ECON0033: ECONOMICS OF INEQUALITY SUMMER TERM 2022
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SUMMER TERM 2022
CENTRALLY MANAGED ONLINE EXAMINATION
ECON0033: ECONOMICS OF INEQUALITY
Time Allowance: You have 2 hours to complete this examination, plus an Upload Window of 20 minutes. The Upload Window is for uploading, completing the Cover Sheet and correcting any minor mistakes and should not be used for additional writing time.
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Page Limit: 12 pages. Your answers, excluding the Cover Sheet, should not exceed this page limit. Please note that a page is one side of an A4 sheet with a minimum margin of 2 cm from the top, bottom, left and right borders of the page. The submission can be handwritten or typed, but the font size should be no smaller than the equivalent to an 11pt font size. This page limit is generous to accommodate students with large handwriting. We expect most of the submissions to be significantly shorter than the set page limit. If you exceed the maximum number of pages, the mark will be reduced by 10 percentage points, but the penalized mark will not be reduced below the pass mark and marks already at or below the pass mark will not be reduced.
Answer all questionsfrom Part A and all questionsfrom Part B.
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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: 14, 16, 17, 18, 20
Economy B: 8, 17, 18, 40, 42
Economy C: 13, 13, 13, 13, 13
(a) Which economy would you choose to live in according to John Rawl´s difference principle criterion?
(b) Imagine there exists a redistribution policy that equalizes the incomes of all members of Economy B. 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 B has asked you to advise them on answering the following questions:
(i) If the implementation cost is 75 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 ofthis redistribution policy? Please list at least three potential sources.
(iii) What is the maximum implementation cost x such that the income distribution of Economy B after the reform is strictly preferred to the income distribution of Economy A (in which no reform is implemented) according to the difference principle?
A2 Please list three examples of an accidents of birth that is a source of inequality in some societies/countries but not in others or that used to be a source of inequality in the past but stopped to be. What factors are responsible for this difference and how does it connect to the level of inequality in the respective countries/societies? Explain.
A3 Economy A consists of three individuals. Their after-tax incomes are: 20, 22, 15.
a) Calculate the Gini coefficient for this economy:
Gini = 
∗ 
∗ ∑
1 ∑j(n)=1|yi− yj |
n ∗ ∑
1 yi
b) Economy B consists of three individuals. Their incomes are: 1000, 200, 450. 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 or B. 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
(a) Explain graphically how the introduction of a nation-wide minimum wage can affect employment and wages in different local labour markets. Please distinguish between the two different labour market models covered in the tutorials as well as whether equilibrium wages are higher or lower than the minimum wage. Please make sure that you correctly label your graphs.
(b) Now consider price theory.
(i) What assumptions of price theory make it an inappropriate theory when studying the employment effects of the minimum wage?
(ii) What were the empirical findings that rejected the standard price theory of minimum wage in the early 1990s?
(c) What effects did the introduction of the minimum wage in Germany in 2015 have on employment and wages according to the paper “Reallocation Effects of the Minimum Wage” (Dustmann, Lindner, Schoenberg, Umkehrer and vom Berge, 2021)? How do the authors explain the effects for low-wage workers?
B2
(a) What types of asset price changes in the United States would decrease wealth differences between the top 10% and the bottom 50% in the wealth distribution? Why? Hint: consider the prices of different kinds of assets.
(b) Explain why the evolution of income and wealth inequality may diverge.
(c) Thinking of the accounting framework for wealth accumulation presented in lecture 7, we can think of wealth changes over time as due to capital gains/losses and changes in savings over time. Explain for what portion of the US wealth distribution (top 10%, between 50-90th percentile, bottom 50%) the savings channel is the least important channel of wealth accumulation and why.
(d) Do changes in the age distribution over time or changes in the fraction of people with college degrees explain the increase in the income and wealth inequality that the US have experienced since the 1980s? How did we show this in lecture 7?
B3 The following figure is taken from the paper “Income segregation and intergenerational mobility across colleges in the United States” (Chetty et al. 2020, page 1594) on the reading list. It depicts the estimated relationship between children’s and parents’ income ranks for graduates of different types of colleges and for the nation-wide average.
(a) Start by considering the curve labelled “National”, depicting a nation-wide average across
individuals.
(i) How would you expect this curve to look like in the absence of any inequality of opportunities (including ability being uncorrelated between parents and children)? Hint: you do not need to understand the technical details of the estimation of this relationship. Start by trying to interpret the slope of the curve.
(ii) How would you expect the graph to look like if there was no intergenerational mobility across income levels at all?
(b) Describe and interpret the differences between the curves for graduates of elite colleges, other four-year colleges and two-year colleges. In reference to this graph, what could be meant by the claim “elite colleges level the playing field across students with different socioeconomic backgrounds”?
(c) What do you think of the claim “elite colleges level the playing field across students with different socioeconomic backgrounds”? Is it true in your opinion? Use your economic intuition.
2023-04-26