1. The Gini measure
2. Other measures
3. Evolution of inequality
4. Relative and absolute poverty
5. Inequality between countries and global inequality
6. Does Public Social Spending reduce income inequality?
7. Wealth inequality v. income inequality
8. Consumption inequality v. income inequality
9. Inequality and social mobility
10. Inequality and GDP
11. Inequality and violence
I could say that the bottom half of the world’s population owns the same as the richest 85 people in the world, but inequality of income or wealth is usually measured in a more systematic way. One traditional measure is the Gini coefficient (named after Corrado Gini). A complete list of countries’ Gini scores is here. Details about the calculation method are here.
The Gini coefficient is a measure of inequality in which zero corresponds to everyone in a country having the same income and one means the richest person has all the income. There are large differences between countries: the U.S. for instance currently has a score of 0.41 whereas Sweden and Japan only have 0.25. Latin America is the most unequal region in the world and the Nordic and central European countries are the most egalitarian, while the is U.S. is among the most unequal developed countries in the world.
Here are some country data:
Although the Gini coefficient is usually calculated for individual countries in order to track the degree of inequality within countries, it is also available for the world as a whole:
Global inequality—the income gaps between all people on the planet—has begun to fall as poorer countries catch up with richer ones. Two French economists, François Bourguignon and Christian Morrisson, have calculated a “global Gini” that measures the scale of income disparities among everyone in the world. Their index shows that global inequality rose in the 19th and 20th centuries because richer economies, on average, grew faster than poorer ones. Recently that pattern has reversed and global inequality has started to fall even as inequality within many countries has risen. (source)
The Gini measure is not uncontroversial. What exactly does it measure? After-tax, after-transfer income or market income? Does it refer to individual or household income? What sorts of things are counted as “income”? How do we account for access to high-quality public services? Different choices result in different levels of income inequality. Hence, other measures are proposed, some of which however may suffer from the same problems.
One other way to measure income inequality – or relative poverty – within a country is to calculate the proportion of a population with income less than 50% of the median income.
Here’s how this measure compares to Gini:
By the way, this graph also shows how government policy – taxation and redistribution – manages to reduce inequality.
Here are the numbers for the OECD countries:
(click image to enlarge)
These are the numbers of children living in households with an income smaller than half of the median income:
Sometimes, 40 or 60% are used instead of 50%:
This system for measuring inequality is often used as a measure of poverty rather than inequality. In that case, poverty is seen as a relative measure rather than an absolute one (see below).
Yet another way to measure income inequality: compare average income for the 10% of the population with the lowest income, to the average income for the 10% of the population with the highest income:
According to this measure, inequality in the U.S. is higher than in other developed countries (the same is true for the Gini measure):
Sometimes, the top 20% is compared to the bottom 20:
Over the most recent full business cycle (from the late 1990s to the mid-2000s), average incomes fell by close to 6 percent among the bottom fifth of households while rising by just 1.2 percent among the middle fifth, by 8.6 percent among the top fifth. (source)
And, finally, you can simply calculate the share of total income that goes to the top 1% earners.
Including capital gains, the share of national income going to the richest 1% of Americans has doubled since 1980, from 10% to 20%, roughly where it was a century ago. Even more striking, the share going to the top 0.01%—some 16,000 families with an average income of $24m—has quadrupled, from just over 1% to almost 5%. That is a bigger slice of the national pie than the top 0.01% received 100 years ago. (source)
Many of these different measures of inequality are correlated. For example:
Perhaps none of these measures is really eye-catching. That’s why you often see things like: “the income of the world’s 500 richest billionaires exceeds that of its poorest 416 million people”. Or: “in the US, the Walmart family has as much wealth as the bottom 40% of Americans combined”.
Let’s stick with Gini for now, and have a look at the evolution of countries’ scores. Two thirds of the world’s population live in countries where income inequality has risen since 1980.
America’s Gini for disposable income is up by almost 30% since 1980, to 0.39. Sweden’s is up by a quarter, to 0.24. China’s has risen by around 50% to 0.42 (and by some measures to 0.48). The biggest exception to the general upward trend is Latin America, long the world’s most unequal continent, where Gini coefficients have fallen sharply over the past ten years. But the majority of the people on the planet live in countries where income disparities are bigger than they were a generation ago. (source)
Another graph for Latin America, comparing income inequality between 1990 and 2008 – countries below the diagonal have less inequality now, and the higher on the graph the more unequal the country is now compared to others:
Apart from many Latin American countries and a few elsewhere in the world, income inequality has been increasing, including in some of the wealthiest countries. In OECD countries, the Gini coefficient increased by almost 10% from 0.29 in 1985 to almost 0.32 in 2008:
Not all OECD countries have seen the same evolution:
This trend is caused by the fact that the incomes of the richest 10% of employees has increased at a far greater rate than that of the poorest 10% of employees. Within the upper echelons, the top 1% have reaped the greatest gains. Technology has disproportionately benefited high-earning workers, who also spend far longer at work than do low-earners. High earners marry other high earners. And governments are doing less to redistribute wealth than they have done in the past (source). Those are, of course, only some of probably many different reasons why income inequality has risen in many countries.
Here’s another way to represent the evolution:
Inequality evolved in different ways in different parts of the world, but globally it came down:
However, when you compare global inequality to inequality within countries, you’ll see that global inequality – although decreasing – is still higher than the inequality in the most unequal countries:
The situation in the U.S. – one of the highlighted cases in the graphs above – is also illustrated by the graph below, which merely compares total income levels for different subsets of the U.S. population (another possible measure of income inequality):
More or less the same but presented in growth rates:
The following graph, presenting income shares in the U.S. rather than absolute income levels or growth rates, is perhaps even more telling:
Like many indicators, income inequality does not evolve at the same rate in different parts of a country. Here’s the case of the different states of the U.S.:
(source, click on the image to enlarge; a higher Gini value means more inequality)
You can clearly see the maps becoming darker over time, and also the shifting of inequality across the country.
