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date: 07 December 2019


Abstract and Keywords

This introductory article begins by discussing why economic inequality is of such profound interest, particularly in the light of recent changes in national and global economies. It goes on to consider the concept of economic inequality and the breadth of topics it encompasses. The distinctive nature of this field of research is discussed, followed by a description of a framework within which the various elements or aspects can be viewed and organized. The aim of the book and its intended audience are then set out in more detail. Finally, the structure of the book itself is outlined, to help the reader navigate through the very broad range of topics and issues covered and also to indicate what the book could not embrace.

Keywords: economic inequality, national economy, global economy

111Drawing on the expertise of some of the most capable scholars in the field of economic inequality, this Handbook aims to fulfill several ambitions and objectives. First the book hopes to provide the reader with an overview and evaluation of the current state of international research on economic inequality in a precise fashion. The second objective is to add new insights and open up novel perspectives for future research. In so doing it hopes to both stimulate further interest in the field and highlight directions and priorities for future development. Along the way, we also seek to convey both how this burgeoning research arena has been evolving, and then how it connects to research in economics more generally.

The book concentrates for the most part on research related to high-income countries, since the developing world differs in fundamental ways and merits separate treatment. None the less, the book does place inequality in the rich countries in its worldwide context of growth and trade and their distributive effects. It also concentrates primarily, but not exclusively, on research that comes from the disciplinary perspectives of economics and public policy—again because it would be impossible also to do justice to the substantial body of research on inequality from other social sciences. The focus on economic inequality may justify this disciplinary concentration. However, a number of contributions to the book take (p. 4) on selected perspectives from sociology, demography, politics, as well as philosophy and law. This will hopefully convey the extent to which one can address ‘economic inequality’ from a number of disciplinary perspectives.

In this introductory chapter we begin by discussing why economic inequality is of such profound interest, particularly in the light of recent changes in national and global economies. We go on to consider the concept of economic inequality and the breadth of topics it encompasses. The distinctive nature of this field of research is discussed, followed by a description of a framework within which the various elements or aspects can be viewed and organized. The aim of the book and its intended audience are then set out in more detail. Finally, the structure of the book itself is outlined, to help the reader navigate through the very broad range of topics and issues covered and also to indicate what the book could not embrace.

1. Why is Economic Inequality So Important?

Economic inequality has long been one of the major themes of socio-political debate and conflict, but interest in this topic from the point of view of economic research has waxed and waned over time. Having been rather neglected during the period of sustained economic growth in Western Europe and North America that followed the Second World War, the 1960s and 1970s saw a resurgence in interest that has been further accentuated by recent trends. In the USA the federal government's War on Poverty from the mid-1960s was accompanied by a substantial body of research, while a similar ‘rediscovery’ of poverty occurred in Britain, Sweden, and a number of other European countries. Increasing interest in inequality more broadly was reflected in landmark academic publications such as Atkinson's The Economics of Inequality (1975) and Sen's On Economic Inequality (1973), at about the time Britain established an official Royal Commission on the Distribution of Income and Wealth. Since then, a very substantial body of research on inequality has been accumulated, building on the potential of improved data and focused on clarifying concepts and measures, capturing trends, and understanding the causal processes at work back and forth to the economy.

As Jenkins and Micklewright 2007 highlight in their discussion of the upsurge in academic interest in inequality, this can be linked to changes in both the context—in terms of factual inequality levels and trends—and the policy environment in which research is carried out. For some years, levels of inequality were sufficiently stable for one analyst to describe tracking them as about as exciting as ‘watching the grass grow’ (Aaron, 1978), but this changed as the post-Second World (p. 5) War boom petered out. The 1980s, for example, saw a dramatic widening in the dispersion of wages in both the UK and the USA, and this gave rise to a sustained and wide-ranging investigation into why this was happening and whether it was confined to those two countries or pervasive throughout the industrialized world (e.g. Gottschalk and Smeeding, 19972000).

Awareness was also growing that inequality in the distribution of income among households, a key aspect of overall economic inequality, was increasing in those countries at the same time. Most recently, there has been a great deal of interest in what has been happening to the remuneration of top executives and the dramatic increase in the gap between their pay and that of the median wage-earner, as well as in the sharply increasing share of overall household income going to the very top of the distribution—the top 1%, for example—that can be observed in many rich countries (e.g. Atkinson and Piketty, 2007). At the other end of the scale, poverty and the related concept of social exclusion have become a significant focus of attention in the European Union (Atkinson et al., 2002). And while the official poverty rate in the USA has remained stubbornly high in spite of the poverty measure lagging behind the general evolution of incomes, interest in better measures of poverty to reflect the reality of low-income life in the USA has taken on new life (Blank, 2008).

