growth, human capital and the environment. Thus, levels of inequality in the economy may
have considerable impact not only on present levels of well-being, but also on the well-being of
future generations.
This paper discusses those links in conceptual terms Section 2. It then outlines a number of
methods for measuring income inequalities Sec- tion 3 and discusses the question of integrating
those measures into measures of national welfare Section 4. Using two of these measures, it then
presents a time series analysis on trends in the distribution of incomes in two case study coun-
tries the UK and Sweden and carries out a sensitivity analysis for the UK on one key
parameter — the value of o in the Atkinson inequality index Section 5.
The differences between equity, equality, fair- ness and justice have been extensively discussed in
the literature e.g. Le Grand et al., 1976; Daly 1992; Dasgupta, 1995; Sen 1997. Quite clearly the
concept of intratemporal equity is broader than the concept of intratemporal income equality. A
thorough analysis of the former issue must pay attention to the intratemporal distribution of a
wide variety of resources, including natural, envi- ronmental, cultural, human and social resources
as well as purely financial ones. Acknowledging these limitations, it is nonetheless our contention
that the distribution of incomes in the economy represents a reasonable proxy with which to illus-
trate the welfare impacts of intratemporal equity, and this paper proceeds on that basis.
2. Well-being and income inequality
Traditional measures of economic growth, such as the gross domestic product GDP, reflect
changes in the absolute level of activity but tend to ignore relative and positional changes. A dollar
income rise to a poor person is assumed to have the same welfare effect as a dollar increase to a
rich person, and aggregate increases in income are assumed to yield equivalent increases in well-be-
ing no matter how they are distributed. In reality, however, we would expect the distribution of
incomes to have differential effects on well-being for a number of reasons.
In the first place, most societies express some kind of social preference for equality over in-
equality; i.e. a society with less inequality in the distribution of resources is preferred to one with
more inequality. As a rule, therefore, societies tend to strive for a more equal distribution of
resources, although there are different views on what the right le6el of equality for a society is.
Some countries might emphasise the poorest peo- ple in society, while others strive for total equal-
ity. Daly 1992 argues that a ‘good distribution is one that is just or fair, or at least one in which the
degree of inequality is limited within some accept- able range.’ Le Grand et al. 1976 identify several
approaches to the question of a fair distribution:
the minimum standard approach — which is concerned only with the poor in the society and
argues that nobody’s income should fall below a certain minimum level;
the total equality approach — which argues that everyone should have the same income,
i.e. the bottom 10 of the population should receive 10 of the income;
the need or desert approach — which accepts inequalities either on the grounds that some
people need more income or because people deserve more due to own effort, sacrifice, intel-
ligence, etc;
equality of opportunity or procedural ap- proach — inequality accepted if everyone has
had the same opportunity, or if the distribution is a result of a fair process.
The social justice approach introduced by Rawls 1971 is what Le Grand et al. 1976 refers to as
a ‘combined approach’ in which inequalities are only justified to the extent that they benefit the
least advantaged.
Related to the issue of fairness is that of the diminishing marginal utility of income: when a
person is poor she would benefit more from an income rise than if she were rich. This, in turn,
would suggest that a transfer from a rich person to a poor person decreases inequalities in a soci-
ety, and thereby raises the overall level of national well-being. Dalton 1920 pointed out that all
inequality measures should have this characteris- tic, i.e. that a transfer from a rich person to a
poor person should always reduce the value of the inequality index.
1
A third issue linking inequality and well-being is the relationship between economic growth and
equality. The question here is whether there is a trade-off between economic efficiency higher na-
tional income and equity a more equally dis- tributed income. The conventional view has been
that striving for income equality slows down eco- nomic growth for several reasons. Firstly, it is
argued that higher equality will lead to less incen- tive to work and less incentive to be productive.
This is related to the impact of tax rates, and is only one of many incentive effects. It has also
been argued that higher equality can lead to a reduction in domestic savings and thereby a re-
duction in growth. This argument is based on the assumption that rich people have a higher mar-
ginal propensity to save Klasen, 1994. In recent years, however, the issue of the relationship be-
tween growth and income inequality has been turned on its head. Income equality is now being
advanced by some as a promoter of growth Per- otti, 1993; Alesina and Rodrick, 1994; Persson
and Tabellini, 1994; Be´nabou, 1996. In these studies, it has been argued that pre-tax income
equality could dampen the demands for redistri- bution policy financed by taxes and hence en-
hance investment, education and R and D.
