Income Transformation and Income Inequality

Abstract

This paper is about the structure of income inequality comparisons. The analysis of income inequality is, of course, essentially about the sharing-out of a “cake” or “pie” and some of the elementary principles which apply to comparisons of alternative cake-divisions are usually assumed to be well known. However, except in the very simplest cases, more is required than these elementary principles. For inequality analysis to have economic meaning, or for it to be used as a basis for rational social decisions, it is important that judgments of alternative share-outs should conform to some sort of structure. We examine the issues that arise in connection with this structure and employ a new experimental test to investigate a specific hypothesis about the relationship between income levels and inequality orderings.

We examine the way in which across-the-board additions to incomes are perceived to change inequality. Using a questionnaire we investigate whether subjective inequality rankings correspond to the principle of scale-independence or of translation-independence, or to some generalized concept of independence which incorporates the other two principles as special cases. We find evidence that the appropriate independence concept depends on the income levels at which inequality comparisons are made. This paper is Partially supported by the Human Capital and Mobility Programme of the EU grant #ERBCHRXCT94067 and ESRC grant #R000 23 5725. We would like to acknowledge the research assistance of Ceema Namazie.