Income inequality and social mobility

About Inequality

Inequality may be measured in terms of a comprehensive variety of economic outcomes. Within a country, the yardstick used most frequently is household (or family) income. A household unit includes elderly persons or children with little or no earnings of their own. Their material well-being thus depends largely on earnings of others in the household. One problem with this approach is that household formation is itself sensitive to economic and demographic conditions. Maintaining a separate household may be a luxury that only the more affluent can afford. Moreover, the incentive for the formation of individual households depends on the age composition of the population as well as rates of marriage and divorce. Times-series evidence on trends in inequality measured at the household level must be interpreted with care (Piketty & Saez, 1-39).

Inequality Evaluation

A second problem is how to evaluate the economic status of the household unit. Should the measure be monetary earnings? If so, should these be limited to earnings from current employment? Or should other types of income, such as returns on invested capital, business profits, and pension benefits, also be included? Should the measure be gross earnings or earnings net of taxes and cash transfers? In the United States and most other countries, net income is more equally distributed than gross income. What adjustment should be made for the “household production” of those family members whose work is performed in the home or for the market value of the services provided by durable assets (e.g., home, car) owned by the household? And what about the value of goods and services (e.g., food, housing, medical care) directly provided to the household by government units or other institutions?

These considerations suggest an alternative basis for measuring well-being: household consumption. But, while consumption is more accurate than income as a means to evaluate the material well-being of a household, it is far less tractable from the point of view of statistical analysis. Data on incomes are largely drawn from statistics routinely collected by government units for other purposes, such as tax records, and coverage is often nearly universal. Household consumption data must be generated by surveys intended specifically for this purpose, with results based on statistical sampling of the population. Moreover, survey instruments and sampling techniques are subject to continual revision, raising additional problems in evaluating trends over time (Feldstein, 357-367).

Impact of Inequality

To assess the impact of trade on inequality, researchers routinely use a much narrower definition: wage inequality, or even inequality of wages within the manufacturing sector and especially the individual earnings of skilled over unskilled workers, often defined as non production relative to production workers. A major advantage of using manufacturing wages is that these can be matched to industry characteristics and exposure to trade. To the extent that trade does affect income or consumption inequality, the impact is most likely to come through changes in wages earned. These changes can occur not only through changes in wage rates but also in employment and ...