Setting the broader context for these developments, globalization has become an important influence on economic and political conditions in the developed countries, as well as raising new concerns about the gap between developed and developing countries. In that situation the share of profits in national income has risen in rich nations, mobile capital threatens to make workers in these countries more insecure, and a ‘race to the bottom’ in terms of social provision is one possible response. The enormous increase in the size of the labor force engaged in the global economy with the opening up of China and India to greater levels of trade in goods and services over the past decade has potentially dramatic implications for workers in OECD countries, not least for labor's bargaining power vis-à-vis mobile capital. On the other hand, Welfare States in many countries, although challenged by these global trends, have proved more resilient to date than some had expected or feared. None the less, a growing concern about economic, social, and even political polarization and the possible consequences of a step-change to higher levels of economic inequality can be detected in many rich and poor countries alike.

In this setting, interest in the topic of economic inequality among researchers reflects the concerns of policymakers and the broader public as well as economists. However, research may approach this complex and politically charged topic from different perspectives, and unpacking these issues helps to answer the important question ‘why should economists “care” about inequality’?

The first motivating factor is simply scientific interest—the desire to know and understand the world around us that underpins the social sciences as it does the (p. 6) physical sciences. For the discipline of economics in particular, the distribution of economic resources and the factors that influence that distribution were among the central concerns of market economics at the outset, as evidenced by the writings of such key early figures as Adam Smith and David Ricardo. They are now coming to the forefront of the field once again.

The second reason is normative in origin: inequality is something about which people often feel strongly. A concern with social justice on the part of the researcher may of course play a role, but the fact that others—including economic agents and those engaged in the political process—have strong views about inequality and equity (fairness) is more than enough to motivate scientific research on the topic.

Finally, for many analysts concern with inequality may be primarily instrumental. It has been remarked that if one tells an economist that inequality has increased, the doctrinaire response is ‘so what?’ That is, even if inequality per se was not of significant concern, economists and others will want to know what real world consequences may be associated with rising inequality. These ‘so what's’ encompass a variety of other phenomena ranging from health status and life expectancy, crime and community breakdown, political power, and temporal patterns of income and poverty mobility, to intergenerational immobility and the transmission of poverty from one generation to the next, all of which are of societal concern. If inequality influences such outcomes or finds itself reinforced by them, understanding the linkages and their significance is an important task for research (Neckerman and Torche, 2007; Burtless and Jencks, 2003).

From the perspective of economics in particular, another key motivating factor is the linkage between inequality and economic efficiency. Economics is concerned with the use of scarce resources and how they can be employed to meet competing ends. Because improving efficiency can make some people better off without reducing anyone else's access to resources, this proposition is on the face of it very attractive. However, the notion that there may be a trade-off between equality and efficiency has played an important part in the way economists (certainly from a standard neoclassical perspective) have approached the topic. If seeking to redistribute income and other economic resources reduces efficiency and economic growth and thus the size of the ‘pie’, how do we evaluate the costs and benefits? Whether and in what circumstances such a trade-off operates is clearly a key issue, and theoretical and empirical analysis of this question has been an important theme in research and policy debates on economic inequality for many years. In particular, the concern that provision of welfare support to the poor or the unemployed creates dependency and undermines work effort goes back to the British Poor Laws and beyond. Conversely, aspects of the conditionality associated with such support in some countries may give rise to concerns about undue interference with basic individual rights. Even more important is the realization that policies might improve both equity and efficiency simultaneously and avoid the trade-off altogether.

(p. 7) The notion that some degree of inequality is not only inevitable but also functional from an economic perspective is a deep-seated one (Welch, 1999). It should be pointed out, however, that different industrialized countries have achieved sustained economic growth while maintaining rather different levels of income inequality and Welfare State support, so there is scope for societal choices to be made (Lindert, 2004). More recently, considerable attention has also been paid to the ways in which higher inequality could act as a barrier to growth, with inequality in capabilities, for instance, serving to reduce the size of pie. Here social protection and the Welfare State more broadly (e.g. via education and health care) can potentially serve to provide an environment that supports rather than undermines economic growth. Indeed, the need to understand the complex interactions between inequality and efficiency would suffice to bring economic inequality high up the research agenda of economics, and is clearly one of the areas where the economic perspective should have most to offer to the broader social science study of inequality.

It is clearly the case that these different sources of concern have different weight for individual researchers, and it may well be that some are more important than others in different countries and in different time periods. To speculate, it might be the case in recent years that the dominant sources of concern underpinning research on economic inequality in North America have derived from instrumental and efficiency perspectives, whereas in Europe the notion that inequality is itself of normative concern may have played a more important role. Such divergences may influence the directions in which inequality research itself develops, illustrating the impact of the broader socio-economic, political, and cultural setting in which it is carried out. The core point to be emphasized is that in both instances the scientific imperative to understand the sources and consequences of economic inequality emerges as a top research concern. In seeking to do so, there is a related disciplinary perspective: to bring the study of income distribution ‘in from the cold’ as far as economics is concerned, as Atkinson 1997 has written, re-integrating it with the core concerns of that discipline. This Handbook is intended to contribute towards all of these objectives and to broadening the view to inequalities in dimensions of key social goods beyond incomes, such as education and health.

