The Public Economics of Inequality

Our research will focus on new data opportunities and methodological advances to go beyond the measurement of income and wealth inequality and provide a more comprehensive account of the distribution of welfare.

This research theme will run from October 2021 to September 2024 and is led by Professor Johannes Spinnewijn.

This new research theme - “The Public Economics of Inequality” - aims to bring the classic approach in Public Economics and its most recent advances to the study of inequality. This approach will be tested and embedded in the interdisciplinary environment that the III provides. The research theme will be organised around three central themes in Public Economics.

The first theme is the measurement of the relevant dimensions of inequality, following the spirit of the late Sir Tony Atkinson. Our research will focus on new data opportunities and methodological advances to go beyond the measurement of income and wealth inequality and provide a more comprehensive account of the distribution of welfare. This includes the measurement of consumption, un-reported income and wealth, and health outcomes and wellbeing.

The second theme is to provide a better understanding of the mechanisms underlying inequality. Starting from the measurement of different dimensions of inequality, we hope to uncover the underlying mechanisms, ranging from economic forces to behavioural biases, and from gender frictions to intrahousehold insurance.

The final theme is to support the design of policy to tackle inequality more effectively. This research theme 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. 

This theme draws together the expertise of LSE academics from different Departments and will be promoted by the Public Economics group at STICERD in the Department of Economics. The theme will support research collaborations as well as knowledge exchange activities. In addition to public lectures, we will organise informal research seminars to discuss the recent work or work-in-progress of the theme members. 

Read more about the 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 theme 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 theme 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.

Theme members

LSE-based scholars:

  • Oriana Bandiera – Professor, Dept of Economics
  • Tim Besley – Professor, Dept of Economics
  • Frank Cowell – Professor, Dept of Economics
  • Francisco Ferreira – Professor, III
  • Daniel Gottlieb – Professor, Dept of Management
  • Xavier Jaravel – Associate Professor, Dept of Economics
  • Stephen Jenkins – Professor, Social Policy
  • Benjamin Moll – Professor, Dept of Economics
  • Joana Naritomi – Assistant Professor, International Development
  • Camille Landais – Professor, Dept of Economics
  • Daniel Reck – Assistant Professor, Dept of Economics
  • Johannes Spinnewijn (Theme Convenor) – Professor, Dept of Economics
  • Andy Summers – Associate Professor, Dept of Law
  • Sandra Sequeira - Associate Professor, Dept of International Development 
  • Kristof Madarasz - Associate Professor, Dept of Management

External Visitor:

  • Francois Gerard – Assistant Professor, Queen Mary

Events

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

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

      Hosted by the International Inequalities Institute

      . 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.

      Watch the video 

      Listen to the podcast 

      Read the slides

    • 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 theme 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. The first seminar is on 9 November 2021.

Relevant Recent and Ongoing Work

  • Philippe Aghion, Celine Antonin, Simon Bunel and Xavier Jaravel (2020), “What are the Labor and Product Market Effects of Automation? New Evidence from France”, Working Paper.
  • Alex Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova and John Van Reenen (2019) “Who   Becomes an Inventor in America? The Importance of Exposure to Innovation, Quarterly Journal of Economics
  • Guenter Beck and Xavier Jaravel (2020), “Prices and Global Inequality: New Evidence from Worldwide Scanner Data, Working Paper 
  • David Bounie, Youssouf Camara, Etienne Fize, John Galbraith, Camille Landais, Chloe Lavest, Tatiana Pazem and Baptiste Savatier (2020) «  Consumption Dynamics in the COVID Crisis: Real Time Insights from French Data  » (working paper)
  • Kirill Borusyak and Xavier Jaravel (2019), “The Distributional Effects of Trade: Theory and Evidence from the U.S.”, Working Paper
  • Chris Clayton, Xavier Jaravel and Andreas SchaabMonetary Policy and Inequality”, Working Paper. 
  • André Decoster, Thomas Minten and Johannes Spinnewijn: "The Income Gradient in Mortality during the Covid-19 Crisis: Evidence from Belgium", Forthcoming in the Journal of Economic Inequality The paper is here: https://link.springer.com/article/10.1007/s10888-021-09505-7
  • Giulia Giupponi and Camille Landais (2020) “Subsidizing Labor Hoarding in Recessions: The Employment & Welfare Effects of Short Time Work”, Working Paper
  • John Guyton, Patrick Langetieg, Daniel Reck, Max Risch, and Gabriel Zucman (2021) “"Tax Evasion at the Top of the Income Distribution: Theory and Evidence", Working Paper 
  • Ben Handel, Jonathan Kolstad, Thomas Minten and Johannes Spinnewijn (2020): “The Social Determinants of Choice Quality: Evidence from Health Insurance in the Netherlands”, NBER working paper
  • Nathan Hendren, Camille Landais, and Johannes Spinnewijn (2020): “Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design”, forthcoming Annual Review of Economics
  • Xavier Jaravel (2019) “The Unequal Gains from Product Innovations: Evidence from the U.S. Retail Sector”, Quarterly Journal of Economics
  • Xavier Jaravel (2021) “Inflation Inequality : Measurement, Causes, and Policy Implications”, Forthcoming Annual Review of Economics
  • Xavier Jaravel and Alan Olivi (2021), “Optimal Taxation and Demand-Led Productivity”, Working Paper
  • Xavier Jaravel and Erick Sager (2020)What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models, Working Paper
  • Niels Johannesen, Patrick Langetieg, Daniel Reck, Max Risch, Joel Slemrod (2020) “Taxing Hidden Wealth: The Consequences of US Enforcement Initiatives on Evasive Foreign Wealth” American Economic Journal: Economic Policy 12: 312-346.
  • Arash Nekoei, Peter Nilsson, David Seim, Camille Landais and Johannes Spinnewijn (2020), “Risk-based Selection in Unemployment Insurance: Evidence and Implications”, forthcoming American Economic Review
  • Henrik Kleven,  Camille Landais, Johanna Posch, Andreas Steinhauer & Josef Zweimuller (2020) Do Family Policies Reduce Gender Inequality? Evidence from 60 Years of Policy Experimentation (working paper)
  • Jonas Kolsrud, Camille Landais and Johannes Spinnewijn (2020) "The Value of Registry Data for Consumption Analysis: An Application to Health Shocks" Journal of Public Economics 189, 1040-1088.
  • Jonas Kolsrud, Camille Landais, Daniel Reck and Johannes Spinnewijn (2021) "Retirement, Consumption and Pension Design", working paper
  • Camille Landais and Johannes Spinnewijn (2020): "The Value of Unemployment Insurance", forthcoming in Review of Economic Studies