Inequality: The Important Role of Family and Inheritance

From the NBER (abstract):

Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth
Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi

Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

Translation: It's nurture, not nature. If that's the case, meritocracy (in an aggregate sense) without some government intervention would be a sub-optimal growth and development strategy, even in a relatively equal society.

Technical Notes

Black, Sandra E., and Paul J. Devereux, Petter Lundborg, & Kaveh Majlesi, "Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth", NBER Working Paper No. 21409, July 2015

Wages and The CE/GDP Ratio

I’ve come across the same dilemma myself, but a box article in BNM’s 2014 Annual Report outlines the latest data (excerpt; emphasis added):

Trends in Malaysia’s Gross Domestic Product by Income

…In terms of share, capital income forms the largest component of GDPI (Chart 3). However, with the growth of labour income outpacing the growth of capital income, the share of labour income to GDP has risen steadily from 29.5% in 2005 to 33.6% in 2013. By definition, however, the labour income component in GDPI excludes income earned by self-employed individuals…With such adjustments, the share of labour income for Malaysia is higher, on average, by 8.0 ppt. throughout the period (Chart 4)….

Malaysia Human Development Report 2013 [UPDATED]

I attended the launch yesterday, which included commentary by the authors, led by YBhg Tan Sri Kamal Salih, and a very lengthy panel discussion.

You can download the full copy here.

This has been a looong time coming as publication was held up for a year. though I’m not a liberty for revealing why. In any case, if you want the very short version, this video explains everything in 2 minutes and 34 seconds:

UPDATE:

Due to bandwidth limitations (too many people have tried to download the report), the MHDR site has been overwhelmed. You can try this alternative link instead to download the report. Warning: it’s a massive 66MB file, so the download could take a while.

Labour Bargaining And Wages

If you had a choice between two jobs with equal compensation, but one has higher bonuses and allowances but the other has higher base pay, which should you choose?

Take the one with higher basic salary (excerpt):

The intercept is negotiable, the slope is fixed

A new hire only gets one chance to negotiate: a brief window between the time that an offer is made and the time when that offer is accepted. Those initial terms and conditions determine the employee's salary for years to come - possibly the entire the duration of his or her time at the institution.

Ethnicity and Inequality

I imagine people can interpret this in any number of ways, but its interesting research nonetheless (excerpt; emphasis added):

Ethnic inequality
Alberto Alesina, Stelios Michalopoulos, Elias Papaioannou

A large body of research has shown ethnic diversity to have a negative impact on development. This column suggests that it is the unequal concentration of wealth across ethnic lines that is detrimental for development rather than diversity per se. It shows that ethnic inequality, measured using ethno-linguistic maps and satellite images of light density at night, is associated with lower GDP per capita, worse living conditions, and lower levels of education…

Global Inequality: By The Numbers

This is an old blog post from the World Bank – I’m catching up on my reading – but still very relevant. Branko Milanovic is an acknowledged expert on global inequality (his “The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality” is a great, non-technical introduction to the subject), and this post takes a fresh look at the issue (excerpt):

The Real Winners and Losers of Globalization

It is generally thought that two groups are the big winners of the past two decades of globalization: the very rich, and the middle classes of emerging market economies…

…However, thanks to a database of household surveys put together recently by the World Bank, we can actually find out for the first time, from a single and consistent data source, who the real winners and losers of globalization are. The results give us a much more finely grained picture of the effects of the two recent decades of globalization…

The Economist On Inequality

The bastion of free market thinking tackles inequality (excerpt):

Inequality and the world economy
True Progressivism

A new form of radical centrist politics is needed to tackle inequality without hurting economic growth

BY THE end of the 19th century, the first age of globalisation and a spate of new inventions had transformed the world economy. But the “Gilded Age” was also a famously unequal one, with America’s robber barons and Europe’s “Downton Abbey” classes amassing huge wealth: the concept of “conspicuous consumption” dates back to 1899.

Occupy Wall Street: Mark Thoma Boils It Down

He’s actually commenting on Robert Reich’s commentary (a comm-commentary?), but I thought Prof Thoma’s remarks far more astute:

Reich: The Wall Street Occupiers and the Democratic Party

…Nothing will change until the interests of the powerful are threatened -- they won't give in until populist demands are the lesser of two evils. In the aftermath of the Great Depression, the fear that capitalism would be replaced by something much worse for business contributed to the acquiescence of the powerful to reform that stripped away some of their power and benefited the working class. But what threats do the powerful face now that would cause them to embrace reform as better than the alternative? Is there anything that makes reversing growing inequality, reducing the political power of the wealthy, and changing the view that the system is rigged in favor of the few the best political choice for those who have the most political influence? So far, I don't think there is -- we see pictures on the news of people on Wall Street sipping champagne and enjoying the show with no signs they feel threatened rather than amused -- and there is little sign so far that Democrats believe their reelection chances hinge on embracing this movement...

To Gini Or Not To Gini

Funny how the subject keeps popping up. First the IMF, then this lovely history lesson from Prof Frances Wooley (excerpt):

Why the Gini?

Stephen Gordon recently posted an excellent analysis of trends in income inequality in Canada and elsewhere. Stephen, like almost all of the other authors cited in his post and the subsequent discussion, measured inequality using the Gini coefficient.

The very next day, I saw a paper by Francesca Greselin arguing that the Gini is inferior to the new Zenga inequality index and should be replaced.

Talk about deja vu all over again. Various limitations of the Gini inequality index have been known for years. Tony Atkinson described some and proposed an alternative to back in 1970; other indices for measuring inequality are the Theil index, and the Hoover index. Greselin and co-authors set out new arguments, and make a convincing case for replacing the Gini. But I don't expect to see the Zenga index in wide use any time soon.

We keep on using the Gini because that's the way people have always done it. But why did people even start using the Gini in the first place?...

Income Inequality in Malaysia

This is more of a first stab at the subject, as I haven’t had time to really play with the data yet. So there won’t be much in the way of analysis beyond eyeballing the charts. The source of the data is from the Economic Planning Unit, and appears to be aggregated from various Household Income Surveys (HIS).

Here’s the time series for Malaysia’s Gini Coefficient:

The IMF Talks Inequality

The September 2011 issue of the IMF’s Finance and Development magazine takes a look at global income inequality (from the Editorial; link to the table of contents at the end of this post):

Haves and Have Less

WE used to think that overall economic growth would pull everyone up. While the rich might be getting richer, everyone would benefit and would see higher living standards. That was the unspoken bargain of the market system.

But now research is showing that, in many countries, inequality is on the rise and the gap between the rich and the poor is widening, particularly over the past quarter-century.

With taxpayers forced to pay for troubles in the financial industry in advanced economies during the global economic crisis, this discrepancy seems particularly galling to wage-earners who have seen their pay stagnate or worse. Inequality has started to attract more research by economists.

This issue of Finance & Development looks at income inequality around the world and how it matters.