Inequality: Tools from the Old Masters to Help Today’s Policymakers
IMF Blog, October 3, 2017
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- Inequality: Tools from the Old Masters to Help Today’s Policymakers
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Bibliographic details
- Authors: Vitor Gaspar, Paolo Mauro, Tigran Poghosyan
- Published: October 3, 2017
Overview
- Authors: Vitor Gaspar, Paolo Mauro, Tigran Poghosyan
- Publication date: October 3, 2017
- Core message: Tools developed by economists such as Arthur Pigou and Anthony Atkinson combine a country’s total income and its distribution into single measures of economic welfare; these tools are well known in academia but underutilized in policymaking and can help weigh equity and efficiency when designing fiscal policy.
Measurement approach: Atkinson’s welfare measure
- Atkinson’s measure expresses welfare in a country’s currency and combines total income and income distribution into one summary metric.
- The measure involves explicitly weighing equity and efficiency trade-offs determined by policy choices and by the observer’s degree of aversion to inequality.
- Illustrative two-person example (used to explain the concept):
- Rich individual income: $250,000 a year
- Poor individual income: $10,000 a year
- Total income: $260,000
- Equalized income alternative (from the perspective of an external observer who strongly dislikes inequality): $20,000 for each person
- Efficiency loss tolerated to attain equality in that example: $220,000
- From that observer’s perspective, $20,000 is the summary measure of welfare for that two-person society.
- Analytical procedure used in the paper:
- The authors compute Atkinson welfare for all countries, repeating the exercise for different degrees of aversion to inequality.
- When comparing countries, the same degree of aversion to inequality is applied to all countries so they are evaluated using a common standard.
- The paper’s figure positions countries by mean income (horizontal axis) and Atkinson welfare (vertical axis); the distance below a dotted line captures the effect of inequality on welfare for each country.
- The figure can be viewed for different aversions to inequality; the first screen shows results for a high aversion to inequality and readers can view results for a lower aversion by selecting other tabs.
Key empirical findings and cross-country comparisons
- General pattern:
- Richer countries tend to enjoy greater Atkinson welfare, but inequality materially affects welfare rankings.
- For a given level of income, Atkinson’s welfare is lower the more the external observer dislikes inequality.
- Specific comparisons highlighted:
- South Africa vs Kyrgyz Republic and Albania:
- South Africa’s mean income is more than double that of the Kyrgyz Republic, and substantially above that of Albania.
- However, inequality is higher in South Africa.
- A highly inequality-averse external observer would judge welfare to be significantly higher in the Kyrgyz Republic and Albania than in South Africa.
- United States vs Sweden and the United Kingdom:
- Mean incomes are higher in the United States than in Sweden or the United Kingdom.
- Inequality is higher in the United States.
- Thus, a highly inequality-averse observer would consider welfare to be higher in Sweden and the United Kingdom than in the United States.
Policy implications and recommendations
- Policymakers should use combined measures of income and distribution (such as Atkinson’s measure) to assess the welfare impact of fiscal policy, explicitly accounting for equity–efficiency trade-offs.
- Applying a common degree of aversion to inequality across countries allows consistent cross-country welfare comparisons and better-informed policy choices.
- Tools that express welfare in currency units (like Atkinson’s) make trade-offs between equality and efficiency tangible and actionable for fiscal policy design.
- Given rising inequality and growing public concern about its social and economic impacts, fiscal policy analysis should incorporate these welfare measures to help make growth more inclusive.
Upcoming related publication
- The authors note that new data and analysis on how fiscal policy can help reduce inequality will be published in the Fiscal Monitor on October 11.
Source: IMF blog post “Inequality: Tools from the Old Masters to Help Today’s Policymakers,” October 3, 2017.
