Public Economics of Inequality

Measurement

Following the spirit of the late Sir Tony Atkinson, researchers around the world have been collaborating to leverage administrative registers to document trends and patterns in inequality. This tremendous effort at improving the measurement of inequality, led by prominent public finance economists like Thomas Piketty and Emmanuel Saez, has been central to putting back inequality at the centre of the academic, public and policy debates. 

While most progress has been made on income inequality (e.g., Atkinson & Piketty 2007, 2010), the rigorous analysis of wealth inequality has followed suit (e.g., Saez & Zucman 2014). However, income and wealth separately provide only a partial picture of the disparity that exists between households. 

Our research uses original data and methods to go beyond the measurement of income and wealth and provide a more comprehensive account of the distribution of welfare. To evaluate how differences in income and wealth come together and translate into consumption opportunities, we can shift attention to consumption expenditures and prices individuals face using new data resources. Standard measures of income and wealth inequality do not account for evasive income and wealth, which can be overcome by data from audits and tax enforcement programs. Going beyond the narrow economic measures, administrative registers allow us to further improve our distributional welfare analysis by accounting for inequality in health, education and the provision of local public goods and infrastructure.

In the coming cycle, we would focus attention on: 

1. Consumption measures: (i) the use of differences in consumption across retired workers to evaluate the social costs and benefits of pension reforms, (ii) the use of marginal propensities to consume to understand the social value of transfers, and in particular, the optimal design of stimulus policies following the Covid crisis.

2. Inflation inequality: (i) develop new price indices when consumer preferences change with income; (ii) leverage “big data” to provide policymakers with a comprehensive picture of inflation inequality by (a) gathering an international database of credit card data allowing to compute inflation inequality in twenty countries, (b) collecting micro price and expenditure datasets covering all important sectors in the United States, (c) using machine learning techniques to run new hedonic regressions for services, and (d) estimating a new housing inflation index to address existing biases. These new datasets and techniques will be shared with the scientific community via a project website to maximize impact.

3. Tax avoidance and tax evasion: (i) better understand the macro extent of tax avoidance and tax evasion at the top of the income and wealth distributions, (ii) use this understanding to construct improved measures of inequality that account more comprehensively for tax avoidance and tax evasion (iii) estimate the distribution of tax gaps by position in the income distribution in a manner compatible with Distributional National Accounts.

4. Health Inequality: to broaden the evidence base to revisit the socio-economic inequality in health outcomes by constructing the most comprehensive data sets to date in the Netherlands and Sweden, linking long panels of individual health and income records with detailed information from other administrative registers and surveys

Mechanisms

A large literature has documented patterns and trends in income and wealth inequality. But where is this inequality coming from? From heterogeneity in endowments and earning abilities, in preference and tastes, or in cognitive abilities? From the heterogeneous and diverse constraints that individuals face in their environment or in the family? Or is the heterogeneity due to the diverse shocks in income, capital returns and expenditures that individuals experience over their lifetime? We will also examine the role of general equilibrium effects in generating inequality. The research conducted in our programme focuses on uncovering these mechanisms.

In the coming cycle, we would focus attention on:

1. The drivers of productivity and innovation, and the two-way relationship between inequality and growth. In particular, we will assess whether promoting social mobility among innovation leaders (inventors, entrepreneurs, venture capitalists, etc.) could serve as a new engine of inclusive growth. This project will use micro data to examine whether innovators’ social backgrounds and peer groups have a causal impact on the direction of innovation and on the distribution of the gains from innovation across consumer groups.

2. The effect of trade on inequality, by structurally estimating the distributional effects of trade in a general equilibrium trade model accounting for the fact that workers of different skill levels work and consume in different industries. The approach will highlight the rich interactions between demand patterns and their impacts on labor markets.

3. The effects of monetary policy on inequality, in particular studying how heterogeneity in price rigidities translates into unequal effects from monetary policy (through general equilibrium effects affecting both employment and consumer prices).

4. The drivers of gender inequality, and in particular the role played by gender norms related to child care. For this, we will develop new historical measures of gender norms using recent advances in natural language processing methods applied to rich textual data from newspapers archives. 

5. To uncover different mechanisms and mediators underlying health inequality, using frontier empirical methods to separate the differential impact and incidence of health shocks across socio-economic groups. We will also explore the role of barriers to health choices to explain inequality in health outcomes. 

6. The role of family structure in generating inequality, and in particular the role played by family size and assortative mating in the short term and in long-run inequality. This would be compared to the short- and long-run effect of historical changes in inheritance rules. The analysis would be applied in the first instance to China with a focus on the impact of changes in the one-child policy.