A further reason for incorporating consider- ations of intra-generational equity into assess-
ments of sustainable welfare is the relationship between investment and income inequality. The
potential conflict between investment in savings for future welfare and investment in improve-
ments in intra-generational equity has already been remarked upon. The level of direct and
indirect investment in human capital is also of importance for the sustainability of an economy.
A healthy and well-educated work force will help to ensure future generations’ consumption possi-
bilities. Research has shown the equalising income differentials might have greater effect on the
status of health and mortality than increasing income Fritzell and Lundberg, 1995; Wilkinson,
1996. This is of particular importance in devel- oped countries where the relative dimension, i.e.
how a person’s economic situation compares to others can trigger ‘psychological mechanisms’ that
can affect the status of health. From the point of view of sustainable develop-
ment, it is clearly important to question whether or not there is a relationship between intra-gener-
ational equity and environmental quality. A now well-known hypothesis put forward by Kuznets
1967 supposes that as income levels increase through economic growth, income inequality
passes through an inverted U-shaped curve, with increasing levels of inequality in the early years of
development giving way to diminishing inequities as development advances. A similar curve termed
the Environmental Kuznets Curve has been pro- posed for the relationship between environmental
degradation and levels of income. It should be noted that both these hypotheses are contentious;
2
and any conclusions that could be drawn from these parallel relationships are beyond the scope
of this paper. However, recent investigations do indicate that there are important relationships
between equity and environmental quality.
Boyce 1994 has argued that a more equitable distribution of power contributes to improve-
ments in environmental quality. His definition of a power function is based on a combination of an
income inequality index Gini, a literacy variable, political rights and civil liberties, and certain
other factors mainly geographical. The overall conclusion from a study of seven different envi-
ronmental factors for a cross-section of high and low income countries is that the ‘results provide
fairly robust support for the hypothesis that greater inequality in the distribution of power
leads to more pollution’ Torras and Boyce, 1998. This hypothesis also appears to be sup-
ported by empirical work in relation to the distri- bution of power within a country Boyce et al.,
1999.
The basis for the correlation between greater inequalities and increased environmental degrada-
2
On the environmental Kuznets curve, see the special issue of Ecological Economics, 25 2, 1998, in relation to income
inequality; it should be noted that the results reported in this paper provide no obvious support for the Kuznets curve
hypothesis.
1
This has become known as the Pigou – Dalton criterion Sen, 1997.
tion can be summarised in three points Boyce, 1994.
1. In a situation where there are benefits as well as costs of environmental degradation, the ex-
tent of the degradation will depend on who is most powerful the winner or the loser. As
power and wealth are often correlated, it is likely that the rich will be the ones with power.
If these are the ones who benefit from the degradation, there will be greater environmen-
tal degradation since the difference in distribu- tion leads to some groups in society not
having the power to counteract the costs. This is the main argument in Torras and Boyce
1998.
2. Greater inequality leads to less concern for the future, i.e. a higher rate of environmental time
preference. The poor have a high environmen- tal time preference as they are concerned with
day-to-day survival rather than future environ- mental degradation. The rich, Boyce argues,
also experience high rates of environmental time preference because political and economic
inequality pose threats to the legitimacy of the powerful for instance, through social unrest.
This prompts those in power to pursue the extraction of short-term profits even if this is
at
the expense
of future
environmental degradation.
3. Environmental degradation is often valued in willingness to pay, which is related to the
ability to pay — income will affect the valua- tion of the costs and benefits. Greater inequal-
ity raises the benefits to the rich, relative to the costs of the poor.
There are clearly a number of other complex relationships between income distribution and the
environment, exemplified, for example, by the ex- tent to which security in low income families in
developing countries is often gained through larger families, which in turn leads to higher
environmental impacts Markandya, 1998, or by the
extent to
which identity
in developed
economies is developed through materially inten- sive consumption patterns Jackson and Marks,
1999. The underlying issue in all of these rela- tionships is the question of the distribution of
benefits versus the distribution of costs. Higher consumption patterns benefit richer communities,
but the cost of these consumption patterns often impact most on poorer communities.
It is clear from these considerations that the relationships between intra-generational equity
and sustainable welfare are complex, but of con- siderable importance. As the UNDP 1996 has
pointed out: ‘average material welfare can be defined by the per capita GDP. However, statisti-
cal averages can mask the diversity that exists within any country. Therefore, from a sustainable
development perspective, it is informative to ex- amine income and wealth distribution throughout
a population.’ This brings us to the issue of how to measure inequalities and how to include con-
sideration of these inequalities into measures of national well-being. This is the subject matter of
the following two sections.
3. Measuring income inequalities
