Measuring Inequality
In most of the tasks about inequality that you might encounter, the data on income or wealth is given and is not questioned. In reality, however, the estimates of these numbers can be biased, and these biases can make an unjustified impression about whether inequality is high or low. Unjustified impressions, in their turn, may lead to unreasonable policy-making. In this task, we will discuss what these biases might be and where they can come from.
(a) (10 rp) Ann uses the administrative (tax) microdata to estimate the income inequality in country N. In particular, she takes the amounts of income tax paid by all households per year, calculates incomes dividing tax payments by the tax rates and gets the Gini coefficient based on this income distribution. Bob argues that due to this approach, Anna is likely to overlook a substantial part of the real income distribution. What part is it? Does this bias lead to overestimating or underestimating the extent of income inequality?
Ответ
People who don't earn taxable income do not pay taxes and don't show up in the tax data. They are generally near the left edge of the income distribution (retirees, people on welfare, etc.), also people working in a shadow economy. Because they are close to the edge, their overlooking will underestimate inequality
(b) (10 rp) Bob uses the surveys data to estimate the income inequality in country N. In particular, he refers to the statistics obtained by a sociological service that regularly asks people about their households' consumption spending (income surveys are also available, but Bob doesn't trust how households report their incomes). Ann argues that Bob's results are biased, too. Why is that? Does this bias lead to overestimating or underestimating the extent of income inequality?
Ответ
Very rich people are unlikely to participate in surveys (answer the questions in the street, pick up the randomly dialed phone, etc.), so this approach will overlook the right edge. Moreover, the more people earn, the less percentage of income they spend (they save more), so even if there was a chance to ask all of them, income inequality would be underestimated.
(c) (10 rp) Carol believes that over time, top 1 percent of incomes in country N are rising more quickly than average incomes. To verify this belief, she has taken Ann's and Bob's estimates at different times. It turned out that one of them does not contradict the belief, but the other one does. Explain which one is which and why it is so.
Ответ
If more income goes to the top of the distribution, this won't be seen in surveys (because they overlook the rich) but will be seen in tax data (because the rich pay taxes).