2. The Concept and Coverage of Economic Inequality

As Amartya Sen 1973 put it, the idea of inequality is both very simple and very complex. It is simple and intuitively appealing enough to move people in very different settings and societies throughout history and across the globe, while being at (p. 8) the same time so complex as to engage some of the most gifted philosophers, political theorists, sociologists, and—not least—economists in teasing out its meanings and implications. The focus of this volume is on economic inequality, which serves to narrow the scope somewhat but still leaves a very broad field to be covered. Economic inequalities can be conceived of as inequalities with an economic effect or an economic origin, being as much an outcome of the underlying economic process as an input into these processes. Individual differences, and therefore distributions, are an unmistakable element of economic theorizing, even if only to provide behavioral incentives to work, save, or take an entrepreneurial risk (Welch, 1999). But in another sense, inequalities start where incentive effect end. They tend to be self-enforcing and self-sustaining, be it on their own or in conjunction with other inequalities. Also, inequality in one respect or for one group may hang together with equality in another respect or for other groups. Thus they can be part and parcel of the economy itself, supporting or weakening its dynamics and aggregate outcomes. Linkages and effects amongst and between inequalities are not necessarily obvious and their unraveling requires analytical effort. The contributions to this Handbook bear witness to that reality.

The distribution of income (or earnings), the key variable of economics, would certainly be seen as at the core of economic inequality, and has been the focus of much of the economic research on the topic, as has low income as an indicator of poverty. However, the flow of income is only part of the story. The accumulated stock of wealth also constitutes a key economic resource, be it for its major role in economic ‘power’ towards the top of the distribution on the one hand or its provision of coverage for financial risks, for example, in old age, on the other hand. Towards the bottom of the income and wealth distribution poverty may also be a matter of exclusion not just from income or wealth but from various aspects of the life of society, reflecting a broader lack of economic power or strength. This brings out that the economic perspective on inequality has at its core a concern with opportunities and constraints. Life-chances, the opportunities, obstacles, and misfortunes that different people face in striving for the sort of life they want to lead, are the fundamental arena where economic inequalities operate, however difficult they may be to capture when it comes to measurement. Economic inequalities can be found in many areas other than income or wealth as illustrated by the (non-exhaustive) range of topics covered in this book. And so, economic inequality remains a concept of challenging breadth and complexity.

It is clear still that inequality in access to economic resources, in endowments, and in opportunities, and the way these affect economic outcomes for individuals and families are crucial. Sen's notion of capabilities, for example, highlights the role of such resources as education and health care in allowing people to function and flourish in the society in which they live. These inequalities are inextricably tied up with institutional structures, including the market and concomitant private and social property rights, and they may both affect, and be affected by, aggregate (p. 9) economic performance. Understanding these relationships is the primary aim of research on economic inequality.

3. Research on Economic Inequality

As already outlined, a very substantial body of research on economic inequality has been accumulated over the past 40–50 years, building on such pioneering empirical studies as those of Kuznets 1955 and Mincer 1958. While inequality research has to be set and understood within the broader development of economics as a discipline, some distinctive features of this area of research may be identified. These include a particular focus on clarifying concepts and developing satisfactory measures and a concern with data and a reliance on its availability, but also a tendency for theory and empirical investigation to become somewhat detached from each other, and to downplay causality. There is the risk that the income distribution field itself can become somewhat separated from the broader field of economics, especially when focusing on non-monetary dimensions. Conversely, given the level of general interest in the topic of inequality, research outcomes and observations are often closely linked to political and social debates.

By their nature the core concept of inequality itself, as well as related ones such as poverty, exclusion, or mobility, have been open to a variety of conceptual interpretations, and considerable effort in the literature has gone into scrutinizing the distinctions and, if not arriving at a consensus, at least ensuring that there is greater clarity surrounding how the terms are being employed. This has proceeded in parallel with the development of measures which can be employed to empirically apply these concepts, and the exploration of their properties and the advantages and disadvantages of alternative measures. Atkinson's (1970) paper “On the Measurement of Inequality” and Sen's (1976) paper on summary poverty measures opened up a rich vein that represents a substantial sub-field in the subsequent literature as well as fundamentally affecting empirical research.

Much of the emphasis in that empirical literature has been on accurately capturing levels and trends in inequality, notably in terms of earnings or income. As Jenkins and Makeweight (2007) emphasize, developments in the type and quality of the data available have underpinned this research. Much wider availability of micro data, as opposed to reliance on grouped data in published reports, has been central. There have also been substantial returns on effort put into harmonizing definitions and measures so that data can be used more reliably for cross-country comparisons—as exemplified by the Luxembourg Income Study (LIS) and Wealth Study (LWS) databases covering many OECD countries and the work of (p. 10) Eurostat in relation to the European Union. The increasing number of longitudinal datasets available for a variety of countries has also made possible the studies of income and labor market dynamics that have played such an important part in the recent literature. Comparative data—notably Cornell's Cross-National Equivalent File (CNEF) and the European Community Household Panel (ECHP)—have paid significant dividends.2 Finally matched employer–employee data from firm registers in many nations have opened a new arena for estimating employer demand for labor (Abowd et al., 2004). These data, properly utilized, create an increasingly reliable picture of inequality levels and trends and therefore allow researchers to concentrate on the ‘why's’ and ‘so what's’ of their emergent patterns, rather than on the factual accuracy of the measures themselves.

