Equality, Participation, Transition: Essays in Honour of Branko Horvat

68 Determinants of Income Inequality
state-sector employment: a reduction of the Gini coefficient from 55 to
41. How important is this effect? How big is it in practical terms? It is
equivalent to transforming Bolivia or Côte d’Ivoire (both with actual
Ginis of about 55) into Sri Lanka or Uruguay (Ginis of 41). The 14.3 Gini
point reduction is almost evenly shared between the effect of state-sector
employment and social transfers: state employment reduces inequality,
on average, by 5.8, and social transfers by 6.8 points.
The effect of the social choice variables is not independent of the level
of income. At low levels of income – less than $1500 at purchasing parity
– the Gini that depends on income alone and actual Gini differ by
very little: by about 5 Gini points, with STATE and TRANS being of
about the same importance in reducing inequality (see the last columns
in Table 4.4). 29 Between $1500 and $4500, social choice variables reduce
inequality by some 12 Gini points. The state sector now becomes more
important than transfers. After $4500, the importance of social choice
variables further increases, reducing the GINI that would obtain, if
income alone mattered, by between 15 and 25 Gini points or, in other
words, cutting the level of inequality by more than a third. The importance
of STATE remains greater than that of TRANS, reaching its peak for
the countries with incomes between $6000 and $10 000 where almost
all socialist countries are located. Finally, for the richest countries, the
reduction in inequality due to social choice variables, equal to 18.6 Gini
points, owes much more to transfers than to state-sector employment.
Two conclusions can be drawn. First, variables which represent social
choice have an important role in determining the degree of inequality.
On average, social choice variables reduce the unweighted Gini coefficient
in our sample by 14.3 Gini points (that is, by a quarter). Secondly,
the importance of social choice variables increases with level of income.
Social choice variables do not matter very much at low levels of income,
but as income rises, society’s preference for policies that reduce
inequality seems to increase. Equality seems to be a superior good. The
standard version of the Kuznets hypothesis, with income level alone, is
therefore less valid as income increases and non-economic factors –
compared with strictly economic factors – become more important in
shaping personal income distribution.
4.5 Conclusions and implication of the findings
We have set out to answer two questions. First, do social choice variables
– jointly, with the purely economic variables included in the
standard formulation of the Kuznets hypothesis – determine income