Income Distribution

Due to variety of reasons, in every society there is inequality in income distribution, which divides people into different groups. It sets a challenge to the economics, which is trying to describe mathematically this inequality, to understand its essence and to give such recommendations, which could bring the society close to the optimal state. Among the achieved results we shall note the Lorenz curve, based on which the dependence is built of the total share of the society’s income P in percentage (the vertical axis) on the share of families N in percentage (the horizontal axis). If each share of families had the same income, we would have a linear dependence:

The aim of this work is to establish the personal income distribution from the elementary constituents of a free market; products of a representative good and agents forming the economic network. The economy is treated as a self-organized system. Based on the idea that the dynamics of an economy is governed by slow modes, the model suggests that for short time intervals a fixed ratio of total labour income (capital income) to net income exists (Cobb- Douglas relation). Explicitly derived is Gibrat’s law from an evolutionary market dynamics of short term fluctuations. The total private income distribution is shown to consist of four main parts. From capital income of private firms the income distribution contains a lognormal distribution for small and a Pareto tail for large incomes. Labour income contributes an exponential distribution. Also included is the income from a social insurance system, approximated by a Gaussian peak. The evolutionary model is able to reproduce the stylized facts of the income distribution, shown by a comparison with empirical data of a high resolution income distribution. The theory suggests that in a free market competition between products is ultimately the origin of the uneven income distribution.

Kuznets famous hypothesis suggests that, at low levels of per capita income, inequality increases whit rising per capita income and decreases only in the latter stages development- resulting in an inverted U – shaped relationship between per capita income and income inequality – based on a model where individuals migrate from low – wage rural sector whit little inequality to an urban sector characterized by high income inequality and high average income. A large number of multi country empirical studies have shown however that the Kuznets hypothesis explains only a very limited part of inter country variation in income distribution (Bulir and Galli 1995) and that other policy and structural variables- such as tax and government spending, social transfers, state employment or human capital- improve significantly the explanation of the cross- country differences in income distribution (Milanovic 1994, Tanzi 1998, Chu, Davoodi and Gupta 2000).

Because of the interrelationship of all sectors of the economy, especially between agriculture and manufacturing, the problem of industrial protection and income distribution requires a general equilibrium analysis. The theoretical structure of a computable general equilibrium (CGE) model is well known. Based on the traditional Walrasian equilibrium, a CGE model consists of a system of equations which explain the behaviour of various economic agents in the economy. General equilibrium is similar to partial equilibrium, in that it assumes all producers to be profit maximisers; consumers to be utility maximisers; and production factors paid according to their marginal revenue products. It differs from a partial equilibrium model in that, whereas in a partial equilibrium model all prices other than the price of a good under consideration are assumed to remain constant, in a general equilibrium model all prices are variables, and quantity adjusts accordingly. By making profit and utility maximisation feasible and consistent, the solution set provided by the CGE model clears all factor and goods markets simultaneously.

For instance, although many current globalization experts would tend to point out the importance of trade and capital flows to demonstrate the higher implications that global integration has had on income distribution, the results here would prove that although countries have indeed lowered their barriers and increased integration, domestic factors could still remain a powerful factor that can influence the direction in which trade and other globalization variables can go. In that sense, it could be argued that certain results obtained could fall within the line of arguments laid out by Vincent Mahler and other scholars’ work reflecting the importance of domestic political variables like wage bargaining agreements and the level of coordination: that domestic factors could still play an important role in determining distributive outcomes in a globally integrated country. In addition to these and other domestic variables, perhaps it would have been interesting to have included certain controls for measuring the size and role played by full permanent contracted workers compared to temporary employed workers; so as to analyze the importance of employment protection laws, and how these in turn could indeed contribute in determining income distribution and the role trade unions play in this (Koeniger, et al., 2007; Rueda, 2007). Future researchers would enrich their investigations if taking this into matter.

and thus influences the environment in which a firm decides its size and its formality status. As a by-product of the analysis, I postulate that income distribution affects the response of the informal sector to fiscal policies, either demand or supply-orientated. The literature is basically silent on these matters whose importance lies in the fact that they may add a new perspective in evaluating the effects of redistributive policies especially in developing countries. Indeed, there are just a few previous works exploring the relationship between income distribution and the extent of informality, all of them based on different theoretical motivations from the one stressed here.

the market structure in the di¤erentiated goods’ sector is oligopolistic. The associated strategic interaction between …rms producing brands of the same quality render both the number of …rms and the number of brands per …rm in equilibrium responsive to changes in the income distribution in the presence of non-homothetic preferences. These income distributional e¤ects – with empirical evidence to support them – have been neglected in the literature of multiproduct …rms due to the reliance on the assumption that preferences are (quasi)-homothetic. We derive conditions under which a general equilibrium exists and is stable with both types of …rms producing more than one brand and extend the framework to two countries where trade in di¤erentiated goods is subject to trading costs.