The literature has naturally also invested a great deal of effort in seeking to understand the causal processes at work in producing and sustaining economic inequality. However, the linkage between theory and empirics has sometimes been looser than in some other areas of economics, with a tendency for empirical research to prioritize careful treatment of the available data. More fundamentally, the study of economic inequality can seem on occasion—at least to economists working on other topics—to have become rather detached from the broader field of economics. This explains, for example, Atkinson's (1997) plea to bring the study of income distribution ‘in from the cold’. On the other hand, economists working in the area can benefit from interaction with other disciplines such as sociology and social policy that share the focus on inequality and its causes and consequences. One may be optimistic that current socio-economic trends such as the generally increasing intertwining of the household and the labor market, through growing female participation (Chapter 12) as well as household worklessness (Gregg et al., 2004), or the rapidly deepening interconnections of incomes and labor worldwide (Chapters 23 and 24), can only help give the study of inequality a place among the central concerns of the economic discipline.

4. Analytical Framework

Atkinson and Bourguignon 2000, in reviewing the components of a theory of income distribution, emphasize that no unified theory exists as yet; income distribution is only one element of broader inequality, so an encompassing theory of economic inequality is even further away. However, we can try to sketch out some (p. 11) starting points for a framework within which the various aspects of inequality—and thus the range of topics covered in this book—can be set.

This framework would start with the distribution of income among households, which is at the core of economic inequality, and the way it is produced. That distribution is influenced most importantly by the earnings from work accruing to different household members. Understanding these patterns requires one to focus on the one hand on individuals in the labor market, their skills and opportunities and the returns they receive, and on the other on patterns of family formation and how earners cluster together with others in households. Labor market institutions, with employers and unions as key actors and the role of the State in regulating minimum wages in particular, are an important influence on the distribution of earnings, as are structured differences between groups of workers by gender, ethnicity or other factors, whether malleable (e.g. education) or not.

Another important component of household income, though less important than earnings at an aggregate level, is income derived as a return on capital—interest, dividends, and rent, as well as capital gains and profits. To understand this capital element, one must turn to the distribution of wealth, and to the relationship between that distribution and other elements of household income. Once again, this requires an understanding of asset holdings and their accumulation at the individual level, including through inheritance, as well as how individuals with different levels of wealth group together in households, and how different forms of wealth produce income streams via the financial and property markets, including pensions.

The third most significant element in household income, which may be the main or only source of income for a substantial proportion of households, is social protection received by its members from the State in the form of cash transfers. These are structured in different ways in different countries, and such institutional differences—including the way they feed back to the labor market and the distribution of earnings—are very important to the lower part of the distribution in particular. Private pensions, paid from occupational schemes or as a result of personal investment rather than from the social security system, again bring the financial markets directly into the picture but for a more advantaged part of the distribution.

Cash transfers and other aspects of State spending have to be financed, of course, and the income tax and social insurance contributions levied on individuals and families make a substantial contribution towards doing so. However, the way the income tax and social insurance systems are structured is also an important influence on the shape of the income distribution, in terms of the proportion of total income involved and the degree of progressivity with which it is raised as well as any structure of refundable tax credits (negative taxes) such as child allowances or in-work tax credits such as the Earned Income Tax Credit in the USA.

(p. 12) Institutional structures, and the political economy considerations they reflect, are also a major force when considering the broader impact of the Welfare State on economic inequality. This includes most obviously the provision of human services, notably health care and education, where approaches differ across countries (in particular the extent to which funding is collectively or privately determined) and can have a major influence on the living standards associated with a given level of household income. Health and education also are key influences on human capital, earnings, and therefore income in themselves, and the relationship between these social goods and economic inequality at individual and aggregate level is an increasingly important part of the picture.

Income is not static over time for individuals and households, and one of the major advances in the research literature has been to recognize the importance of adopting a dynamic perspective. This relates to both individual earnings and to household income, from month to month and year to year, but also to intertemporal trajectories over the work career and life-span and to mobility in income and wealth from one generation to the next. Changes in household structure and migration can each play an important role in generating changes in household income, so demography and migration must also be incorporated into the analysis of economic inequality.

The global context is also critical to understanding the structure and evolution of economic inequality in high-income countries, as amply illustrated by the expansion of global trade and capital flows and the concerns to which this has given rise in rich countries. The impact this may have on the distribution of earnings and returns to different levels of education and skills has been the subject of much research, but the potential effects on the overall distribution of income and on the ability of individual welfare states to influence inequality in income and life-chances also need to be incorporated into the framework.

