Opportunity-sensitive poverty measurement

Opportunity-sensitive poverty measurement Paolo Brunori*, Francisco H. G. Ferreira†, Maria Ana Lugo‡, Vito Peragine* New Directions in Welfare Economics OCDE Paris, 8 July 2011 * University of Bari † The World Bank and IZA ‡ The World Bank and Oxford University

Plan of the talk • Motivation • Two classes of opportunity-sensitive poverty measures • Partial orderings: opportunity-sensitive poverty dominance • Complete orderings: a specific sub-class of poverty indices • Empirical application: OSP in Brazil • Conclusions

1. Motivation • Poverty analysts have long found it desirable for their toolkit to include measures that are sensitive to inequality among the poor. “Given other things, a pure transfer of income from a person below the poverty line to anyone who is richer must increase the poverty measure” Transfer axiom in Sen (1976, p. 219) Foster, Greer, Thorbecke (1984) combined sensitivity to relative deprivation with sub-group consistency and decomposability.

1. Motivation • But sensitive to which inequality? • Sen (1980): “Equality of What?” – Tanner Lectures • Dworkin (1981): “What is equality? Part 2: Equality of resources” • Cohen (1989): “On the currency of egalitarian justice” • Roemer (1998): “Equality of Opportunity” • Van de Gaer (1993): “Equality of Opportunity and Investment in Human Capital” • Inequality of opportunity is now typically understood as that inequality associated with pre-determined circumstances, over which individuals have no control. • Ex-ante: inequality in the opportunity sets across circumstance-homogeneous groups (between types). • Ex-post: inequality among people exerting the same degree of effort (within tranches).

1. Motivation The value of (outcome) inequality-sensitive poverty measures is to distinguish between poverty in distributions such as B and C.

1. Motivation The value of (opportunity) inequality-sensitive poverty measures would be to distinguish between poverty in distributions such as C and D.

2. Two classes of opportunity-sensitive poverty measures • Notation and set-up: • H individuals indexed by h. • Individuals fully described by a list of circumstances c, belonging to a finite set and a scalar effort level e. • We partition the population into n types , such that • Income is generated by a function , • Each type-specific income distribution is denoted • The societal income distribution is • Poverty: the set of poor individuals in each type is • Key assumption: There is agreement on an ordering of types:

2. Two classes of opportunity-sensitive poverty measures • Axioms: A1: Monotonicity: P is non-increasing in x A2: Focus: For all F, G in D: A3: Anonymity within types: For all F in D, and for all A4: Additivity: There exist functions for all , assumed to be twice differentiable, such that whenever and, M,N and Π are permutation matrices.

2. Two classes of opportunity-sensitive poverty measures A5: Inequality of opportunity aversion (IOA) A6a: Inequality neutrality within types (INW) A6b: Inequality aversion within types (IAW)

2. Two classes of opportunity-sensitive poverty measures • The “strict” class of opportunity-sensitive poverty measures: P0, that satisfy A1-A6a

2. Two classes of opportunity-sensitive poverty measures • The “hybrid” class of opportunity-sensitive poverty measures: POI that satisfies A1-A5 and A6b

3. Partial orderings: opportunity-sensitive poverty dominance • OSPD in the strict class – sequential dominance, from least advantaged to the most advantaged type: Theorem 1: For all distributions F(x), G(x) in D and a poverty line z, if the following conditions are satisfied: - Note that these are sufficient (not necessary) conditions

3. Partial orderings: opportunity-sensitive poverty dominance • OSPD in the hybrid class (POI): Theorem (Jenkins and Lambert, 1993, Chambaz and Maurin, 1998): For all distributions F(x), G(x) in D and a poverty line z, if and only if the following condition is satisfied:

4. Complete orderings: a specific sub-class of poverty indices • There is a potential tension between A5 (IOA) and A6b (IAW). • A sequence of type-progressive transfers may increase inequality within types. • Is the hybrid class an empty set?

4. Complete orderings: a specific sub-class of poverty indices • No. A sub-class of poverty indices, , can be shown to satisfy both IOA and IAW: • Notice that this is obtained from the general class we had earlier, by writing and using the classic FGT formulation for the individual poverty index, and the inverse type rank as the weight wi. • Integer ranks (and normalized gaps below unit) ensure the subsidiarity of IAW to IOA.

4. Complete orderings: a specific sub-class of poverty indices • For α ≤ 1, • I.e. They satisfy INW, rather than IAW. • Hi has a natural interpretation as the degree of effort required for escaping poverty by those born in type i.

5. Empirical application: OSP in Brazil • As an example, we investigated trends in income and opportunity-sensitive poverty in Brazil, 2001-2008. • Monthly per capita household income in reais. • Spatially price-deflated poverty lines from Barros et al. (2011) - SEDLAC • Circumstances: • Region of Birth: N, NE, CW, S, SE • Race: White & Asian; Black & Mixed-Race; Indigenous • 15 types, ranked by their current headcount poverty.

5. Empirical application: OSP in Brazil • Both income poverty and OSP decline sharply over the period, but they are not perfectly correlated:

5. Empirical application: OSP in Brazil • Income FGTs and OS-FGTs diverge primarily when types are re-ranked. • This picture is therefore quite sensitive to the specific partition of types.

6. Conclusions • It has often be judged important to have poverty measures that are sensitive to inequality among the poor. • Many now feel that inequality in the space of opportunities is at least as important as inequality in outcomes. • This paper proposed two classes of opportunity-sensitive poverty measures • Depending on whether one wished to impose strict neutrality to inequality within types, or to allow for some aversion. • Dominance conditions were derived. • An FGT inspired sub-class of OSP was derived, and shown to resolve the tension between aversion to inequality of opportunity and to outcome inequality in a particular (desirable?) manner. • Using a 15-type example from Brazil, we illustrate that opportunity-sensitive poverty and income poverty are clearly, but imperfectly, correlated. • They contain different information about the evolution of deprivation.

6. Future work • Broader class of poverty measures • Empirical: test dominance conditions • Alternative data with more circumstances

Opportunity-sensitive poverty measurement