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The Point: Tony Atkinson argues why we need to incorporate the income distribution into economic analysis and gives examples of recent attempts in this area. In order to achieve this, the economic discipline needs to learn from other disciplines such as sociology and political science. He argues that will enable researchers to give definite answers to questions in which the ordinary person is interested. Such as: how can we use economic theory to explain what is happening to the incomes of individuals, families, and households?
The data he uses point toward three main trends (1) the UK stands out for the sharpness of the rise in recorded income inequality in the 1980s (2) changes in the personal distribution are large enough to affect our view of aggregate economic performance (3) changes in inequality may better be described as ‘episodic’. Meaning we have to consider long-run equilibrium properties as well as explanations of episodic departures.
He goes on by discussing different sources of inequality in the UK. Real earnings of the bottom decile grew by 11% compared with 50% for the top decile, between April 1979 and April 1995. A worrying trend is the divergence between the employment rates of individuals and households, driven by a rise in both workless and two-income households. Contrary to expectations he observes similar inequality levels between households with and without income from work and makes the case to pay more attention to the fall in the redistributive impact of the tax and transfer system.
The connection between economic theory and income distribution is largely embedded in the supply and demand framework. The skill premium has increased over a period in which relative number of skilled workers in employment rises, suggesting there has been a rise in the relative demand for skilled labour. Economic theory has contributed these shifts to international trade and technical change. The rising within occupational inequality can be attributed to (1) unobserved skill components or (2) alternative explanations that complement the reasoning underlying the supply and demand framework, adding elements of social interactions, collective bargaining, income policies and social norms. The analysis of public choice also provide important insights that help us to understand trends in the income distribution.
Method: The paper gives an empirical overview of recent trends in inequality accompanied by a discussion on different hypotheses that can explain these trends. These hypotheses are drawn not only from mainstream economic theory but also tie into subjects such as sociology, social psychology and political science.
“The factor distribution is certainly part of the story, but it is only part, and the other links in the chain need to receive attention”
“We may want to adopt a lifetime view or even dynastic perspective, leading us to view the distribution either more or less favourably.”
“It is not just the dispersion of labour income that we need to understand and not just private incomes that need to be considered. The determinants of public redistribution are part of what has to be explained.”
“A subject so central to social science as income distribution is unlikely to be one that we can solve on our own, and I take receptiveness to outside ideas to be a sign of a discipline in good health.”
Citation: Atkinson, Anthony B. "Bringing income distribution in from the cold." The Economic Journal 107, no. 441 (1997): 297-321.