Economists propose a new way to measure unfair inequality

A new paper in The Review of Economic Studies, published by Oxford University Press, introduces a novel measure of inequality. Under this new measure the United States is rated one of the most unequal places in the West. Only Greece has a higher rating. This is driven especially by longstanding structural inequalities of opportunity. The main driver of inequality across Europe, however, is the impact of the European sovereign debt crisis of 2010.

Beginning in the 1980s, rising income inequality has led to intense debates. Calls for more redistribution are often countered by economists arguing that that some level inequality is necessary to push people to work harder and may simply reflect the natural outcome of a market economy.

The researchers here argue that standard economic measures of inequality are inadequate to inform this discussion. In general, economic justice advocates distinguish between fair (justifiable) and unfair inequality. Under such reasoning inequalities are unfair if they are rooted in factors beyond someone’s control. People are more willing to accept income differences due to effort rather than outside circumstances. It is arguably justified that those working long hours earn more than others who show up for work only occasionally, for instance, but how much of this inequality is fair?

In this paper researchers propose a measure of unfair inequality that reconciles two ideals of economic equity: equality of opportunity and freedom from poverty. This is the first work combining widely-endorsed principles of justice into a joint measure of inequality. Researchers here used the Panel Study of Income Dynamics, a longitudinal survey of American families conducted by the University of Michigan beginning in 1968, to analyze the development of unfair inequality in the United States between 1969 and 2014. They combined this data with the European Union Statistics on Income and Living Conditions to measure unfair inequality in the United States against unfair inequality in 31 European countries.

The results indicate that both total inequality and unfair inequality in the United States more than doubled between 1980 and 2014. The share of unfair inequality increased from 15.2% to 18.9%. This trend was mostly driven by increasing inequality between groups with different socioeconomic backgrounds. Increasing unfairness in the United States results mainly from increased violations of the equality of opportunity principle and decreases in social mobility across generations.

Researchers also compared inequality between the United States and 31 European countries in 2010. In absolute terms, the U.S. has the second highest level of unfair inequality after Greece. Yet, treating the U.S. Southern States as a separate country would result in the highest level of unfair inequality of all countries. Countries with the least unfair inequality are the Nordic countries and the Netherlands. European countries with the highest measure of unfair inequality were Greece, Portugal, Romania, Spain, and Italy, countries that were particularly affected by the European debt crisis.

These findings indicate that in 2010 unfair inequality in the United States had a different structure than in European societies. While unfair inequality in these European countries is driven mostly by violations of the freedom from poverty principle, U.S. unfairness is driven mostly by violations of the equality of opportunity principle.

“We have developed a new measure of unfair inequality based on the concepts of equal opportunity and freedom from poverty,” said the paper’s lead author, Andreas Peichl. “This new benchmark considers that income inequality per se is not necessarily a bad thing. Instead, we propose to analyze the causes of inequality and break them down into fair and unfair components. In this work we consider inequality as unfair if people have unequal opportunities or insufficient resources to make ends meet. We hope that this new measure enables researchers to conduct more normatively guided analyses of inequality in the future and that it will be informative for the policy debate about inequality.”  

The paper, “Measuring Unfair Inequality: Reconciling Equality of Opportunity and Freedom from Poverty,” is available (at midnight on February 22^nd) at: https://academic.oup.com/restud/article-lookup/doi/10.1093/restud/rdab101.

Direct correspondence to: 
Andreas Peichl
University of Munich (LMU)
ifo Institute – Leibniz Institute for Economic Research at the University of Munich e.V.
Poschingerstraße 5
81679 Munich GERMANY 
peichl@econ.lmu.de

To request a copy of the study, please contact:
Daniel Luzer 
daniel.luzer@oup.com