This paper clarifies first the nature and significance of financial profit by applying the structural axiom set as consistent point of departure. As a crucial result the fundamental theorem of income distribution emerges. It states: profit is no factor income. Since the individual firm is blind to this structural fact it subjectively interprets profit as some kind of reward. As a matter of fact, firms do not ‘make’ profit, they only redistribute it among themselves. With profit consistently defined it is possible to determine the nominal and real shares of the elementary income categories wage income and distributed profit.

The issues discussed so far have been inter-country income distribution and changes therein. In a number of studies, the authors further attempt to estimate the ‘global’ income distribution, i.e. taking both the distribution across and within countries into consideration [Dowrick and Akmal, 2001; Bourguignon and Morrisson, 2002; Dikhanov and Ward, 2002; Sala-i-Martin, 2002]. These studies are based on P$ income data originating from national accounts. The within-country distributions are estimated with different methods and levels of disaggregation. The first study rely on the quintile data from Deininger and Squire [1996]. Bourguignon and Morrisson, as well as Dikhanov and Ward, use decile income estimates from household expenditure/income surveys. Sala-i- Martin estimates a gaussian kernel density function, allowing him to disaggregate intra- country quintile income distribution down to the household level in each country. Gini is the main distribution measure applied (but Theil and LogVar are also used).

from 1985 through 2001. We estimate China’s income distribution using a new maximum entropy density approach that works well when only a limited set of summary statistics by income interval are available. The maximum entropy principle is a general method to assign values to probability distributions on the basis of partial information. We extend this method to grouped data and use

We have formally introduced the model for the evolution of personal income distribution depending on economic growth in §1.3. PID is one of the key economic parameters. Despite some principal uncertainties in the data set on personal incomes, it represents the longest and the most detailed and accurate source of information on the distribution of income (individual, family, household) for a quantitative analysis and modelling. (As discussed in §1.2, other source provide estimates, which either cover a shorter period or less resolved, like the BEA gross personal income estimates.) Original income distributions, i.e. the number of people in given income bins, for even years between 1994 and 2002 are displayed in Figure 1.4.1. The width of corresponding bins is fixed to 2500 current dollars, i.e. it is not corrected for inflation. For the sake of clarity, the numbers of people with income inside original $2500-wide income intervals are aggregated into $10,000-wide intervals. The distributions show an increasing number of people in the fixed bins with income above ~$20,000 and a decreasing number below this value. (Notice the lin-log coordinates.) This is an expected result of population growth, real economic growth, and inflation. The first of the three processes potentially leads to an upward displacement with time of the curves as a whole. The displacement is uniform (in relative terms) when the population added every year is distributed over income in the same way as before, i.e. when the PID of the added population mimics the original PID. The US population grows at a rate of approximately 1% per year due to the excess of births over deaths and positive immigration.

Examining the experiences of 29 provinces over 11 years, we have focused on how the change of income distribution (and the income share of the rich, the poor, and the middle class) had been affected by the changing structure of economy (higher growth rates, increasing exposure to foreign trade), the role of the state (the reduction of SOE sector, and more decentralized fiscal expenditure), and increasing urbanization. We have found that inequality and Q5 increased with, and Q1 decreased with, the reduction of SOE share, higher inflation and growth rates, and (less significantly) the increasing extent of foreign trade. We have also found some evidence for Director’s Law (Stigler 1970): income redistribution tends to shift resources from the rich and the poor to the middle class, as witnessed by the positive sign on Q34, but generally negative signs of Q5 and Q1. Intriguingly, provinces farther from the coast had larger inequality, an observation probably reflecting the consequences of greater imperfection of capital market. Schooling and increasing urbanization did not play a significant role in the increasing income inequality during this period.

However the inequality is deemed to be too high and unfair because of the deep gaps between the living conditions of the greater part of population and the visibly luxurious life of the rich. The common believe that the income and wealth distribution is unjust derives also from the notorious fact that many of the very high incomes and wealth come from activities or from capital gained in the shadow economy, from breaking the law or taking advantage of law weaknesses, and from corruption. The fast growth of the income earned by some people, while a lot of poor lack the opportunities and possibilities/capabilities to have a good employment, if any, is also disturbing. The income distribution is characterized also by large differences between the incomes earned by employers, employees or some independents and those earned by farmers or received by unemployed and most of retired people, between the income and living conditions of households in urban and rural areas, and some of these differences are widening. This has led to the idea that there is a process of social polarization, suggested also by the fact that some population categories traditionally belonging to the middle class (teachers, doctors, civil servants, etc.) have relatively low wage earnings.

The reform of the income distribution system is an important part of the economic system reform, is an important reflection of economic development and social progress, and is an important guarantee for building a harmonious socialist society. The income distribution gap of our country is mainly reflected in the large income gap between urban and rural areas, the large regional in- come gap, the large income gap between different industries, and the large internal income gap within enterprise, which has directly impacted on the building progress of a well-off society. We must adhere to the principle of income distribution in socialist society: “from each according to his ability, to each according to his work”, and increasing the proportion of labor-factor income in the total income year by year, until exceeding the levels of the developed capitalist countries. In addi- tion to salary, the human resources also participate in the distribution of the enterprise’s profit in the form of capital. The risk gain obtained from capital is divided into three parts among enter- prise, bank and depositor in a certain proportion. The quality level of the most basic product is proportional to the value of the minimum unit of currency. To reform the income distribution system, the country can set up 7 job positions, with each position divided into 7 levels; therefore, the income can be distributed according to the distribution coefficient table, and has an annual increment at the rate of 10%.

