Saturday, January 23, 2010

The World Distribution of Income: Falling Poverty and… Convergence, Period


We estimate the world distribution of income by integrating individual income distributions for 139 countries between 1970 and 2000. Country distributions are constructed by combining two widely-used data sets: the PPP-Adjusted National Accounts data of the Penn World Tables is used to anchor the mean and Deininger and Squire (1996) and World Bank microeconomic surveys are used to pin down the dispersion.

The WDI is used to estimate poverty rates and headcounts. The CDF for 1990 stochastically dominates that of 1970, which means that poverty rates declined for all conceivable poverty lines. The 2000 CDF also stochastically dominates the 1970 distribution for all relevant levels of income. The two distributions for levels below $262 cross only because Congo/Zaire is included in the analysis, even though no good National Accounts data is available for this country for the late 1990s.

Poverty rates are reported for four poverty lines. For all lines, poverty rates in 2000 were between one-third and one-half of what they were in 1970. There were between 250 and 500 million less poor people in 2000 than in 1970. The number of people that live on less than one-dollar-a-day in 2000 was about 195 million, an order of magnitude less than the 1.2 billion widely publicized by institutions like the World Bank and the United Nations. We analyze poverty across different regions and countries. Asia is a great success, especially after 1980. Latin America reduced poverty substantially in the 1970s but progress stopped in the 1980s and 1990s. The worst performer was Africa, where poverty rates increased dramatically since 1970.

We estimate nine indexes of income inequality implied by our world distribution of income. All of them show substantial reductions in global income inequality during the 1980s and 1990s.

Finally, we argue that when in 2000, the United Nations established the Millenium Goal of halving the 1990 poverty rate, the world had already gone between 60% and 70% of the way towards achieving it.

We construct an estimate of the WDI for each year from 1970 to 2000. We do so by first estimating a distribution of income for each of 139 countries accounting for 93% percent of the world’s population in 2000. Individual country distributions are constructed using two widely used data sets. First, we use PPP-adjusted GDP per capita data from the Penn World Tables 6.1 (Heston, Summers and Aten (2002)) to anchor the mean of each country’s distribution. Second, the within-country dispersion is estimated using the income and expenditure micro surveys World Bank’s World Development Indicators which expand Deininger and Squire (1996). Since microeconomic surveys are not available annually for every country, we need to make some approximation (discussed in Section 2) to assign a level of income to each quantile for each country and year. We then use a non-parametric approach to estimate a smooth income distribution for each country/year. Finally, these individual distributions are integrated to compute the WDI.

The related literature includes Bourguignon and Morrison (2002) who attempt to estimate the WDI going back to 1820. Like Sala-i-Martin (2002), Bourguignon and Morrison (2002) estimate the WDI directly by assuming that each quintile in each country is made of individuals with identical incomes. Another drawback of Bourguignon and Morrison (2002) is that their analysis comprises only 33 countries or groups of countries and ends in 1993.

Another related paper is Bhalla (2002)9. Although the methodology and the data used by Bhalla differ from that of this paper, his main conclusions in terms of the evolution poverty and global income inequality are quite similar. Bhalla (2001) uses a parametric approach called the “Simple Accounting Procedure” (SAP) to approximate the Lorenz Curve for each individual country.10 As we will discuss in the next section, we use a non-parametric approach to approximate the density function.11 Another difference from Bhalla (2002) is that he uses World Bank PPP data rather than the Penn World Tables data to pin down the mean of the distribution. For most countries, the choice of data set does not matter much. It does, however, for the largest country in the world: the growth rates of PPP-adjusted per capita GDP reported by the World Bank are much larger than those of the PWT.12

Download full text paper here

Wednesday, January 20, 2010

A Century of Work and Leisure


Has leisure increased over the last century? Standard measures of hours worked suggest that it has. In this paper, we develop a comprehensive measure of non-leisure hours that includes market work, home production, commuting and schooling for the last 105 years. We also present empirical and theoretical arguments for a definition of “per capita” that encompasses the entire population. The new measures reveal a number of interesting 20th Century trends. First, 70 percent of the decline in hours worked has been offset by an increase in hours spent in school. Second, contrary to conventional wisdom, average hours spent in home production are actually slightly higher now than they were in the early part of the 20th Century. Finally, leisure per capita is approximately the same now as it was in 1900.

A complete accounting of non-leisure time must include time spent in home production. Xenophon (4th century BC) believed that home production was as important as market production, and devoted half of his work Oeconomicus to issues of household management (Leeds (1917)). More recently, Becker’s (1965) article made modern economists aware of the importance of measuring and modeling home production. To this end, we combine results from various studies to construct a series showing trends in the average number of hours spent on home production.

