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Inequality of

Opportunity
and Growth
Marrero &
Rodriguez

Inequality of Opportunity and Growth


Journal of Development Economics, 2013

Research
Question and
Motivation
Data

G. Marrero1

J.Rodriguez2

Estimation
Results and
Conclusions
Comments
and Critics

1 Departament

de Analisis Economico, IUDR


Universidad de La Laguna, Spain

2 Departamento

de Fundamentos del Analisis Economico I


Universidad Complutense de Madrid, Spain

May 17, 2016


Olta Ndoja, Alessandra Stampi-Bombelli
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Why should we care?


Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation

Widespread increases in income inequality have raised


concerns about their potential impact on our societies and
economies
Previous literature inconclusive and ambiguous result
on effects on income inequality upon growth

Results and
Conclusions
Comments
and Critics

WHY?
Income inequality affects growth through different channels

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Inequality
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data

savings
growth
investment project size

Estimation
Results and
Conclusions

human capital accumulation

Comments
and Critics

growth
entrepreneurial activity

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Outline
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation

Research Question and Motivation

Data

Estimation

Results and Conclusions

Comments and Critics

Data
Estimation
Results and
Conclusions
Comments
and Critics

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Definition of income inequality


Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data

The extent to which income is distributed in an uneven


manner among a population
Contribution of Rodriguez and Marrero income
inequality composite measure of inequality of
opportunity and inequality of effort

Estimation
Results and
Conclusions
Comments
and Critics

total inequality =
inequality of opportunity + inequality of effort
{z
} |
{z
}
|
(IO)

(IE )

Total effect depends on which of two channels dominates


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Inequality of Effort (IE)


Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

The part of income inequality caused by individual


responsible choice and based on effort exerted
Defined as inequality within groups
Differences in:
number of hours worked
occupational choice

The inequality reflects the reward of unequal effort


stimulates hard work, saving, education
Positive effect on GROWTH

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Inequality of Opportunity (IO)


Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

The part of income inequality beyond individual control


and responsibility
Defined as inequality across groups
Based on initial differences, called circumstances, in:
wealth
provision of social connections
formation in skills (family culture)
genetics! race

Parental education as proxy for first three, while race


directly measured

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Inequality of Opportunity
Effect on economic growth
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

In the presence of credit market imperfections and fixed


costs to education (assumption):
Borrowing constraints: reduction in opportunity to access
credit to invest in higher education or in potentially
profitable investment projects
This generates:
Misallocation of talent
Underinvestment in human capital (suboptimal)

Negative effect on GROWTH

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Data
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez

PSID: Panel Study of Income Dynamics


Three decades 1970-2000

Research
Question and
Motivation

26 states throughout whole U.S. territory

Data

Growth variable: real personal income

Estimation
Results and
Conclusions
Comments
and Critics

PSID database satisfies the requirements of having:


two distant periods of time (decades)
comparable and homogeneous measures of individual
disposable income and circumstances

For more information on data selection click

here

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Theil 0 Decomposition
Index of Inequality
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation

Why not Gini? Lorenz curve?


Advantage: decomposable

Data
Estimation
Results and
Conclusions
Comments
and Critics

total income inequality = inequality across + inequality within


|
{z
} |
{z
}
IO

(For more information on Theil 0 decomposition

IE

here

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Inequality of Opportunity Estimation


Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation

Remember: IO is measured by different circumstances


Consider two circumstances:
Fathers education:
no education
primary education
secondary education
tertiary education

Data
Estimation
Results and
Conclusions

Race:
white
non-white

Comments
and Critics

sample is divided into a total of 8 groups (M)


M=8
estimated inequality of opportunity index: IO-8group
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Econometric Specification
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation

Reduced-form growth equation:


GYi,(ts,t) = i +0 Tt +Yi,ts +0 INEQi ,ts +0 Xi,ts +i,t
where:

Data
Estimation
Results and
Conclusions
Comments
and Critics

GYi,(ts,t) = lnYi,t lnYi,ts growth rate of real


personal income
Tt : time-specific effects
i : country specific effects
Yi,ts : real per capita lagged income (in logs)
INEQi ,ts : inequality indices (IO, IE, or total
inequality)
Xi,ts : set of control variables
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Econometric Specification
Inequality of
Opportunity
and Growth

Depending on the controls included in X the model is :

Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation

Small: include mainly human capital and populations


characteristics
Suffers from: omitted variables bias

Results and
Conclusions
Comments
and Critics

Base: include also industry mix, farm employment, public


expenditure on welfare, lag employment growth and
fertility rate at the beginning of the period
Suffers from: multicollinearity problem

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Main results
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

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Main results
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

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Main results
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

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Estimation approach
Inequality of
Opportunity
and Growth

OLS on pooled data: biased estimator

Marrero &
Rodriguez

FE and RE estimators : endogeneity problem because


the lagged transformed income variable is correlated with
the transformed error term
Use instead:

Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

System-GMM estimator: based on the use of internal


instruments (lagged levels of regressors) and estimates a
system of equations in both first-differences and levels
If youre curious about the technical endogeneity stuff click
here

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Implementing System-GMM estimator


Inequality of
Opportunity
and Growth
Marrero &
Rodriguez

Use Dynamic Panel Data (DPD) model:

Research
Question and
Motivation

i,ts + 0 INEQi ,ts + 0 Tt + 0 Xi,ts + i,t


lnYi,t = i + lnY

Data

where: = (1 + )
Model includes:

Estimation
Results and
Conclusions
Comments
and Critics

Set of equations in FD:


0
0
0

lnYi,t = lnY
i,t1 + INEQi,t + Xi,t + Tt + i,t
Set of equations in levels where the instruments of the levels are
suitable lag of their own first differences
(i.e. lnYi,ts INEQi,ts andXi,ts for s 2)

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Estimation results
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data

Table: Growth, TI, IE, IO (system-GMM). Note: t-statistics in parenthesis


* significant at 10%, ** significant at 5% , *** significant at 1%

Variable
Total inequality
Inequality return to effort

Estimation

Inequality of opportunity
Results and
Conclusions
Comments
and Critics

Income lag
College
Fertility rate
Hansen J-test (p-value)
m1-test(p-value)
Num. observ.

