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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.

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explaining inequality the world round cohort size kuznets curves and openness

Explaining Inequality the World Round: Cohort Size, Kuznets Curves, and Openness.

By Matthew Higgins and Jeffrey G. Williamson

the three hypothesis
The threehypothesis
  • Inequalityandcohortsize
  • Inequalityandopenness
  • Kuznetcurvehypothesis
cohort size hypothesis
Cohortsizehypothesis
  • „Fatagecohortstendtogetlowrewards“
  • Importantwherethefatcohortslie in thedemographicstructure
  • Cohortsizevarianceacross countries vs. within countries over time
inequality and openness
Inequalityandopenness
  • Risinginequalitycorrelatedwithincreasingglobalization
  • Trade (Heckscher- Ohlin argument)
  • Immigration
  • Labor supplyshiftsimportant
  • Globalizationascauseforfallinginequality in developing countries andincreasinginequality in developed countries?
kuznets curve hypothesis i strong version
Kuznets curvehypothesis I – Strong version
  • Inequalityfirstdecreasesandthendeclinesduringeconomicdevelopment
  • Demand for different skilllevelscausestheinequalitydevelopment
kuznets curve hypothesis ii weak version
Kuznets curvehypothesis II – Weakversion
  • Demand forces not necessarilythereasonforKuznet movements
  • Other forces possible
  • Forces of some demographic transition (cohort size)
  • Different policies (attitude towards liberal policies, schooling,…)
  • Natural resource endowments
empirics
EMPIRICS
  • Pooleddatasetof 111 countries, 1960-1990ies
  • Variables:
    • Decadalaverageof Real GDP per worker (RGDPW)
    • RGDPW2
    • GINI-coefficent
    • Log of (Q5/Q1) incomeratio (GAP)
    • 8 dummies, includingdecadaldummies
problems
Problems
  • Simultaneitybias- Instrumental variables?
  • Omitted variable bias
  • Heteroskedasticity- heteroskedasticity-robust-estimators
slide9

Monotonicallydeclining

Inverted U, but impreciseestimations

extension of the model
Extension ofthemodel
  • MATURE: shareofpopulationwithagebetween 40-59
  • OPEN: Sachs-Warner index
    • a blackmarket premium of 20 percentormoreforforeignexchange
    • an exportmarketingboardwhichappropriatesmostforeignexchangeearnings
    • a socialisteconomicsystem
    • extensive non-tariffbarriers on importsof intermediate andcapitalgoods.
slide13

M3/GDP is a measureforfinancialdepth (howsophisticatedarefinancialinstitutions in a country, howmanyhaveaccesstothese…)

  • FREEDOM geometric average of two indices, one measuring civil liberties and one measuring political rights
slide15

Alternative measuresforopenness:

  • quantitative andtariffrestrictions on imports,
  • theshareofimports plus exports in GDP
  • Natural levelofopenness:

thelogsofcountrysize, population, per capitaincome, per capitacrudeprovenoilreserves, theaveragedistancefromtradingpartners, andtwodummy variables describing, respectively, whether a countryis an islandorislandlocked

globalization and inequality
GlobalizationandInequality
  • 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
slide17

Alternative demographicmeasures:

  • total fertility rate
  • population growth rate
  • labor-force growth rate
  • the infant mortality rate
  • life expectancy at birth
fertility rate
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
Fixed countryeffects
  • Dummy variable foreverycountry
  • Unbiasedandconsistentundertheassumptionthatunobservedeffectsarecorrelatedwiththeexplanatory variables
  • Loss in efficiency
  • Serial correlation-> LDV
explaining cohort size effect on inequality
Explainingcohortsizeeffect on inequality
  • Threechannels
  • 1) alteredagestructure, leavingage-earningsprofileconstant (+)
  • 2) different agegroupswith different withininequalitylevels (+)
  • 3) age-earningsstructurechanging, different experience premium (-)
simulations i
Simulations - I
  • Threekeysetsofparameters
  • 1) Age profileoflaborproductivityoverthelifecylce
  • 2) Age profileofthevarianceofearningsoverthelifecylce
  • 3) Elasticityofsubstitutionbetween different agegroups
simulations ii
Simulations - II
  • Treatestimatedmeanage-incomeasrepresentingtheage-profile oflaborproductivity
  • Select variousvaluesfortheelasticityofsubstitutionacrossagegroups
  • Evaluateinequalityindexesassociatedwithvarioussteady-statepopulationgrowthrates
simulations iii
Simulations - III
  • Perfectsubstitutability
  • Small effectbychanging mix betweenolderandyoungerworkerscausedby different wage levels (32.5 to 32.1)
  • Larger effectcausedby different variancewithinagegroups (43.1 to 39.7)
  • Takingmean-earningsandvarianceeffectstogether: similareffect
simulations iv
Simulations - IV
  • Imperfect elasticityofsubstitutionnecessaryforcohortsizeeffecttobetrue
  • 3.0 : offsetsfirsttwochannels
  • suggestslowerelasticityofsubstitution
slide26

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.