A number of cross-validation studies show time use diaries to be the most accurate source of estimates for housework (and market work for that matter) (Juster and Stafford (1985, 1991)). Thus, we use estimates based on time diary data to the extent possible.

The historical studies generally including the following activities in home production: planning, purchasing, care of family members, general cleaning, care of the house and grounds, preparing and clearing away food, making, mending, and laundry of clothing and other household textiles (Vanek (1973), page 57). Activities such as playing and talking with and reading to children are usually included in childcare in the time use studies from 1965 on. We exclude them for two reasons. First, these activities rank high on the enjoyment index and hence are more properly classified as leisure. Second, while little time was devoted to these activities in the studies from 1900 to 1965, they have become an increasingly important in terms of time expenditures. Thus, including them in home production would lead to noticeably higher estimates at the end of the sample. Our measure of childcare included in home production is basic child care plus time spent in homework help, teaching, and meeting with teachers. See the data appendix for more details.

Our studies of the time diary literature indicate that the most important distinctions are for age, gender and employment status. Our strategy for constructing total hours spent in home production is as follows. For each of the relevant age, gender and employment status cells, we first gather as much information as possible on hours of housework for that category. We then interpolate values between years of the time diary studies. Finally, we weight the estimated hours of housework of each cell by the fraction of the population that falls in that cell.

Download full text paper here

Sunday, January 17, 2010



Americans now work 50 percent more than do the Germans, French, and Italians. This was not the case in the early 1970s when the Western Europeans worked more than Americans. In this paper, I examine the role of taxes in accounting for the differences in labor supply across time and across countries, in particular, the effect of the marginal tax rate on labor income. The population of countries considered is that of the G-7 countries, which are the major advanced industrial countries. The surprising finding is that this marginal tax rate accounts for the predominance of the differences at points in time and the large change in relative labor supply over time with the exception of the Italian labor supply in the early 1970s. This finding has important implications for policy, in particular for making social security programs solvent.

Americans, that is, residents of the United States, now work much more than do Europeans. Using labor market statistics from the Organisation for Economic Co-operation and Development (OECD), I find that Americans on a per person aged 15-64 basis work in the market sector 50 percent more than do the French. This was not always the case. In the early 1970s, Americans allocated less time to the market than did the French. The comparisons between Americans and Germans or Italians are the same. Why are there such large differences in labor supply across these countries? Why did the relative labor supplies change so much over time? In this lecture, I determine the importance of tax rates in accounting for these differences in labor supply for the major advanced industrial countries and find that tax rates alone account for most of these differences in labor supply.

This finding has important implications for policy in particular for financing social security retirement programs in Europe. On the pessimistic side, one implication is that increasing tax rates will not solve the problem of these under funded plans, because increasing tax rates will not increase revenue. On the positive side, the system can be reformed in a way that makes the young better off while honoring promises to the old. This can be accomplished by modifying the tax system so that when an individual works more and produces more output, the individual gets to consume a larger fraction of this increase output.

The major advanced industrial countries, which used to be called the G-7 countries, are the European countries France, Germany, Italy, and the United Kingdom, plus Canada, Japan, and the United States. For these countries comparable and sufficiently good statistics are available to carry out this investigation. The data sources are the United Nations system of national accounts (SNA) statistics and the OECD labor market statistics and purchasing power GDP numbers.1 The periods considered are 1970–74 and 1993–96. The later period was chosen because it is the most recent period prior to the U.S. telecommunications/dotcom boom of the late 1990s, a period when the relative size of unmeasured output was probably significantly larger than normal and there may have been associated problems with the market hours statistics. The early period was selected because it is the earliest one for which sufficiently good data are available to carry out the analysis. The relative numbers subsequent to 2000 are pretty much the same as they were in the pre technology boom period 1993-96.

I emphasize that my labor supply measure is hours worked per person 15-64 in the taxed market sector. The two principal margins of work effort are hours actually worked by employees and the fraction of the working age population that work. Paid vacations, sick leave, and holidays are hours of non working time. The time of someone working in the underground economy or in the home sector is not counted. Other things equal, a country with more weeks of vacations and more holidays will have a lower labor supply in the sense that I am using the term. I focus only on that part of working time that the resulting labor income is taxed.

