In this thesis, theoretically sound and empirically tractable solutions are provided to problems inherent in the traditional practice of measuring inequality in the distribution of annual income. Inequality is taken throughout to mean the extent to which society falls short of a situation in which everyone is equally well-off. The measurement of annual income inequality is inappropriate in this regard because it is consumption, not income, that produces welfare. Furthermore, individual, and therefore social, welfare depends on consumption over the lifecycle, not just in a single year. There are also problems of a less theoretical nature. Measured annual inequality includes an age-related component attributable to the shape of lifecycle income profiles. Annual inequality indices also fail to account for the effects of income mobility.
In response to these problems, two new approaches to the measurement of inequality are proposed. In the welfare approach, an improved index of inequality is sought by replacing annual income with a summary statistic of lifecycle consumption. Lifecycle inequality is then decomposed within and among age-cohorts. Intercohort inequality captures the contribution of economic growth to total inequality, while intracohort inequality is an index of pure interpersonal inequality. The decomposition approach is a compromise between the inadequacy of measuring annual income inequality and the impossibility of measuring lifecycle consumption inequality. Total inequality is measured in panel consumption data treated as a single
distribution, and then decomposed into indices of age-related, mobility-related, and pure interpersonal inequality.
Empirical implementation of the decomposition approach indicates that age-, and especially mobility-related, inequality account for substantial portions of total measured inequality. Sensitivity tests of the decomposition approach indicate that it is a robust method of measuring inequality.
Finally, the decomposition approach is applied to the problem of measuring the trend of inequality, widely observed to have been remarkably constant in the post-War period. Although the trend of measured annual inequality is constant, lifecycle inequality as measured using the decomposition approach declines over the sample period.
The principal finding of this thesis is that the decomposition approach to the measurement of inequality is essential for an accurate assessment of the level and trend of pure interpersonal inequality. / Arts, Faculty of / Vancouver School of Economics / Graduate
|University of British Columbia
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