Stone Lectures 2008 – The Distribution of Income: the ∩ + U hypothesis

Sir Tony Atkinson, the Stone Lecturer 2008, delivered two lectures under the heading ‘Economic Data and the Distribution of Income’ at two NIESR events held at NIESR 15th April, 2008 and at the Bank of England 16th April, 2008.

These two lectures form the continuation of the lecture series jointly organised by National Institute of Economic and Social Research and Cambridge University Press. The Sir Richard Stone Lecture Series is a series of lectures by the world’s leading academic economists.

These two lectures were about economic data, taking as a case study the distribution of income, in the UK and in the world as a whole. In these lectures, Sir Tony argued we are inundated with economic data – on television, in newspapers, in political speeches – and economists have become ever more sophisticated in their econometric analyses. Yet, we rarely stop to examine their origins and their quality. Where do the statistics come from? What are their strengths and weaknesses? Do they measure what we want to measure?

Stone Lecture 2 "The Distribution of Income: the ∩ + U hypothesis"

Speaker: Sir Tony Atkinson, FBA
Chair: Professor Charlie Bean, Executive Director and Chief Economist at the Bank of England

The event, brought together a mix of policy-makers and economists from business and academia.

Sir Tony said: “Economic statistics were at the heart of the interests of Sir Richard Stone in his long career as an economist. He was concerned to link data to economic theory, to tackle constructively data deficiencies, and to develop economic statistics to serve the common good. In these lectures, I have tried to adopt the same approach. I begin by examining the teaching of economic statistics. I argue that the – very welcome – increase in the teaching of econometrics has tended to displace “old fashioned” economic statistics. With some notable exceptions, econometrics textbooks teach students what to do with data but nothing about the assessment of data quality or suitability. They are not encouraged to “look at the data”.

But does data quality matter? In Lecture I, I present four examples of studies that reach important conclusions, but where these conclusions are the product of the poor quality of the data employed. When more suitable data are employed, the conclusions disappear. One of these studies concerns the impact of inequality on growth – a central topic in macro-economics. Another concerns the relationship between inequality and life expectancy. Has increased income inequality in the UK really reduced life expectancy by a whole year? Another concerns the impact of inflation on inequality. Does inflation lead to higher inequality? In all four cases, data quality turns out to be a crucial issue.

These findings are negative, but in the final part of the first lecture I try to demonstrate how we can adopt a constructive approach to the use of economic data, taking as an example the distribution of earnings. Here we have seen major improvements in official statistics. Indeed, this year marks the 40th anniversary of the launching of the New Earnings Survey. This survey provides fascinating insights into the recent changes in the earnings distribution, notably the “fanning out” at the top. But we need also to step back. Before adopting one source of data, we should ask what is the whole range of possible sources, and how far can the different findings be triangulated? We need to ask how far we can go back in time. Is the recent rise in earnings dispersion unprecedented?

The second lecture is devoted to a single case study, designed to illustrate in greater depth the approach to economic data advocated in the first lecture. The case study concerns the world distribution of income. The world distribution is a much discussed subject, and strong views have been expressed about the impact of globalisation. Before, however, we can discuss these issues, we need to establish the factual basis, and this is the subject of the lecture.

In particular, I want to investigate a view that is coming to be widely held about the evolution of the world distribution, a view that I refer to as the ∩ and U hypothesis. The first part of the hypothesis relates to the international distribution. Over a number of centuries, inequality between countries has risen, but this is now being reversed, notably on account of the growth of China and India. So international inequality is following a ∩-shape. The second part of the hypothesis concerns inequality within countries. According to this, inequality within countries, after falling for a long period, has begun to rise in recent decades: a U-shape. As it has been described in the US, there has been a “great U-turn”.

I consider in turn these two hypotheses and ask what data are needed to investigate their validity. What combination do we need of national accounts and distributional data? What degree of data comparability is needed? Answering these data questions forces us in turn to examine in greater depth the purposes of the calculations. Why are we interested in the distribution of income between countries? What exactly are we seeking to measure? How far is it valid to construct a distribution among all world citizens?

What do I conclude about the ∩ and U hypothesis? In brief, half of each leg seems to be firmly established.”

Sir Richard Stone (1913-1991) was awarded the Nobel Prize in Economics in 1984 for his work on the development of systems of national accounts. Much of this work was published jointly by the Department of Applied Economics in Cambridge and the National Institute of Economic and Social Research. The first volume, containing his estimates of consumer spending and a statistical analysis of consumer behaviour which is at least as important records at the start of the Preface that “The detailed investigation of consumers’ expenditure…. was begun at the National Institute of Economic and Social Research in 1941” and acknowledges the financial support of the National Institute. It is with this in mind that the National Institute is proud to name this the Sir Richard Stone Lecture Series.

Sir Tony Atkinson is Professor of Economics at the University of Oxford and Fellow of Nuffield College, of which he was Warden from 1994 to 2005. He is a Fellow of the British Academy, and has been President of the Royal Economic Society, of the Econometric Society, of the European Economic Association, and of the International Economic Association. He was responsible for the Atkinson Review of Measurement of Government Output. He has been a member of the Conseil d’Analyse Economique, advising the French Prime Minister. He was knighted on 2001 for services to economics, and is a Chevalier de la Légion d’Honneur. He is author of Unequal Shares, The Economics of Inequality, Lectures on Public Economics (with J.E. Stiglitz), Poverty and Social Security, Public Economics in Action, Incomes and the Welfare State, Three Lectures on Poverty in Europe, The Economic Consequences of Rolling Back the Welfare State, Social Indicators and The EU and Social Inclusion (both with B Cantillon, E Marlier and B Nolan), and The Changing Distribution of Earnings in OECD Countries.