The extent and nature of economic inequality is a core characteristic of and concern for the society as a whole. This means finally that the scope for policy and politics to affect inequality, the choices that this involves, and how they are made, has to be incorporated into the framework of this book.

5. The Aim and Coverage of this Handbook

As made clear at the outset, the aim of this Handbook is to provide the reader with an overview and evaluation of the current state of research on economic inequality and a forward-looking perspective of future research. It seeks to convey (p. 13) what the basic accomplishments of this very broad area of research are and how it has been evolving, and in so doing, to both stimulate further interest in the field and highlight fruitful directions and priorities for its future development.

One primary audience for which it is written is a student at a master's degree or advanced undergraduate level, of course including those studying economics but not confined to those for whom economics is the principal subject being studied. It can indirectly serve to assist their primary studies, and it may also help them think about future research they may decide to contribute to themselves.

The other audience is professionals, either governmental or non-governmental, engaged in the policy arena as well as the interested ‘layperson’ with a keen interest in the subject of inequality. 3 They will find in a single volume a synopsis of the best knowledge on most of the policy-relevant aspects of inequality. The style of presentation is thus designed to be non-technical (except in a very limited number of instances where it could not be avoided). This means that the content should also appeal to researchers on inequality coming from other disciplines seeking an overview of what economics has to offer. It is a defining characteristic of the field that it is focused on issues that are of very broad societal concern, and the volume seeks to reflect that in its mode of presentation insofar as this can be done without compromising the material.

The comparative perspective is also central to our endeavor. There is much to be learned from direct international comparison that is difficult to uncover at the national level. Quite naturally countries differ with respect to inequalities—something that is amply borne out in the contributions to this book. But also if direct comparability is lacking, usually because data are unavailable, studies in one country might well inspire other countries. The stress on the USA in some chapters should be interpreted in that way.

In terms of coverage, the volume includes a broad range of the topics where economic research on inequality over the past 40 or 50 years has focused and is blossoming today. As already noted, it concentrates for the most part on research related to high-income countries, since the developing world differs in fundamental ways and merits separate treatment. However, inequality in the rich countries is placed in its global context, with the chapters of Part VI devoted to inequality and growth, world income inequality and poverty, and the impact of global economic forces on what is happening in high-income countries. The book also concentrates primarily—but not exclusively—on research from the disciplinary perspective of economics. It would be impossible to represent this research at all adequately in a single volume, while at the same time doing justice to the substantial literature on inequality from for example sociology, politics, philosophy, and law. Still, several (p. 14) of the chapters in this book convey the perspectives of sociology, demography, and political science, as well as philosophy and law.

6. Structure and Content of the Handbook

The volume comprises 27 chapters, which are grouped into seven sections covering the following areas of discourse:

  1. 1) Overview, Concepts, and Measurement—providing the basic epistemological and methodological starting points;

  2. 2) Extent of Inequality—laying the empirical foundations and setting out extant stylized facts of inequality for household incomes, labor and capital incomes, wealth and top incomes;

  3. 3) Earnings Inequality—treating the role of the economy's core arena: the labor market and its institutional, personal, and gender-based components;

  4. 4) Dimensions of Inequality—highlighting the importance of particular elements or dimensions of distributional study, namely poverty, and household consumption and time use, and the relationship between inequality and happiness, health, and education respectively;

  5. 5) Dynamics of Inequality—focusing on the time perspective of demographic change, migratory movements of people and jobs, and lifetime (intertemporal and intragenerational) mobility as well as intergenerational mobility;

  6. 6) Global Perspectives on Inequality—discussing economic growth and inequality, the effects of globalization on labor and capital incomes, and the study of global poverty and inequality;

  7. 7) Changing Inequalities—considering ways of addressing inequality as practiced by the Welfare State, by policy-making more generally and, finally, the limits to the degree of equality that can be achieved by market economies.

The 26 chapters that make up this framework share a common broad structure. After explaining the relevance of the chapter's subject to the study of inequality, they review the state-of-the-art theory, followed—after an overview of data and sources—by a discussion of the empirical state-of-the-art. Many chapters also add new insights based on original work. Then they provide an evaluation of both theory and evidence, and end with suggestions for future research and, where relevant, possible implications for policy-making.

The volume begins with an overview of the philosophical and normative approaches to inequality in Chapter 2. It summarizes the important advances made by political philosophy and shows how these ideas have filtered into economic (p. 15) thinking. It concludes by stressing the fundamental importance of certain questions that this raises. This contrasts with the empirical and positivist approaches to methods and techniques for actually measuring inequalities in Chapter 3. An extensive state-of-the-art overview is given of the instruments of inequality studies. The methods and technical terms outlined in this chapter are deployed throughout the remainder of the book.

