Explaining Inequality the World Round: Cohort Size,
Kuznets Curves, and Openness.By Matthew Higgins and Jeffrey G. Williamson
The three hypothesis• Inequality and cohort size• Inequality and openness• Kuznet curve hypothesis
Cohort size hypothesis• „Fat age cohorts tend to get low rewards“• Important where the fat cohorts lie in the demographic structure• Cohort size variance across countries vs. within countries over time
Inequality and openness• Rising inequality correlated with increasing globalization• Trade (Heckscher- Ohlin argument)• Immigration• Labor supply shifts important• Globalization as cause for falling inequality in developing countries
and increasing inequality in developed countries?
Kuznets curve hypothesis I – Strong version• Inequality first decreases and then declines during economic
development• Demand for different skill levels causes the inequality development
Kuznets curve hypothesis II – Weak version• Demand forces not necessarily the reason for Kuznet movements• Other forces possible• Forces of some demographic transition (cohort size)• Different policies (attitude towards liberal policies, schooling,…)• Natural resource endowments
EMPIRICS
• Pooled dataset of 111 countries, 1960-1990ies
• Variables:• Decadal average of Real GDP per worker (RGDPW)• RGDPW2• GINI-coefficent• Log of (Q5/Q1) income ratio (GAP)• 8 dummies, including decadal dummies
Problems• Simultaneity bias - Instrumental variables?
• Omitted variable bias
• Heteroskedasticity - heteroskedasticity-robust-estimators
Monotonically declining
Inverted U, but
imprecise estimations
Extension of the model• MATURE: share of population with age between 40-59
• OPEN: Sachs-Warner index(i) a black market premium of 20 percent or more for
foreign exchange(ii) an export marketing board which appropriates most
foreign exchange earnings(iii) a socialist economic system(iv) extensive non-tariff barriers on imports of intermediate
and capital goods.
Quite high
Lacks degrees of freedom!
• M3/GDP is a measure for financial depth (how sophisticated are financial institutions in a country, how many have access to these…)
• FREEDOM geometric average of two indices, one measuring civil liberties and one measuring political rights
Alternative measures for openness:• quantitative and tariff restrictions on imports,• the share of imports plus exports in GDP• Natural level of openness:
the logs of country size, population, per capita income, per capita crude proven oil reserves, the average distance from trading partners, and two dummy variables describing, respectively, whether a country is an island or is landlocked
Globalization and Inequality• Milanovic (2005) proxies openness by the ratio of trade to GDP, finds
negative effect of openness on inequality in poor countries• Ravallion (2001) as well• Dollar and Kraay (2000, 2002) find that openness has no impact on
inequality
Alternative demographic measures:• total fertility rate• population growth rate• labor-force growth rate• the infant mortality rate• life expectancy at birth
Fertility rate• De La Croix and Doepke (2003) find negative correlation between high
fertility and growth, via education• Barro (2000): High correlation between inequality and fertility
Fixed country effects• Dummy variable for every country• Unbiased and consistent under the assumption that unobserved
effects are correlated with the explanatory variables• Loss in efficiency• Serial correlation -> LDV
Explaining cohort size effect on inequality• Three channels• 1) altered age structure, leaving age-earnings profile constant (+)• 2) different age groups with different within inequality levels (+)• 3) age-earnings structure changing, different experience premium (-)
Simulations - I• Three key sets of parameters• 1) Age profile of labor productivity over the lifecylce• 2) Age profile of the variance of earnings over the lifecylce• 3) Elasticity of substitution between different age groups
Simulations - II• Treat estimated mean age-income as representing the age-profile of
labor productivity• Select various values for the elasticity of substitution across age
groups• Evaluate inequality indexes associated with various steady-state
population growth rates
Simulations - III• Perfect substitutability• Small effect by changing mix between older and younger workers
caused by different wage levels (32.5 to 32.1)• Larger effect caused by different variance within age groups (43.1 to
39.7)• Taking mean-earnings and variance effects together: similar effect
Simulations - IV• Imperfect elasticity of substitution necessary for cohort size effect to
be true• 3.0 : offsets first two channels• suggests lower elasticity of substitution
• Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of economic growth, 5(1), 5-32.• De La Croix, D., & Doepke, M. (2003). Inequality and growth: why
differential fertility matters. The American Economic Review, 93(4), 1091-1113.• Dollar, D., & Kraay, A. (2002). Growth is Good for the Poor. Journal of
economic growth, 7(3), 195-225.• Milanovic, B. (2005). Can we discern the effect of globalization on
income distribution? Evidence from household surveys. The World Bank Economic Review, 19(1), 21-44.• Ravallion, M. (2001). Growth, inequality and poverty: looking beyond
averages. World development, 29(11), 1803-1815.