Policy Design

Better measurement of inequality, and a better understanding of the mechanisms driving it, are vital to design policies to allow for a fairer allocation of welfare and opportunities.

These policies include for instance taxes and transfers to redistribute income and wealth, social insurance to insure against risk or adversity such as unemployment, disability or old-age, family policies, monetary policies, etc.

The design of these policies relies on balancing complex trade-offs. Redistribution and insurance for instance tends to attenuate incentives, introducing an equity-efficiency trade-off that limits the ability to provide social protection. This research programme builds on a rich tradition in public economics to develop general frameworks and common methodologies, tightly integrating theory and empirics, intended to inform and improve policy design. 

In the coming cycle, we would focus attention on:

1. Developing new generations of social insurance models to guide the design of retirement pension policies, or labor market policies to insure workers against various shocks in the labor market.

2. Developing a new generation of optimal tax models, accounting for general equilibrium effects of taxes on the rate and direction of innovation, as well as on a countries’ competitiveness in internationally traded markets.

3. Extending theories of optimal redistributive taxation to study optimal tax enforcement on wealthy households.

The hallmark of our approach is to: (i) express the trade-offs in terms of simple statistics that can be identified empirically and (ii) carefully estimate these statistics with high-quality data to (iii) provide robust, evidence-led policy recommendations. In the empirical implementation, we bring several innovations: First, we provide new evidence on behavioral distortions from policies along dimensions that have been under-explored (migration, savings and capital accumulation, innovation, evasion, etc). Second, we provide direct empirical evidence on the benefit side of the trade-offs, such as the value of providing insurance or redistribution, using new methodologies that account for all the resources that households have available.

Professor Johannes Spinnewijn, Public Economics of Inequality Research Programme Leader, LSE III and Professor, Department of Economics, LSE.

Professor Oriana Bandiera, Faculty Associate, LSE III and Professor of Economics and Sir Anthony Atkinson Chair in Economics, Department of Economics, LSE.

Professor Tim Besley, Faculty Associate, LSE III and School Professor of Economics and Political Science, Department of Economics, LSE.

Professor Frank Cowell, Faculty Associate, LSE III and Professor of Economics, and MSc Economics (2nd year)Programme Director, Department of Economics, LSE.

Professor Francisco H. G. Ferreira, Amartya Sen Professor of Inequality Studies and Director of LSE III.

Dr François Gerard, Assistant Professor, Queen Mary University of London

Professor Daniel Gottlieb, Professor of Managerial Economics and Strategy, Department of Management, LSE.

Dr Xavier Jaravel, Faculty Associate, LSE III and Associate Professor of Economics, Department of Economics, LSE.

Professor Stephen Jenkins, Faculty Associate, LSE III and Professor of Economic and Social Policy, Department of Social Policy, LSE.

Professor Camille Landais, Faculty Associate, LSE III and Professor of Economics, Department of Economics, LSE.

Dr Kristóf Madarász, Associate Professor in Managerial Economics and Strategy, Department of Management, LSE.

Professor Ben Moll, Professor of Economics, Department of Economics, LSE.

Dr Joana Naritomi, Faculty Associate, LSE III and Assistant Professor, Department of International Development, LSE.

Dr Daniel Reck, Assistant Professor of Economics, Department of Economics, LSE.

Dr Sandra Sequeira, Associate Professor in Development Economics, Department of International Development, LSE.

Dr Kate Smith, Assistant Professor of Economics, Department of Economics, LSE.

Dr Andy Summers, Faculty Associate, LSE III and Associate Professor, Department of Law, LSE

