Is Income Inequality Influenced by Financial Knowledge? A Macroeconomic and Longitudinal Analysis

Our objective is to analyze whether financial knowledge influences income inequality. For this purpose, we resort to a new index of financial knowledge that differs from the existing ones in that it is both longitudinal and macroeconomic. We use this index as one of the explanatory variables of the Net Gini Index in our panel data estimations. Based on a sample of 63 countries over the period 2008–2014, our results allow us to conclude that financial knowledge is related to income inequality and that, moreover, this relationship is non-linear. Thus, increases in financial knowledge could reduce income inequality when starting from relatively low levels of such knowledge. However, at a certain threshold, the income redistributive effect of financial knowledge could disappear or even reverse. Even so, national strategies for financial education could be useful to achieve economic equity in those countries where financial knowledge levels are low. In addition, we shed light on the effect that other variables (such as institutional quality or under-education) have on income inequality.

Redistributive Effects of Health Care Out-of-Pocket Payments in Cameroon

Background: The bulk of health care financing in Cameroon is derived from out-of-pocket payments. Given that poverty is pervasive with a third of the population living below the poverty line, health care financing from out-of-pocket payments is likely to have redistributive and equity effects. Out-of-pocket payments on health care limit the ability of households to afford non-healthcare goods and services.Method: The study uses data from the 2014 Cameroon Household Survey to estimate the Kwakwani index for analyzing tax progressivity and the model developed by Aronson, Johnson, and Lambert (1994) to measure the redistributive effect of out-of-pocket payments for health care. The estimated indexes measure the extent of the progressivity of health care payments and the reranking that results from the payments.Results: The results indicate that out-of-pocket payments for health care in Cameroon in 2014 represented a significant share of household prepayment income. The estimates also show that the redistributive effect is positive implying that health care payments are weakly progressive and will weakly enhance equity and post-payment reranking is low. Conclusion: The study concludes that out-of-pocket payments on health care in Cameroon are progressive (income redistributive effect = 0.00144). A positive redistributive effect suggests that out-of-pocket payments on health care exert an equalizing effect on the distribution of post-payment incomes. However, the existence of some horizontal inequity and re-ranking implying that people in the same income band are treated unequally depending on the burden of ill-health.

Does income redistribution impede innovation?

Economic inequalities have been increasing in many countries since the 1980s provoking calls for more income redistribution. One argument against increased redistribution is that it could hamper innovation and technological progress. To the best of our knowledge, this is the first paper that empirically investigates the relationship between government redistributive policies at the top of income distribution and innovative activity in a panel of countries. We use new,high-quality and cross-country comparable panel data on income redistribution from distributional national accounts. The sample covers 34 advanced and emerging countries over 1980-2010. We do not find any negative impact of the redistributive effect on innovation in the crosscountry setting. This result is robust to the use of various measures of income redistribution and patent-based indicators of innovation (patent counts, patent citations and patent originality).

Mexico

This chapter focuses on income inequality in Mexico, which increased between 1989 and 1994. Between 1994 and 2006, inequality declined; between 2006–14, inequality was again on the rise. The authors apply decomposition techniques to analyse the proximate determinants of labour income inequality and fiscal incidence analysis to estimate the first-order effects of taxes and social spending on the distribution of income. The key component that underlies the ‘rise–decline–rise again’ pattern was the evolution of returns to skills. In addition, while changes in fiscal policy in the 1990s were progressive and pro-poor, the redistributive effect has declined significantly since 2010, as transfers have become less progressive and net indirect taxes have increased.

No Country for Old (Poor) Men: Fairness and Public Pensions

Public pensions are a ‘social technology’ at the heart of most welfare states. The basic goal pursued by a public pension system is to make sure that individuals do not outlive their savings. An increasing number of states have recently moved to a system that matches individuals’ contributions over their working lives to a specific stream of revenue during their retirement years (i.e. defining contributions rather than benefits). As a result, intragenerational fairness concerns have started to become more relevant. In this article, we shall claim that, irrespective of how one conceptualises the welfare state, most public pension systems violate actuarial fairness and any plausible account of distributive justice, and that they do so for structural reasons. Studying the Italian case, we offer insights on this regressive redistributive effect, based on regional data, and offer an implicit policy solution to obviate this problem.

How does inflation influence income inequality in Russia?

The paper studies the impact of inflation on income inequality in Russian regions. It was revealed that the reduction in inflation from double-digit rate to the Bank of Russia’s target did not help to mitigate inequality, but rather exacerbated it. We identified a group of products which changing price dynamics affects inequality. The price increase may lead to the decline in inequality through redistributive effect. It is shown that in Russia this effect is associated with the channel of unexpected inflation that results in real wealth transfer from more prosperous lenders to less well-off borrowers. The policy of inflation targeting, successfully implemented by the monetary authorities in recent years, has reduced the volatility of inflation and limited the operation of this channel. At the same time, quantitative estimates of the increase in inequality as a result of achieving price stability remain relatively low.

Uninsured Unemployment Risk and Optimal Monetary Policy in a Zero-Liquidity Economy

I study optimal monetary policy in a sticky-price economy wherein households precautionary-save against uninsured, endogenous unemployment risk. In this economy greater unemployment risk raises desired savings, causing aggregate demand to fall and feed back to greater unemployment risk. This deflationary spiral is constrained inefficient and calls for an accommodative monetary policy response: after a contractionary aggregate shock the policy rate should be kept significantly lower and for longer than in the perfect-insurance benchmark. For example, the usual prescription obtained under perfect insurance of a hike in the policy rate in the face of a bad supply (i.e., productivity or cost-push) shock is easily overturned. The optimal policy breaks the deflationary spiral and takes the dynamics of the imperfect-insurance economy close to that of the perfect-insurance benchmark. These results are derived in an economy with zero asset supply (zero liquidity) and are thus independent of any redistributive effect of monetary policy on household wealth. (JEL E21, E24, E31, E52, G51)

Chasing Disparity: Economic Development Incentives and Income Inequality in the U.S. States

Political scientists and policy scholars have traditionally looked at the role of welfare and tax policies in shaping income inequality. Less attention has been paid to the key policy area of economic development. But states spend billions on economic development incentives each year to encourage firms to locate in their state. The few studies that have examined the impact of economic development policy on inequality have found mixed results, and have not considered who shapes and benefits from economic development policy when identifying possible causal mechanisms. I argue that increased incentive spending leads to increased inequality through either a market conditioning effect (incentives disproportionately boost the incomes of top earners prior to taxes) or a redistributive effect (incentives allow wealthy firms, investors, and employees to keep income that would otherwise be taxed and transferred). These mechanisms are tested using data on incentive spending and inequality across the 50 states from 1999 to 2014. The findings demonstrate that incentives increase income inequality via a redistributive effect only. This effect, though, is relatively large, long-lasting, and robust to different measures of incentive spending. Despite using economic development incentives to try to generate greater prosperity, state governments may be inadvertently exacerbating inequality.