Measuring Unfair Inequality: Reconciling Equality of Opportunity and Freedom from Poverty

Over the past few decades, rising income inequality has spurred debates around the world. While many call for policies to help redistribute wealth and counter inequality, others argue that inequality is actually necessary to both motivate and reward hard work and economic productivity. But, as LML Fellow Ravi Kanbur and colleagues argue in a recent paper, standard measures of inequality don’t offer a useful basis for this debate over fairness. Much public discourse simply assumes that less inequality necessarily implies a more equitable distribution, yet perfect equality – everybody receiving the same income – also wouldn’t satisfy principles of equity, as people exert different levels of effort and start with different opportunities.

As the authors point out, most theories of distributive justice argue that it isn’t just inequality that matters, but the sources and structure of inequality. These theories differentiate between fair (justifiable) and unfair (unjustifiable) sources of inequality, and suggest that unfair inequality should be eliminated, but fair inequality allowed to persist. For example, according to some theories of justice, outcome inequalities are unfair if they are rooted in factors beyond individual control – early life nutrition, for example, or educational opportunities – which are not influenced by individual choice. In line with this reasoning, individuals are generally more willing to accept income differences which are due to effort and individual preferences rather than external circumstances.

In their paper, Kanbur and colleagues aim to bring depth to the equality debate by proposing a new measure of unfair inequality which reconciles two widely-held normative principles, referred to as equality of opportunity (EOp) and freedom from poverty (FfP). This new measure detects unfairness emanating from unequal opportunities or poverty even if one of the two guiding principles is satisfied. They then show how this measure offers insight for the inequality debate and the design of appropriate policy responses.

To illustrate, the researchers provide two empirical applications of the new measure, first analysing the development of inequality in the US over the time period 1969-2014 from a normative perspective. The results show that the US trend in unfair inequality has mirrored the marked increase of total inequality since the beginning of the 1980s. However, beginning with the 1990s unfair inequality follows a steeper growth curve than total inequality. They also demonstrate that this trend is mainly driven by a less equal distribution of opportunities across people that face different circumstances beyond their individual control. Second, the researchers also provide an international comparison between the US and 31 European countries in 2010, finding that unfairness in the US shows a remarkably different structure than comparably unfair societies in Europe. The evidence suggests that inequality in the most unfair European societies is largely driven by poverty increases in the wake of the financial crisis of 2008. To the contrary, unfairness in the US is driven by marked decreases in social mobility.

The paper is available as a pre-print at https://www.ifo.de/DocDL/wp-2020-323-hufe-kanbur-peichl-measuring-unfair-inequality.pdf

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