The second part, on the extent of inequality, begins with Chapter 4 and the evidence on how the distribution of income among persons varies across developed countries, and how it has been changing in recent years. Inequalities in market incomes (from work and capital), in disposable incomes (after public transfers are added and income taxes and social contributions subtracted), and the role of cash and non-cash redistribution are all discussed. The aim is to provide a picture of key ‘stylized facts’ and recent trends, various specific aspects of which are also taken up in subsequent chapters. This is followed by Chapter 5 on the more traditional economics of functional distribution and the shares accruing to both labor and capital sectors. Indeed as seen in later chapters on high incomes and globalization, functional share research is just beginning a new resurgence. Wealth (net worth, debt) and the transfer of wealth (inter vivos and at death) in rich societies are increasingly key elements of economic well-being and inequality. Chapter 6 explores the level and trend of wealth inequality while suggesting the lacunae in the field, especially our very inexact measures of retirement wealth. The final chapter (7) of Part II deals in depth with the issue of how high incomes have been changing over long time periods for many rich countries, noting especially the increases in top shares within most nations over the past two decades.

The third part of the book is about earnings and labor market inequality and begins in Chapter 8 with a review of the distribution of individuals' earnings and how that reflects differences in both wages and work effort, and how in turn these feed into the more aggregate measure of income inequalities. This individual focus is in contrast to the relationship of employer behavior to labor market inequalities, the subject of Chapter 9. Matched employer-employee data are casting an important new light on how variation in wage-setting practices across firms can affect the structure of earnings and earnings mobility. The chapter finds that very different wages are paid to equivalent labor across and within firms. The chapter also argues in tantalizing fashion that policies targeting firm selection of workers may affect inequality as much as policies of training and education which played the key role in the previous chapter. Institutions are first addressed head on in Chapter 10, which focuses on the role of unions, a core feature of labor market institutions, and their influence on economic inequality. While the union wage gap has generated an enormous body of empirical research, particularly for the USA and the UK, there has been much less research into the impact of unions on wage dispersion and wage inequality. The chapter considers the separate contributions of union power, membership composition, bargaining coordination, and wage policy, the (p. 16) combination of which determines the impact on inequality. It then summarizes new estimates of how the presence of trade unions has influenced the extent and dynamics of earnings inequality across advanced economies during the 1980s and 1990s. Next, Chapter 11 is also concerned with earnings, but deals with the bottom of the distribution, low pay. It discusses theoretical frameworks within which low pay may be analyzed, and how it is generally defined and measured. The varying patterns across countries in terms of the extent of low pay and the profile of those affected are presented. The policy issues to which low pay gives rise—notably the much-debated issue of the role and impact of minimum wage regulation—are also discussed. The unequal treatment of women in the labor market goes back to the first written sources on gender bias even if major changes have been occurring over the last 50 years. However, the transformation remains seriously incomplete as detailed in Chapter 12. Deficiencies in employment levels, occupational structure, and earnings are scrutinized. These massive changes are linked back to the educational attainment of women, technological change, and employment shifts toward the service sector. Effects on household incomes and fertility are discussed. Due attention is paid to the important role and the nature of policies for gender equality. Gaps in the proper understanding of the processes of the transformation of women to paid labor as well as their implications are identified as issues for further research, with a careful consideration of the use and justification of policy interventions.

Part IV of the book opens with Chapter 13, where a central policy-relevant facet of economic inequality, poverty and social exclusion, is treated. The chapter discusses the nature of the concept of poverty and how it is generally measured. It then reviews the evidence about the extent and nature of poverty in developed countries, thought of and measured in different ways, absolute and relative. It also focuses on what is known about the key influences on poverty, at the individual and societal levels. It discusses how poverty is related to income inequality and to social exclusion as well as multidimensional approaches to thinking about and capturing poverty in rich societies. Inequalities in what people do with their money and their time are the next dimensions of inequality that we address. The subjects of time use and the explicit and implicit consumption of households are covered in Chapter 14. Non-market time-use patterns are well laid out and the importance of radical changes over time and cross-country differences for the study of inequality is argued to lie in their implications for relative well-being. Though there still is a paucity of cross-national comparative studies of either expenditure or consumption inequality, the time seems ripe to strengthen the focus on the conceptual framework (see also Chapter 4 on the topic of consumption inequality).