Download full text paper here

Thursday, January 14, 2010

Asset Prices and the Measurement of Wealth and Saving


The paper defines concepts of real wealth and saving which take into account the intertemporal index number problem that results from changing interest rates. Unlike conventional measures of real wealth, which are based on the market value of assets and ignore the index number problem, the new measure correctly reflects the changes in the welfare of households over time. An empirically operational approximation to the theoretical measure is provided and applied to US data. A major empirical finding is that US real financial wealth increased strongly in the 1980s, much more than is revealed by the market value of assets.

Economists seem to be convinced that there exist better measures of real GDP than the Big-Mac-Index. In this paper I argue that the same is true for real wealth, and I develop a measure that accounts for the intertemporal index number problem. I will show, both in theory and in an empirical application that the new measure can significantly deviate from conventional wealth series. Such an improved measure of real wealth is important in several respects. First, it is a better welfare indicator. If the market value of assets increases because interest rates have fallen, are households richer, not just in a nominal, but in a real sense? Real wealth as I define it answers this question. It has the property that an increase in its value indicates an improvement in the economic situation of a household. I will show that this is not true for the currently used wealth measures.

Second, real wealth plays an important role in the measurement of saving. Several authors have pointed out that conventional measures of national saving, based on the National Accounts, are insufficient. They reflect investment in physical capital1 only, and even here they are incomplete, since they use some more or less arbitrary accounting principles for asset valuation, and exclude changes in the value of existing capital. Bradford (1989, 1990, 1991) has forcefully argued that the change in the market value of assets is a better measure of saving than those derived from the National Accounts. The same view is expressed, e.g., in Barro (1989, p.50). One can criticise these claims on two grounds (cf. the comment of Stiglitz, 1991, on Bradford). First, one may argue that asset prices contain valuation bubbles2, and changes in asset prices thus not always reflect changes in real wealth (reasonably defined). The fact that the proposed measure of national saving is very volatile, and even negative in some years, may be interpreted as pointing in this direction. The second critique concerns the inherent index number problem, caused by changes in interest rates. The latter problem is solved if saving is defined not as the change in market values, but as the change in real wealth as defined in the present paper. On the first criticism, the present paper has nothing to say. I proceed under the strict neoclassical assumptions of rational expectations and asset valuation by fundamentals, which I consider as a useful starting point of the analysis. An interesting question, which I will analyse theoretically as well as empirically, is whether the savings measure based on real wealth is less volatile than the measure based on the market value of assets.

Third, the new measure of real wealth has potential implications for the definition of the income tax base. In many European countries, as well as in the US, the”ideal" base of income taxation is considered to be the Schanz-Haig-Simons concept of income (cf., for example, Goode, 1990, p.62). This includes the change in the market value of assets, adjusted, of course, for ination. The appeal of this concept is not derived from formal models of optimal taxation, it is rather based on more traditional considerations of fairness and ability to pay. Tax theorists often complain that the practical implementation of the income tax does not account for inflationary changes in asset values. This paper shows that accounting for inflation in the usual sense is still insufficient. In addition, it is necessary to account for revaluations of assets that reflect changes in the intertemporal price structure, without changing the real wealth position of households. In the spirit of Schanz-Haig-Simons, only changes in real wealth as defined in this paper should be included in the income tax base.

Download full text paper here

Monday, January 11, 2010

The Three Horsemen of Growth: Plague, War and Urbanization in Early Modern Europe


How did Europe overtake China? We construct a simple Malthusian model with two sectors, and use it to explain how European per capita incomes and urbanization rates could surge ahead of Chinese ones. Those living standards could exceed subsistence levels at all in a Malthusian setting should be surprising. Rising fertility and falling mortality ought to have reversed any gains. We show that productivity growth in Europe can only explain a small fraction of rising living standards. Population dynamics – changes of the birth and death schedules – were far more important drivers of the longrun Malthusian equilibrium. The Black Death raised wages substantially, creating important knock-on effects. Because of Engel’s Law, demand for urban products increased, raising urban wages and attracting migrants from rural areas. European cities were unhealthy, especially compared to Far Eastern ones. Urbanization pushed up aggregate death rates. This effect was reinforced by more frequent wars (fed by city wealth) and disease spread by trade. Thus, higher wages themselves reduced population pressure. Without technological change, our model can account for the sharp rise in European urbanization as well as permanently higher per capita incomes. We complement our calibration exercise with a detailed analysis of intra-European growth in the early modern period. Using a panel of European states in the period 1300-1700, we show that war frequency can explain a good share of the divergent fortunes within Europe.