Ln Income pc
(Small)
(Base)
18.528
24.216
(1.22)
(2.43)

0.566
0.283
(6.70)
(1.92)
1.117
1.794
(4.13)
(4.09)

0.364

(3.20)
0.262
0.442
0.003
0.084
78
78

Ln Income pc
(Small)
(Base)

53.607
(2.09)
98.852
(1.82)
0.617
(5.09)
0.869
(3.33)

0.365
0.008
78

60.736
(3.17)
80.448
(1.89)
0.351
(3.05)
1.521
(3.99)
0.369
(4.36)
0.598
0.010
78

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Estimation results
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation

Table: Effects of one standard deviation change in inequality indices on


growth and steady-state per capita income (system-GMM).

Data
Estimation
Results and
Conclusions
Comments
and Critics

Theil 0
IO ratio
IE(IO-IE model)
IO(IO-IE model)
Growth (x100)
Pc real income
Pc real income, logs

Mean
0.1128
0.1457
0.0957
0.0172
20.190
14363
9.5501

Std
0.0527
0.0948
0.0436
0.0154
6.110
3062
0.2134

One std. dev. change of the


associated inequality index
On growth On s.s. income (level)
1.28
255.5
2, 17
413.1
2.65
586.4
1.24
274.3

One std. dev. change relative to the


std. dev. of growth or pc real income
On growth
On s.s. income
20.9
8.3
35.5
13.5
43.3
19.2
20.3
9.0

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Conclusions
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation

Inequality of opportunity has a negative impact on growth


IO G
Inequality of effort has a positive impact on growth
IE G

Data
Estimation
Results and
Conclusions
Comments
and Critics

Total income inequality effect depends on weather


the positive or negative effect dominates in a specific
population
In this population total income inequality has a
positive impact on growth
TI G

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Positive Points
Internal Validity
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

Robustness and sensitivity analysis:

Results robust to the econometrics technique (use


pooled-OLS, cross-section OLS, FE and RE)

Results robust to the sample size (use 20, 30, 70 and 100
obs)

Results robust to the exclusion of outliers states (dropped


one at time )

The analysis of the importance of control variables shows


that the most important variables are fertility and college
while results remain unchanged when we drop
industry-mix and welfare expenditure

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Positive Points
External Validity and Contribution
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez

External validity:
Inequality of opportunity negative impact on growth

Research
Question and
Motivation
Data
Estimation

Inequality of effort positive impact on growth


However, the total effect will depend on which of the two
effects dominates in that specific population

Results and
Conclusions
Comments
and Critics

Contribution:
They analyze income inequality as a composite measure
to isolate each of the two effects

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Negative Points
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data
Estimation
Results and
Conclusions
Comments
and Critics

Sample size too small


Only two circumstances in the estimation of IO (race and
parental education)
Small model suffers from omitted variables bias
Base model suffers from multicollinearity between control
variables

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References
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data

[1] Gustavo A. Marrero, Juan G. Rodriguez. (2013). Inequality of opportunity and growth, Journal of Development Economics, 104: 107-122

Estimation
Results and
Conclusions
Comments
and Critics

Cool World Bank video on inequality of opportunity

here

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Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Research
Question and
Motivation
Data

Thank you for your attention!

Estimation
Results and
Conclusions
Comments
and Critics

Any questions?

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Appendix
Data Selection
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez
Appendix

PSID: household panel database born in 1968 (surveys


conducted annually until 1997, then every other year)
IO estimation: consider household heads (male in married
households, female or male otherwise)
To remove composition effect: sample restricted to
household heads between 18 and 65
Disregard states with fewer than 50 observations at any
decade
Back to

main

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Appendix
Theil 0 decomposition
Inequality of
Opportunity
and Growth

T (v )
| {z }

Marrero &
Rodriguez

total inequality
Appendix

= T (
v) +
| {z }
IO

M
X

pm T (v m )

|m=1 {z
IE

where:
v = (v 1 , .., v m ) vector of partition of income into M
groups
m

T (
v ) = ln yy mean logarithmic deviation of average
income of group m to average total income
v m percentage of income of a certain group m over all
income
pm frequency of type m in the population
Back to

main
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Appendix
Lags of variables as instruments
Inequality of
Opportunity
and Growth
Marrero &
Rodriguez

In general,
ln Yit = i + ln Yit1 + it

Appendix

taking the first difference poses a problem,


ln Yit ln Yit1 = i i +

(ln Yit1 ln Yit2 )


{z
}
|

+it it1

=(ln Yit2 ln Yit3 )+it1 it2

because the error term is correlated with the lagged transformed


income variable
need to take as instrument s 2
Back to main

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