• Danesh, Kaveh, Kolstad, Jon, Parker, Will and Spinnewijn, Johannes (2023) The Chronic Condition Index: analyzing health inequalities over the lifecycle. In progress.
• Jaravel, Xavier and Lashkari, Danial (2023) Measuring Growth in Consumer Welfare with Income-Dependent Preferences: nonparametric methods and estimates for the U.S., accepted Quarterly Journal of Economics.
• Kleven, Henrik, Landais, Camille, Posch, Johanna, Steinhauer, Andreas and Zweimuller, Josef (2023) Do Family Policies Reduce Gender Inequality? Evidence from 60 years of policy experimentation, forthcoming at AEJ: Policy.
• Kolsrud, Jonas and Spinnewijn, Johannes (2023) The Value and Limits of Unemployment Insurance, prepared for the LSE Public Policy Review.
• Kolsrud, Jonas, Landais, Camille, Reck, Daniel and Spinnewijn, Johannes (2023) Retirement Consumption and Pension Design, forthcoming American Economic Review.
• Levell, Peter, O’Connell, Martin and Smith, Kate (2023) Targeting Household Support During Price Shocks: distributional effects and policy design, Work in Progress.
• Mueller, Andreas I and Spinnewijn, Johannes (2023) The Nature of Long-Term Unemployment: predictability, heterogeneity and selection (No. w30979). National Bureau of Economic Research.
• Aghion, Philippe, Antonin, Celine, Bunel, Simon and Jaravel, Xavier (2023) The Local Labor Market Effects of Modern Manufacturing Capital: Evidence from France, American Economic Review: Papers and Proceedings 
• Borusyak, Kirill and Jaravel, Xavier (2023) Are Trade Wars Class Wars? The Importance of Trade-Induced Horizontal Inequality, revise and resubmit Journal of International Economics 
• Bourguignon, François, et Landais, Camille (2022) Micro-simuler l’impact des politiques publiques sur les ménages: pourquoi, comment et lesquelles?, Notes du conseil d’analyse économique 74, (5), pp. 1-12. 
• Danesh, Kaveh, Kolstad, Jon, Parker, Will and Spinnewijn, Johannes (2023) The Chronic Condition Index: AnalyzingHealth Inequalities Over the Lifecycle", in progress 
• Dray, Sacha, Landais, Camille & Stantcheva, Stefanie (2023) Wealth and Property Taxation in the United States, R&R at the Quarterly Journal of Economics 
• Einio, Elias, Feng, Josh and Jaravel, Xavier (2023) Social Push and the Direction of Innovation, under review 
• Fize, Etienne, Grimprel, Nicolas and Landais, Camille (2022) Can Inheritance Taxation Promote Equality of Opportunities?, LSE Public Policy Review, 2(4), p.9. 
• Jaravel, Xavier and Lashkari, Danial (2023) Measuring Growth in Consumer Welfare with Income-Dependent Preferences: Nonparametric Methods and Estimates for the U.S., accepted Quarterly Journal of Economics 
• Kleven, Henrik, Landais, Camille, Posch, Johanna, Steinhauer, Andreas & Zweimuller, Josef (2023) Do Family Policies Reduce Gender Inequality? Evidence from 60 Years of Policy Experimentation, forthcoming at AEJ: Policy 
• Kolsrud, Jonas and Spinnewijn, Johannes (2023) The Value and Limits of Unemployment Insurance, prepared for the LSE Public Policy Review 
• Kolsrud, Jonas, Landais, Camille, Reck, Daniel and Spinnewijn, Johannes (2023) Retirement Consumption & Pension Design, forthcoming American Economic Review 
• Levell, Peter, O’Connell, Martin and Smith, Kate (2023) Targeting household support during price shocks: Distributional effects and policy design, Work in Progress
• Mueller, Andreas I. and Spinnewijn, Johannes (2023) The Nature of Long-Term Unemployment: Predictability, Heterogeneity and Selection (No. w30979). National Bureau of Economic Research 

Deadwood Labor: The Effects of Eliminating Employment Protection

Work-in-progress Seminar Series

Tuesday 7 November 2023. 5.00pm. Online and in-person event. LSE Sir Arthur Lewis Building (SAL), Room 3.05. 

Speaker: David Seim, Stockholm University 

Discussants: Ben Schoefer, University of California, Berkeley; and Emmanuel Saez, University of California, Berkeley

We study the role of employment protection legislation (EPL) in boosting employment among older workers. Our analysis juxtaposes the quantitative employment gains with the qualitative “deadwood labor” problem that such gains entail. We do so by conducting a comprehensive analysis of the sharp and complete elimination of EPL that occurs at age 67 in Sweden, as well as reform-driven shifts in this cutoff. First, focusing on direct separation effects, we find that 8% of jobs separate in response to the elimination of EPL. Effects stem from jobs with stronger initial EPL (long-tenure, firms subject to “last in, first out” rules), and those in the public sector. Separations appear involuntary to workers, with firms targeting plausibly unproductive (sick) workers. Second, we focus on effects of continuing jobs. While wages appear rigid to EPL, we uncover novel, sizable intensive- margin hours reductions among continuing jobs, and an 8% drop in earnings conditional on staying on the job. Third, we estimate total equilibrium effects at the cohort level, where separations fully pass through into employment to population rate effects, with no offsetting effect from hiring. On a per-capita basis, total earnings of older workers drop by 21.5%. We validate these local effects by leveraging a reform-driven shift in the age cutoff from 67 to 68. Overall, our study reveals that EPL can provide a boost to the length of the working life by extending the duration and quality of last jobs to older workers’ benefit—in a form of redistribution from firms to workers.

