Unformatted text preview: PADP 8670 POLICY ANALYSIS I Equity Angela Fer7g, Ph.D. Equity-Efficiency Trade-off Okun's Leaky Bucket "The money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich." AdministraDve costs of taxing and transferring IncenDve effects: Rich have less incenDve to work b/c high marginal tax rates to pay for transfer to the poor Poor have less incenDve to work b/c transfer payment reduced as they make more money An excepDon: "A policy that improves efficiency oMen promotes inequality (e.g. a reducDon in capital gains taxes). If early investments [in children] are followed by conDnued high quality learning experiences, then it promotes economic efficiency and reduces lifeDme inequality. There is no equity-efficiency trade-off for early intervenDons for the disadvantaged. This is a unique feature of early childhood intervenDon programs." James Heckman 1 Equity ObjecDves Equity or fairness refers to the relaDve distribuDon of well-being in a society Most policy debates center on equity issues Who will receive the benefits of the policy Who will lose if policy is adopted Examples TaxaDon Welfare, social security, Medicare Trade Two ConcepDons of Equity Outcome concepts of equity Concerned with the variaDon in the shares that individuals (or groups) receive. Process concepts of equity Are the rules and methods for determining a distribuDon of shares fare? 2 Outcome Concepts General DistribuDon Overall distribuDon of uDlity in the economy or measureable proxies for uDlity such as income or wealth Specific Egalitarianism The equity of the distribuDon for par.cular goods and services This implies that some (specific) goods require an equal distribuDon in order to achieve equity or fairness Figure 7.1 Lorenz Curve and Gini Index of Income Inequality 100 Line of Perfect Equality Percent of Income Area A Area B Lorenz Curve 0 100 Percent of Population (Ordered from Lowest to Highest Income) Gini Index = A/(A+B) 3 US Gini Coefficients 0.48 0.47 0.46 0.45 0.44 0.43 0.42 0.41 0.4 0.39 0.38 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: US Census Bureau 2009 Process Equality Process equality becomes applicable once we acknowledge that inequality of share sizes is explicitly permiged. Concern is not with aggregate inequality but with whether the shares were determined by a "fair" process. 4 Equal Opportunity Each person should have the same chance of obtaining a share of a given size. One measure is intergeneraDonal earnings/ income mobility: the elasDcity of child's (adult) income with respect to their parent's income 176 The Journal of Human Resources
0.5 Trend in the elasDcity of intergeneraDonal income mobility 0.45 0.4 0.35 Elasticity 0.3 0.25 0.2 0.15 0.1 0.05 0 1949- 1950- 1951- 1952- 1953- 1954- 1955- 1956- 1957- 1958- 1959- 1960- 1961- 19621952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 Source: Mayer and Lopoo 2005 Figure 1 Estimated Elasticities by Rolling Group Year Born and 1952 are Group 1. Males born between 1950 and 1953 are Group 2 and so on through males born in 1965. The estimated effect of parental income is thus a moving average in which each individual appears up to four times. The data shown in Figure 1 is presented in Appendix Table A1. Figure 1 shows that the elasticity of son's income with respect to parents' income first rose then declined. The elasticity peaks at 0.473 for children born between 1953 5 CondiDonal Equal Opportunity Every person with idenDcal excepDonal characterisDcs has the same chance of obtaining a share of a given size. ExcepDonal characterisDc a factor that is legiDmately expected to influence shares. Intelligence Effort Good looks Horizontal and VerDcal Equity Horizontal and VerDcal equity are defined by the excepDonal characterisDcs. TreaDng those with the same excepDonal characterisDcs the same horizontal equity Smokers, drivers, drinkers TreaDng those with different excepDonal characterisDcs the same verDcal equity Those charged with a crime Voters 6 ...
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- Fall '10
- James Heckman