The last three chapters in this part deal with three dimensions which are both precedents and antecedents of inequality: happiness, health, and education. In recent years an interesting new literature has grown up on subjective well-being (p. 17) (or happiness). Chapter 15 defends the use of the modern approach against mainstream skepticism, working its way back to the origins of the new development in the 1970s. It explains the concepts and discusses their different dimensions, with an extensive treatment of the debate on the measurability of happiness. The chapter concludes by highlighting the potential importance of the study of inequality for happiness researchers. Next, Chapter 16 deals with the relationship between economic inequality and health. It first reviews the most common hypotheses about how inequality might affect health and vice versa. It then turns to an assessment of the empirical evidence for a link between health and inequality. It emphasizes that the cross-sectional relationship between inequality and health is quite likely to provide biased estimates so use of panel data and appropriate techniques represents a significant advance in the literature to date. The evidence for a relationship between inequality and health (in either direction) is found to be weak, and the field is characterized as one with too many theories for the number of available data points at this time. Educational attainment is a key influence on economic inequality, through both the inequalities of education acquisition itself and the unequal effects of educational outcomes on economic and social outcomes—in employment as well as earnings. Chapter 17 therefore reflects on the very big literatures that have grown on each of these aspects, making important methodological progress regarding the causality of linkages. Those with low levels of educational attainment are heavily penalized in present-day labor markets. Policy-making in education seems to lag behind these new market insights and therefore education provides an important area for future research activity related to inequalities of both schooling and its outcomes.

Dynamic aspects of inequality are the focus of the fifth part of this volume. Indeed the way that we measure income inequality is often affected by demography—changes in the age and gender composition of workers and households more generally. Chapter 18 shows the effects of changes in the size and composition of the population itself on measures of economic inequality. Population ageing and retirement patterns, increased labor force participation, and the growth of female-headed families have all had major ‘demographic’ effects on the composition, level, and the trend in inequality. Similarly falling fertility rates and increasing migration from poor to rich countries will have a still different impact on future patterns of inequality. Chapter 19 focuses on migration and its implications for the level and structuring of economic inequality. The theoretical framework within which this can be examined is first set out, focusing on the potential labor market impacts and the wage and employment consequences of in-migration. A picture of native-immigrant differences in labor force participation, unemployment, and occupational and educational attainment in OECD countries is then presented. The empirical evidence on economic absorption (or assimilation) over time and across generations, the role that self-selection and selection through admission rules can (p. 18) play, and the impact of cultural or ethnic identity on economic performance, and hence inequality, are all discussed in some detail.

The final two chapters in this section are about the nature of dynamics per se as they are measured by datasets which follow the same people or generations of the same families over time. Chapter 20 deals with an issue of abiding interest, the transmission of economic inequality from one generation to the next. It begins with a theoretical discussion of various mechanisms that might lie behind the associations between income and family background, and what can be learnt from an economic model of parental investments in their children. The income concepts and measures used to describe intergenerational associations in income in the research literature are then described. An overview of what is known from recent research about cross-national patterns in intergenerational income mobility is provided. The question of whether parental income has a causal impact on the economic success of offspring, and results from a variety of approaches about what lies behind the association between income and family background, are also discussed. Chapter 21 is then concerned with economic mobility within, rather than across, generations. It begins with a detailed explanation of the most common methods used to calculate intragenerational mobility and the empirical problems of implementing these measures across countries, using panel data. It goes on to describe the relationship between the data used in studies of mobility and the conceptual content of the research. It then reviews the major findings of empirical studies of intragenerational income mobility, pointing out for example that most studies find no clear relationship between greater cross-sectional inequality and greater intragenerational mobility, as is often casually assumed. The field is judged to be relatively underdeveloped in comparison to the cross-sectional inequality literature, due partly to the scarcity of the type of data required to study such mobility.

Part VI of the book develops the perspective of worldwide inequality, globalization, and economic development. Chapter 22 investigates how inequality and its corollaries may affect a country's economic growth or undermine its institutions. It reveals complex and multidimensional effects of inequality on growth. The chapter advocates replacing the common, overall approach to the effects of inequality on economic growth with a finer methodology relating these effects to the different parts of the distribution: poverty at the bottom, wealth and incomes at the top, and the middle class in between. In addition, it argues for the role of institutions in place (or not) as a determinant of the size of these effects. The contentious relationship between globalization and inequality is the subject of Chapter 23. It takes stock of (existing) knowledge about this as well as how we know it, spelling out the uncertainties of this knowledge and the ways to study these. A detailed treatment of the channels of transmission leaves no doubt that globalization is for real and is rapidly advancing, doubling the global labor force. Globalization is also shown (p. 19) to reduce between-country inequalities and potentially increase within-country inequalities. The upbeat conclusion is that policy should and can ‘lean against the wind of rising inequality’ assuring a wider distribution of the benefits.

The global context of economic inequality in developed countries is examined in Chapter 24 which summarizes the recent evidence on global poverty and inequality, including both developed and developing countries. The issues involved in aggregating inequality indices across countries to construct a meaningful measure of global inequality are discussed, and the main results from research that has sought to measure global income inequality are summarized. The empirical relationship between economic growth, poverty, and inequality dynamics is discussed, bringing out the key stylized facts to emerge from these data. The likely economic determinants of poverty and inequality changes are also discussed.