Job Displacement Insurance in Developing Countries 

Work-in-progress Seminar Series

Tuesday 28 November 2023. 5.00pm. Online and in-person event. LSE Sir Arthur Lewis Building (SAL), Room 3.05. 

Speaker: Joana Naritomi, LSE, International Development, SPP

Discussants: Francois Gerard, Queen Mary, University of London; and Gustavo Gonzaga, Pontifical Catholic University of Rio de Janeiro

Abstract: The vast majority of the world population lives and works in developing countries, where the risk of job loss is substantial, and the proportion of social insurance spending relative to GDP is comparatively lower than in high-income countries.  Nonetheless, Job Displacement Insurance (JDI) policies are becoming prevalent and emerging as an important element of social protection in the developing world. JDI comprises government-mandated or provided programs designed to offer financial assistance to workers following job loss. This chapter discusses the main policy types targeting these workers and how the context of developing countries influences coverage and policy design. Specifically, we explore how the conventional trade-off between incentives and insurance is impacted by the prevalence of informality, a key characteristic of these labor markets. Additionally, the chapter discusses gaps in the literature and avenues for future research.

CEPR Public Economics Annual Symposium 2023

STICERD Public Events and Lectures

Wednesday 14 June 2023 - Friday 16 June 2023. Online and in-person public event.

Keynote speaker: Joel Slemrod, Michigan University

Speakers: Fatih Guvenen, Magne Mogstad, Clara Martinez-Toledano, Florian Scheuer, Luigi Pistaferri,  Ludwig Straub, Owen Zidar and Eric Zwick.  

Evaluating Allocations of Opportunities

Part of the III Inequalities Seminar Series

Tuesday 4 October 12.30pm to 1.30pm. Online and in-person public event. LSE Centre Building, Room 2.05.

Speaker:
Dr Francesco Andreoli, Associate Professor of Economic Policy, University of Verona

Chair:
Professor Johannes Spinnewijn, Public Economics of Inequality Research Programme Leader, LSE III and Professor of Economics, LSE

This event will provide a robust criterion for comparing lists of probability distributions - interpreted as allocations of opportunities - faced by different social groups. Borrowing from decision making under objective ambiguity, we argue in favour of comparing those collections of probability distributions on the basis of a uniform - among groups - valuation of the expected utility associated to these distributions. We identify an empirically implementable criterion for comparing these lists of probability distributions - conic extension of Zonotope inclusion - that is agreed upon by all conceivable such valuations that exhibit aversion toward inequality of opportunities. We illustrate our criterion by evaluating allocations of educational opportunities among castes and genders in different Indian states.

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Social capital and economic mobility

STICERD Morishima Lecture

Wednesday 31 May 2023 18:30 - 20:00. Online and in-person public event. 

Speaker: Raj Chetty, William A. Ackman Professor of Economics at Harvard University and the Director of Opportunity Insight

Chair: Camille Landais, Professor of Economics at the Department of Economics and an associate of LSE's International Inequalities Institute. 

How can we give children from low-income families better chances of rising up out of poverty?  This talk will discuss recent research using data on billions of friendships from Facebook that identifies economic connectedness -- the degree of social interaction between low- and high-income people -- as a key predictor of economic mobility.  It will then discuss what factors determine the degree of interaction across class lines and policy implications to increase the forms of social capital most relevant for upward income mobility.

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New Data and New Dimensions of Inequality: launch of the public economics of inequality

Hosted by the International Inequalities Institute

Wednesday 27 October, 4:00-5:30pm. Online public event. 

Speakers: Dr Xavier Jaravel (Department of Economics, LSE), Professor Camille Landais (Department of Economics, LSE), Dr Daniel Reck (Department of Economics, LSE) and Professor Johannes Spinnewijn (Department of Economics, LSE)

Chair: Professor Francisco Ferreira (Amartya Sen Professor of Inequality Studies and LSE III Director)

In this inaugural lecture the speakers illustrated how big data from administrative registers allows to go beyond standard measurement of inequality. The discussed topics include gender inequality, the contribution of tax evasion and price inflation to inequality in wealth and consumption, and inequality in health outcomes.

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Listen to the podcast 

Read the slides

In addition to public lectures, we will organise informal research seminars to discuss the recent work or work-in-progress of the programme members. 

We organise a research seminar series jointly with the Institute for Fiscal Studies. For more information see: https://www.lse.ac.uk/economics/events-and-seminars/ifssticerd-public-economics-seminar-series

We organise informal research seminars to discuss the recent work or work-in-progress of the programme members. This seminar takes place every month on a Tuesday between 5.00pm and 6.00pm. If you would like to attend, please subscribe to the Public Economics of Inequality seminar.