Epidemics and wars frequently ravaged Europe between 1350 and 1700. We argue that death and destruction spelled riches and power in the early modern period. Europe’s precocious rise may owe more to these scourges of mankind than to technological innovation. We build a simple two-sector extension of the standard Malthusian model that can shed new light on the puzzling rise of European per capita incomes. Many interpretations of the ”rise of Europe” have emphasized technological creativity and high rates of innovation, compared to Asia (Mokyr 1990). We argue that, in a Malthusian setting, better technology cannot explain the ”First Divergence”, and we also show that fertility restriction alone is insufficient. Instead, we build a model in which per capita living standards can rise markedly without technological change or fertility decline. Some long-run growth models generate the early transition from stagnation to sustained growth by means of a delayed response of fertility to wages. This allows per capita incomes to rise slowly but steadily in tandem with population. We argue that this cannot be realistic in most settings, because fertility responds ’too rapidly’ to permit anything other than a short-lived increase in living standards. In a micro-founded model, we show that only very large, negative shocks can be followed by a marked delay between rising incomes and return to earlier population levels. We argue that the Black Death hitting Europe in the 14th century was precisely such a shock, lifting wages and per capita incomes for several generations. Richer individuals began to demand more urban goods, and because early modern European cities were ”graveyards” (Bairoch 1991), incomes could permanently exceed subsistence levels. This is particularly true because city growth acted as a catalyst for European belligerence. It also spread disease through trade – links that we call the ’Horsemen of Growth.’

We demonstrate that permanently higher mortality rates, driven by greater urbanization after the Black Death, were empirically important. In our calibrations, the mortality channel consistently emerges as accounting for at least half of the increase in per capita incomes. Fertility restriction is probably responsible for the remainder. We complement the calibration exercise with a detailed analysis of the intra-European growth record after 1300. Using a panel of European states in the period up to 1700, we find that war frequency – our preferred proxy for the ’Horsemen of Growth’ – can explain a good share of the divergent fortunes within Europe. In particular, we find that we can explain a good deal of the rise of North-Western Europe compared to the rest of the continent. The effect of war, trade, and urbanization is broadly similar – if not stronger – than Atlantic trade (as suggested by AJR 2005). While war emerges consistently as a driver of higher incomes in early modern Europe, there is little reason to assume that the same will be true today. Non-reproducible factors of production, such as land, only play a small role in most economies. Even where they matter a great deal, such as in parts of Africa, modern wars may not yield the same effect. Military technology has become markedly more destructive, of both people and capital equipment. This checks the positive effect of rising land-labor ratios.

One implication of our findings is that urbanization is not simply an indicator for development. City growth also made higher per capita incomes sustainable in a Malthusian setting. Our paper has emphasized the contrast between early modern Europe and the rest of the world. In the final analysis, Europe’s political fragmentation and geographical heterogeneity interacted with the negative shock of the Black Death in a unique way. In combination, urbanization, warfare, and trade ensured a mortality regime that was different from the one prevailing in Asia. Future work should focus on the other factor contributing to Europe’s precociously rising incomes – the emergence of the European Marriage Pattern.

Download full text article here

Friday, January 8, 2010

The Role of Mexico in the First Oil Shortage: 1918-1922, an International Perspective


In 1921 Mexico produced a quarter of world’s petroleum, making the country the second largest producer in the world, but by 1930 it only accounted for 3 per cent of world’s production. To date the discussion has mostly relied on events taking place in Mexico for explaining the decline of the industry. Very little attention has been placed to developments in petroleum industry elsewhere, except Venezuela. Practically no attention has been paid to the reasons for the rise of oil output in Mexico. This neglects the massive changes taking place in the petroleum industry worldwide during the Great War years and its aftermath, and overall ignores the shortage of oil that occurred in the world’s markets between 1918-1921. These are crucial events in order to understand the early rise of the Mexican oil industry and set the basis for a better understanding of the subsequent sudden decline.

In 1921 Mexico produced a quarter of world’s oil, making the country the second most important producer in the world, but by 1930 it only accounted for 3 per cent of world’s production. In 1938 the petroleum industry was nationalised by the Mexican government and it took it over fifty years to regain the level of output of 1921. Two main lines of arguments have been used in order to explain the rapid decline of the Mexican oil industry during the 1920s. The first explanation argues that the decline was the result of the institutional change caused by the Mexican Revolution. The second hypothesis vindicates that Mexico simply run out of oil deposits that could be extracted at competitive costs given technology, prices and competing sources. Some authors have argued that both hypotheses are true. The problem is that the discussion has mostly relied on events taking place in Mexico, using sources and data exclusively relating to Mexico. Very little attention has been placed to developments in petroleum industry elsewhere, except Venezuela. Practically no attention has been paid to the reasons for the sudden rise of oil output in Mexico. This neglects the massive changes taking place in the petroleum industry worldwide during the Great War years and overall ignores the shortage of oil that occurred in the world markets between 1918-1921. These are crucial events in order to understand the rise of the Mexican oil industry and set the basis for a better understanding of the subsequent sudden decline.