Finally, the extent and nature of intervention by the state and its critical influence on and by economic inequality is addressed in Part VII of the book. Chapter 25 focuses on the Welfare State, which includes social protection, health, education and training, housing, and social services, but can also be conceived more broadly to include policies that affect earnings capacity and the structure of the labor market. It discusses the difficulties of capturing the impact of the Welfare State on income inequality, given that one does not observe what the distribution would be in the absence of the Welfare State or specific aspects of it. Theories of Welfare State redistribution are reviewed, and the conventional categorization into welfare ‘regimes’ discussed. The empirical evidence about the extent and nature of redistribution by the Welfare State is described, including non-cash services as well as cash transfers, and the impact on poverty in particular is discussed. Economic inequality is also strongly affected by the political process, and vice versa. In Chapter 26, the intricacies of politics and policies which affect inequality are reviewed. The idea that inequality is self-correcting in democratic societies cannot explain persistent inequalities or recent governmental responses to rising inequality. The perceptions and realities of social risk, different beliefs about the link between individual effort and economic outcomes and mobility, and the formation and change of cultural issues and identities all have important effects. While more definitive research has to be undertaken, it appears that access to political power by the wealthy has been found to counteract median voter theorems and lead to a less than egalitarian outcome in most Welfare States. The possibility of attaining equality in principle concludes the book in Chapter 27. It considers different ways (socialist, social-democratic) in which, conditional on democracy and market processes, more egalitarian outcomes might be brought about. It is argued that the spread of egalitarian ideas through argument and persuasion has an important role to play in introducing or reinforcing the institutions needed to bring about more solidarity societies. The results, while not optimistic, offer at least one way in which a more egalitarian society might be realized in market economies.

(p. 20) 7. Some Further Issues

Even a substantial volume such as this cannot hope to be comprehensive, and in concluding this introductory chapter it is useful to highlight some topics that merit particular attention in future research over and above the issues brought to the fore in the individual chapters. These may be divided into two groups: other topics to which the research literature has paid some attention and those which have been neglected to date.

In the first category one could include the purely theoretical investigation of issues related to inequality, notably the investigation of theoretical models of for example wealth accumulation and intergenerational transmission—a distinct strand of the literature to which a chapter could well have been devoted. Other topics related to inequality to which considerable attention has been paid by researchers include discrimination, pensions and the economic circumstances of older people, the relationship between macroeconomic fluctuations or ‘economic conditions’ and inequality, and the range of issues arising when one tries to open up the ‘black box’ of the household and explicitly consider within-household inequality. These are touched on in various chapters in the volume, but could undoubtedly have merited more attention that we had either time or space to give to them.

In the second category are issues which have not been adequately treated in the literature, and this is reflected in their treatment in this Handbook. One can start in this case with the tendency for the field to ignore or neglect its own history, rediscovering issues and relationships that have in fact been the focus of concern and analysis for many years. Another major gap is the failure to analytically link the personal and functional distributions of income comprehensively and robustly—a pressing concern for the future given what have often been dramatic shifts in both these distributions in recent years. Chapter 5 serves to highlight its importance but could not fill the gap. Consumption inequality itself is not often studied in a cross-national context due to severe conceptual measurement and data limitations. A variety of issues relating to the impact of the globalizing international economy have emerged so recently that they have not yet been adequately researched—with outsourcing from the rich countries and its potential extent and impact one of the most obvious.

Another important issue in analyzing global inequality relates to the construction and use of Purchasing Power Parities (PPPs) to allow national household and aggregate income data to be converted into a common currency. 4 In using PPPs with household income micro data both the quality of the income data (relative to (p. 21) the aggregates on which the PPP are based) and the types of goods and services purchased in each nation can introduce biases, 5 and further research into their construction and use for inequality and poverty comparisons is a priority. This is illustrated by the fact that the scale of the measured contribution of China to reducing world income poverty depends on a set of PPPs just recently calculated. 6

In introducing this Handbook on economic inequality, we conclude by emphasizing that the relationship between inequality and economic performance, although it has been the subject of considerable research, remains poorly understood and hotly debated. Each of the subsequent chapters highlights a variety of topics on which research is often urgently needed, and our hope is that this Handbook will act as a stimulus to this intellectually exciting and substantively indispensable enterprise.


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(1) Our thanks to Anders Björklund and Andrew Leigh for comments on an earlier version of this chapter.

(2) Covering Australia, Canada, Germany, the UK and the US, and the 15 older EU member states respectively.

(3) In contrast, the very valuable recent surveys on income distribution edited by Silber 1999 and Atkinson and Bourguignon 2000, for example, are aimed at a more advanced level, the economics Ph.D. student alone.

(4) The best-known efforts come from the International Comparison Project (ICP) of the United Nations (〈〉 ), and especially the OECD and World Bank's efforts. See 〈〉, and the Penn World Tables (PWT) at 〈〉.

(5) For instance, countries that use tax systems to purchase health care and education will find that the PPPs undervalue their disposable incomes compared to ones where they are left to the market. Moreover, increasing world trade which drives down prices of tradeable goods and services is not often accounted for in national price surveys.

(6) See Elekdag and Lall (2008) at 〈〉.