SUMMER TERM 2023
CENTRALLY MANAGED ONLINE EXAMINATION
ECON0033: ECONOMICS OF INEQUALITY RESIT
Answer all questions from Part A and all questions from Part B.
PART A
Answer all questions from this section.
A1 There are three different economies with five people in each economy. Consider the following income distribution measured in income units:
Economy A: 49, 49, 49, 49, 49
Economy B: 51, 55, 57, 59, 63
Economy C: 39, 57, 59, 103, 107
(a) Which economy would you choose to live in according to John Rawls ’ difference principle criterion?
(b) Imagine there exists a redistribution policy that equalizes the incomes of all members of Economy C. Unfortunately, the implementation of this redistribution policy leads to an economy-wide cost of x income units that is also equally split across individuals. The government of Economy C has asked you to advise them on answering the following questions:
(i) If the implementation cost is 100 income units, should the redistribution policy be implemented if the goal is to reduce inequality according to the difference principle?
(ii) What are potential sources for the implementation costs of this redistribution policy? Please list at least three potential sources.
(iii) What is the maximum implementation cost x such that the income distribution of Economy C after the reform. is strictly preferred to the income distribution of Economy B (in which no reform is implemented) according to the difference principle?
A2 Consider unemployment and wage inequality in Europe and in the United States since the Great Recession.
(a) Please describe how differently they evolved in these two parts of the world.
(b) Describe the Krugman Hypothesis and how it explains the differences.
A3 Economy A consists of three individuals. Their after-tax incomes are: 60, 66, 45.
a) Calculate the Gini coefficient for this economy using the double-summation formula approximation:
b) Economy B consists of three individuals. Their incomes are: 3000, 600, 1350. What is the Gini coefficient for this economy? Draw the Lorenz curve for the income distribution of this economy.
c) Imagine an individual has to decide whether to live in economy A orB. Which economy does he/she choose if he/she decides to live in the economy with the lower inequality measured by the Gini coefficient? Is this decision rational in your opinion - what other factors could he/she take into account? Explain.
PART B
Answer all questions from this section.
B1 There are four workers in an economy who have the following pre-tax daily wages in the years 1980 and 1985:
|
Person i
|
1
|
2
|
3
|
4
|
|
Wage in 1980
|
20
|
43
|
22
|
51
|
|
Wage in 1985
|
24
|
47
|
30
|
52
|
(a) Calculate the value of pre-tax daily wages at the 10th, 50th and 90th percentile.
(b) Calculate the relative increase in the pre-tax daily wages from 1980 to 1985 at the 10th, 50th and 90th percentiles. What happened to wage inequality overtime?
(c) Assume that the economy has a progressive income tax-system similar to that of the United Kingdom. Assume further that between 1985 and 1990 the inequality in pre-tax wages increased starkly in the economy. Do you expect that inequality in post-tax wages is higher or lower than inequality in pre-tax wages in 1985? Can a stark increase in pre-tax inequality between 1985 and 1990 lead to a relatively low increase between 1985 and 1990 in the Gini coefficient calculated using post-tax incomes, or even decrease the Gini coefficient calculated using post-tax incomes? Explain.
B2
(a) Globalisation is sometimes blamed for increasing inequality. One type of globalisation is labour market globalisation: immigration can increase the supply of labour in certain sectors and for certain skill levels, which could then lower wages in those sectors and skill levels. David Card’s 1990 paper on the Mariel boatlift provides one of the first quasi-experimental studies of the impacts of immigration on wages. What is the paper’s main finding?
(b) Card exploits the Mariel boatlift to identify causal effects. Explain why the decision of Fidel Castro to allow Cubans to move to Miami eliminates a common confounder when trying to estimate the causal effect of immigration on local wages.
(c) Why did Card not simply compare the wages in Miami before and after the Mariel boatlift to estimate the causal effect of the influx of immigrants on Miami’swages?
(d) What comparisons did Card do to isolate the causal effect of the Mariel boatlift? What is the identifying assumption?
B3
(a) Please describe in your own words the difference between inequalities in education and inequalities by education and how this can be connected to the concepts of circumstances and effort discussed in the paper Hufe, Kanbur, and Peichl (2021) and to the concept of dynamic complementarities between skills and investments discussed in the paper Cunha (2010).
(b) In 2021, the German government announced the provision of 2 Billion EUR to mitigate the effects of the COVID-19 pandemic on pupils, including simplified access to vouchers for private tutoring for pupils from low-income families. Compared to other European countries, schools in Germany have been closed for a longer time during the first year of the pandemic. Please explain how you would categorise the voucher policy in the policy matrix for inclusive prosperity. Do you think the reform aims to reduce inequality in opportunities, in outcomes, or both? Explain why.