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April 04, 2011

Comments

What is the ideal distribution of income in society? Any Tips.

Himanshu,
Good question but one lacking any consensus. If someone asked me for a general guideline, I'd say something like: Not so equal that it stifles growth; not so unequal that it stifles development. Another way is to look at distributions in countries rated the highest on the UN human development index, i.e., the Scandinavian countries. If you find any interesting reports, put a link up here.

Here's a link on Sweden's decadal wealth distribution : http://www.scb.se/Pages/TableAndChart____306604.aspx

The highest decade earns 60 times more the lowest one. So I think that what's really important is not wealth distribution itself per se, but the quality of life available to the lowest economic section. I'm not sure how that plays in the presence of inflation driven by the rich, but there is a need for the government to provide a basic social net which is practically absent in India.

Shanth,

Thanks. A quick look tells me that P90/P10 is 6.2x. Where do you see the 60x figure? Also, this is "total income from employment and business", so does not represent the disparity after redistribution through various means. That would be the most relevant data I think.

If we are going to discuss income and wealth, we have to be a bit careful with terminology and data. As any accountant or economist would tell you, income is a flow variable and wealth is a stock variable: the stock of your wealth goes up when the flow of income adds to it. The wealth of households is the value of their assets (accumulated over time, but measured at a point in time) while income is what they earn during a particular period (say, one year).

This distinction has implications, both in measurement and in economic policy-making.

A quick glance at the Swedish data turns out to be frustrating. No units are mentioned for the data (presumably they are in krona). More confusingly, the values for P90 and P10 (which yield the 6.2 ratio that Namit quotes) don't match with (what I am assuming are) the cutoffs for decile 1 and decile 10 in the table. If you compute the ratio with those two cutoff numbers, it comes out to 29.8.

Focusing on income distributions, one might be surprised to find that income inequality, as measured by a Gini coefficient, is quite similar between India and the UK (or Italy). However, the dire poverty that one sees in India is more or less absent from the UK. To me, this indicates that an additional metric to keep in mind is a measure of the location of the left tail of the distribution - let's say the average income of the bottom decile. Clearly, in the advanced countries such as the UK, or Italy, or the US, the bottom decile is still better off than the corresponding bottom decile from countries such as India or Bangladesh. This implies that the first task of developing countries is to ensure that the bottom decile moves up the income scale. An outcome which reduces the gap between the rich (top decile) and the poor (bottom decile) without moving the whole distribution is not helpful.

Hmmm ... I think I read the table wrong. I wasn't sure what the data in the columns marked "20 and older", "20-64" were. I thought they were median incomes for each decile. Is that meant to be population in that decile which falls in that age group? Which means that the rest of the population of that decile is made up of younger people? 18-20? I'm now confused by what that table means.

I agree that the disparity after redistribution is what matters, but a system of taxation which reduces inequality should also significantly disincentivise terrible inequalities before taxation.

@vp: I somehow didn't see your post, but I think the statement about the absolute position of the bottom decile (or even the bottom half) is important in addition to measures of inequality is what I was trying to say but less clearly. I think I got the 60x figure by looking at the first and last decile cuttoffs(?) in the 20-64 age group.

Here is a NYT article by Manu Joseph, the editor of OPEN magazine and author of the novel "Serious Men." In describing his (depressing) take on how wealth and economic disparity are manifesting themselves in India, it references the income and wealth stats that I linked to.

I don't think an attempt to find an optimal distribution of income or wealth would lead to any kind of consensus. What a lot of people might agree on is that no human being should live below a certain absolute standard of living. The first task should be to order the economic priorities such that every individual obtains the income that is needed to maintain this standard of living within a defined period of time.

I found the following post (The Haves and the Have-Nots) by Catherine Rampell very useful. In particular the graph in the article conveys a lot of comparative information. I archived this article in The Best From Elsewhere section of our blog some time back. It is #72 on the list.

http://economix.blogs.nytimes.com/2011/01/31/the-haves-and-the-have-nots/

There are a number of studies that argue that societies that are less unequal have fewer pathologies but this is a second order concern for us. Our approach ought to be to indirectly reduce inequality via a focused effort to improve the living standard of the population presently existing below the minimum acceptable standard of living.

South Asian,
Thanks for the interesting link. Good to see you here. I often lurk on your blog ...

I agree with your ought statement. Hope the folks at the helm in South Asia are able to summon both the will and the means to enforce minimum wages and labor laws that exist already, and provide better safety nets (such as NREGA, which is a start). This video report by Ravish Kumar, for instance, documents how much less than minimum wage many people make for their labor today, even in Delhi.

Interesting. When I moved out of India, I was supposedly among the wealthiest (top 0.01% or $1 million assets) within India and I actually lived a poor quality of life (not very big house in Bombay, traveling by train, simple non-luxury car, one international vacation every 2 years, etc.). Not because I liked to live like that, because I couldn't afford more. Now I'm in the US, I'm supposedly in the middle class, but I can enjoy whatever I couldn't in India - a much bigger house in a beautiful neighborhood, a luxury car, vacations every long weekend.

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