Due to the Great War and the Soviet Revolution, Europe lost all its domestic supplies of oil and, become totally dependent on its Asian oil supplies (Dutch East Indies and British India) and overall, on the United States. Mexican oil was to play a major role at this time of shortage. This paper focuses on the rise of the Mexican oil industry by concentrating on the events taking place in the world’s petroleum industry. Thanks to the data of the American Petroleum Institute, the U.S. Department of Commerce, and the Mexican Government it is possible to place Mexico in the changing context of the world oil markets of the early 1920s. In addition, it shed some extra light into the debate about the rapid fall of the industry.

The first section of this paper reviews the literature debate, revealing how little attention has been paid to the raise of the industry, and how much concentrated on events within Mexico has the debate remained. The second section steps out of Mexico in order to show the extensive changes taking place in the oil industry worldwide during the First World War and its aftermath, including the surge in demand and the awaken of nationalism world-wide regarding the exploitation of oil resources. The intense growth of demand for petroleum products was not followed by an equal growth in supply. The distortions introduced by the War, the Soviet Revolution, the cold winters of the end of the 1910s, plus the final War effort produced the first petroleum shortage of the 20th century. Section three reveals the importance of Mexican oil at this time of shortage. Section four peeks at the sudden decline of the Mexican petroleum industry departing from the depiction of the rise of the industry provided in earlier sections. The conclusions summarise the main findings of this paper.

Download full text paper here

Tuesday, January 5, 2010

The Quasi-Judicial Role of Large Retailers: An Efficiency Hypothesis of their Relation with Suppliers


The paper explores an efficiency hypothesis regarding the contractual process between large retailers, such as Wal-Mart and Carrefour, and their suppliers. The empirical evidence presented supports the idea that large retailers play a quasi-judicial role, acting as “courts of first instance” in their relationships with suppliers. In this role, large retailers adjust the terms of trade to on-going changes and sanction performance failures, sometimes delaying payments. A potential abuse of their position is limited by the need for re-contracting and preserving their reputations. Suppliers renew their confidence in their retailers on a yearly basis, through writing new contracts. This renovation contradicts the alternative hypothesis that suppliers are expropriated by large retailers as a consequence of specific investments.

Like all complex relationships, those established between suppliers and retailers suffer from substantial conflicts. Claims of faulty performance, either intentional or unintentional, are the main source of conflict. Other common discrepancies concern prices and deliveries. Discussion frequently arises about whether the invoiced prices are or are not in accordance with the previously agreed levels. There are also delivery delays that are punished by the retailer when they cause stock outs and losses of sales. Clarification of these arguments is difficult. Price schedules are intricate and it is hard to evaluate the cost caused by imperfect performance. Opportunism is possible on both sides. For instance, it is possible for a return of merchandise with the allegation of late delivery to be due to opportunistic behavior on the part of the retailer because sales did not go as well as planned when ordering the goods.

Errors in the administration circuits are also a main source of conflict. Examples of these are differences in the quantities and prices between the time of ordering and delivery of the merchandise, or accounting errors, where the quantity in the invoice and the delivered quantity do not correspond. Retailers claim that administrative problems are common because the administrative systems of small-size suppliers are underdeveloped. There are cases when the supplier issues the invoice and the delivery note at the same time so, if the delivery suffers from some defect, this is only discovered when the whole invoicing process has started. This makes fixing the problem cumbersome and slow. In other cases the transportation agent may fail to return the delivery notes to the supplier, causing administrative chaos. The importance of the supplier’s administration is supported by the fact that some retailers refuse to work with suppliers that lack reliable administrative systems.

How important contractual and administrative factors are becomes clear when we observe the empirical relation that exists between the average duration of the payment periods in each country and the importance attributed to the different kinds of phenomena that cause payment delays. It has been observed that the average payment period is positively correlated with the importance of debtors’ financial difficulties resulting in delays and negatively correlated with the importance of both disagreements between creditor and debtor and administrative errors. In other words, in countries with longer payment periods, debtor insolvency is more important while disagreements and administrative errors are less important, arguably because there is more time to solve both problems before the end of the contractual credit period (Table 2). This can mean that a longer payment period worsens problems with a financial origin, while it lessens those related to contractual and administrative issues.

Download full text paper here