The higher the age dependency ratio in the population the higher expenditure on health care and subsidies in the country.The evidence is that provided by Boix (2001) where the largest share of children and elderly people in population will increase the share of the government sector in the economy. The government should stretch resources to meet the educational demand (Stijns, 2001). Larger expenditure on education can be assumed to raise the educational level of the population, though this influence can only appear with a certain time. The educational level of the population influences the income distribution through many factors, such as technological development and economic growth. The higher educational level of human capital increases the productivity and technological development. According to Temple (2000), most studies have confirmed that the population’s higher educational level leads to faster economic growth. Specifically, in Tanzania those areas with many people who have got an education and special training will have higher income distribution compared to areas that many people are ignorant.

Emergence of trading blocks, formation of monetary unions, and integration of external policies are the main outcomes of globalization during the last decade. However, during the same era, fiscal management has gone through the process of decentralization. It is widely believed that effectiveness of fiscal policies in delivering social service can be enhanced in a decentralized unit. Level of deprivation in the society is considered to be a threat to the integration of global system, therefore, poverty, income inequality and social development has gained priority in the agenda of fiscal policies. Development strategies in Pakistan are also focusing upon poverty alleviation, equity in income distribution among the masses, and social development. These three areas have become the major concerns for the policy makers at national as well as at local levels since the introduction of devolution in Pakistan. These are the core issues taken in to account while formulating effective development strategies for the province of Punjab. Hence, In order to bring any significant change, there is an acute need of profound analysis of poverty, prevailing income inequalities, and social development.

Proposition 1 establishes the convergence for the case where bad states occur with positive probability ¯ < 1. The proof relies on the coupling of stochastic processes to achieve its conclusions. This is a simple and intuitive approach to proving limit theorems for Markov processes and is explained in Grimmett and Stirzaker (1982), for example. The basic idea behind the proof is to show that irrespective of the initial distribution the future behaviour of the system must eventually be identical. The ¯rst step in our proof is to show that there is a ¯nite number N , such that if there are N consecutive bad states the entire income distribution is concentrated at the point (1 ¡ ®)y. To establish this we show that all individuals must have wealth less than k after a ¯nite number of periods, because successive failures of the capital intensive technology will eventually destroy the richest generations asset stock. The richest individuals borrow and the poorest lend, once all individuals have insu±cient wealth to ¯nance the capital intensive project without borrowing. We show that individuals with inherited wealth (1 ¡ ®)y use the subsistence technology and invest all of their wealth in the mutual fund, so their savings are constantly being destroyed and can never leave a bequest of more than (1 ¡ ®)y. The borrowers also end up at the lowest wealth after one bad state, thus the stock of people at the lowest inherited wealth level grows and includes the entire population in a ¯nite number of periods. Once this ¯rst step is established it follows that for any two initial income distributions there is a probability ¯ 2N (the probability that they both have N successive bad states)

This work shows an application of Leontief’s closed model that, as far as I am aware, has not been explored previously. Such application is the study of income distribution between wages and profits when the rate of profit is the same in all industries. The results are consistent with those of Sraffa’s model, except for the fact that in Leontief’s model it is possible to build a standard system for each level of income distribution. This system, except for the scale of production and the units of measure employed, is equal to any whole-industry production process taking place within the balanced-growth path corresponding to Leontief’s closed model for the given level of income distribution. Furthermore, in the balanced-growth path, for each good, the amounts of invest- ment and profit in the industry producing the good are equal to the value, respectively, of the quantity of that good consumed and the surplus of that good produced in the whole industry. For this reason, for the set of households, included in the model as a particular industrial branch, the common profit rate measures the growth of the labor force. Unlike von Neumann’s model, the balanced growth-path corresponding to Leontief’s closed model shows explicitly the quantities of labor used in each industry, the quantities of goods consumed by work- ers and the growth of the labor force. Under a weak assumption, the growth rate is independent of worker’s choice.

Wage Policy in the Public Sector and Income Distribution Sheshinski, Eytan The Hebrew University of Jerusalem.[r]

with all its varying social structures [10-12]. In their review of 98 empirical studies, Lynch et al found 40 studies that indicated a relationship between unequal income distribution and increased ill-health, but 34 studies showed no relationship at all and 24 studies showed mixed results [12]. The studies that unequivocally point to an effect of income distribution on health are those that measured inequality on the state level in the United States [13,14]. Three European studies, two from the United Kingdom [15,16] and an Italian study by de Vogli et al [17] support the relationship between unequal income distribution and ill-health. De Vogli et al analysed the association between income inequality and life expectancy in 21 different countries and between different regions in Italy [17] and found that unequal income distribution had an independent effect on lower life expectancy both in the international and the regional comparisons. The other European studies presented in recent years have not been able to confirm the American findings that income inequality is associated with health.