills, we have to provide adequate
incentive for those with the talents and entrepreneurial abilities and the skills,
adequate incentive for them to work, earn better incomes, grow their wealth.
That is the reality we face.
If we make it difficult for people who are able to seize opportunities in Asian
markets and globally to make the most of their talents, if we make it difficult
for them to earn their keep in Singapore and to feel that Singapore is a place
where they can grow their business, grow opportunities, we will be
unfortunately holding down the wages of the rest. And thats the reality we
face as a global city.
Tharman Shanmugaratnam, Minister for Finance
Economic Society of Singapore Annual Dinner 2010 Keynote Address
When measuring material well-being, look at income and consumption rather than
production (e.g. GDP, GNP)
Give more prominence to the distribution of income, consumption and wealth
Broaden income measures to non-market activities
Improve measures of peoples health, education and environmental conditions; develop
robust and reliable measures of social connections, political voice and insecurity.
Quality-of-life indicators should assess inequalities in a comprehensive way.
Measure peoples life evaluations, hedonic experiences and priorities.
Develop a dashboard of environmental indicators that measure the value of the underlying
stock of natural resources.
Develop indicators for environmental pressures that reflect our proximity to dangerous
levels of environmental damage.
The economist, Robert Frank, argues that peoples concerns about their relative
position (i.e. status) often lead to arms races in which individuals try to outdo one
another by spending more on positional goods . The key feature of an arms race is
that what is individually rational is not collectively so, e.g. standing in a packed
stadium to get a better view.
These arms races lead to expenditure cascades that divert resources from important
non-positional goods (such as leisure or environmental goods), causing large welfare
losses in society. Frank shows how rising inequality in the US has caused middleclass families to spend sharply higher fractions of their incomes on positional goods
like housing, forcing them to curtail other categories of spending.
A growing concentration of wealth in the hands of the rich may also lead to a
diversion of resources from the wider economy to financial speculation and
conspicuous consumption .
Franks solution to this wastage is a progressive consumption tax.
Sources: Robert Frank, Falling Behind, Luxury Fever, The Winner-Take-All Society (with
Philip J Cook)
The authors argue that the relationship between inequality and poor health and
social problems are too strong to be attributable to chance. They then suggest
causal links specific to each health and social problem.
- Argue that the link runs mostly from inequality to the particular health or
social problem, and not the other way round.
- They also argue that people at almost all income levels, not just the poor, do
worse in more unequal societies. Inequality, not poverty, is the main culprit.
Criticisms:
Data only shows correlation not causality
Some of the relations are quite sensitive to the choice of countries, e.g.
inclusion of Hong Kong, Korea, Taiwan and Singapore would alter the
relationship between income inequality and infant mortality significantly
Conclusions
Inequality in Singapore has increased significantly in the last decade,
probably at a rate faster than in most advanced economies.
Globalisation and rapid technical change are main causes. It also appears
that public policies have not slowed the increase in inequality, and may even
have accentuated it in some respects.
Inequality harms society, and may also contribute to financial and
macroeconomic instability.
We can pursue more progressive policies, e.g. more progressive taxation,
expansion of social safety nets, and more aggressive use of social insurance.
What matters is the design of our social safety nets, not the total level of
spending.
By pursuing a more progressive agenda, the government bolsters public
support for free trade, globalisation and economic restructuring, and
increases Singaporeans acceptance of liberal immigration policies.
Thank you
donaldlow73@gmail.com