Here are some numbers on the levels and evolution of income inequality in Africa:
Measures of inequality give an indication of relative poverty. The people at the bottom end of an unequal distribution in a particular country, can still be better off in an absolute sense than the average person in another country where, according to absolute measures of poverty, that person earns less and can buy and consume less.
Take the case of China and the US:
There are very few Chinese who are richer than the poorest Americans. Some conclude from cases such as these that income inequality is not important and that absolute measures of poverty and income are all that count. Why should we worry about income inequality in the US when the poorest in the US are as wealthy as people from the top class in China? Should we not rather focus our efforts at raising the poorest of the world to the level of the poorest US citizens? Maybe, but we should also remember that people do conceptualize poverty as a relative thing and that income inequality can have negative effects (low self-esteem, fatalism and absence of willpower caused by a system that perpetuates inequality; corruption of democratic procedures; effects on economic growth; etc.).
There seems to be a correlation between relative and absolute poverty, or between income inequality and levels of absolute poverty. The more unequal a society, the larger the numbers of people suffering from poverty:
Of course, there’s not only inequality within countries. The following graph, from the Special Studies series of the World Trade Organization, shows the differences in annual per capita GDP growth between rich and poor countries. The vertical axis shows the average annual per capita growth between 1960 and 1990, and the horizontal axis the per capita GDP in 1960.
Had the per capita incomes of the poorer countries (left side of the graph) been converging with that of the richer ones (right side), or had, in other words, the income inequality between poor and rich countries been decreasing, then the countries would have lined up from left to right along a downward-sloping line with the poorest country growing the fastest. This is not the case.
Global income inequality is worse than inequality in the most unequal country. If the world were one country, it would have a Gini coefficient of almost 70. This is only slightly down from 20 years ago, but way up compared to for example 1820 when it was only 55. For comparison, one of the most unequal countries in the world, South Africa, has a Gini of 63. The US, a relatively unequal country among the richer ones, has 45. Between 1989 and 2008 the over-all level of global inequality basically remained the same:
Recently, however, there’s a small decrease:
See also these factoids:
- The minimum wage for some of the best jobs in Haiti is US$6.97/day whereas the U.S. poverty line for 1 adult is US$30.60/day. (source)
- The median person in the world today (give or take, the 3,564,000,000th person) lives on about $1,225 a year or $3.3 a day. The poorest 5 percent of Americans are still living on more than that—around $3,000 to 4,000 per capita per year; or about $10 a day. Only the richest 5 percent of people in India live on the same amount. (source)
- The world’s richest 1 percent – who live mostly in the West – are the 71 million people in households that enjoy incomes somewhere around $250,000 a year and above; that’s a minimum of ±$700 a day. And that’s 200 times the median. (source)
- The world’s richest 500 million people – the top 13% – earn almost half the world’s income; that’s a yearly income of over $11,500 a year or over $30 a day. (source)
I think it does. But first, perhaps, a word on public social spending. What is this? It’s government support for those in need. This can be financial or other types of support. It can be cash benefits such as unemployment checks, tax advantages (e.g. to poor families with children), or “in-kind” goods and services such as free wheelchairs for the disabled. “Public” means that the government provides this support. (There’s also private social spending: e.g. companies can voluntarily pay their employees an additional amount for child support or old age pension).
The graph below shows that there is a correlation between relatively high levels of public social spending (measured as a percentage of total N.N.I.) and relatively low levels of income inequality (measured with the Gini-coefficient):
(source, click on the image to enlarge)
So we can assume that helping the needy does indeed push their income upward, and reduces inequality. This of course corresponds to a widely shared intuition about the importance of a social safety net and income distribution.
The same conclusion results from the following graph, correlating levels of government spending and Gini:
A government that captures more of GDP can do more against inequality.
The top 1% of Americans control 20% of the wealth, twice what they had in 1973.
And then remember that income inequality is a problem because of the differences in wealth it generates. It’s apparent from these graphs that income is just one determinant of wealth (a very ill person may have a high income but low wealth; someone owning three different houses may have a retirement income very much below a large young family struggling to remain afloat on a considerably higher income etc.).
Whereas wealth disparities between individuals are always – on average – larger than income disparities, the opposite is true for consumption disparities: people save when their incomes go up and borrow when their incomes drop, and both activities tend to reduce difference in living standards. This is why you can have increasing income inequality and yet slower increases – or no increases at all – in consumption inequality.
Another reason for smaller difference in consumption than income across people: consumption has a lower upper limit than income. People can consume more than others but not really that much more. After your second yacht, you’ll just tend to save your additional income instead of consuming even more. Also the lower limit of consumption is higher than the lower limit of income: you can have 0 income but not 0 consumption. For these reasons as well, consumption inequality tends to be smaller than income inequality.
Some argue that we should look at consumption inequality rather than income inequality. What matters to people is not how much they earn but how much they can consume. And what they consume also gets better over time, without getting a lot more expensive (often things get cheaper). Hence, even with unchanging levels of consumption expressed in monetary value, people are becoming better off. There’s also decreasing marginal utility: someone’s second yacht isn’t as valuable to that person as someone’s first high quality dvd player. No need to worry about income inequality.
Whatever the merits of this opinion – and I think it’s overstated because income and wealth are important, and not just for consumption – the fact is that consumption inequality has actually risen, almost on a par with income inequality:
When leftists complain about high levels of income inequality, their opponents on the right sometimes argue that inequality is the natural outcome of personal desert. If you’re wealthy, you should be praised for your work, and if you find yourself on the wrong side of inequality you should invest more effort and try harder to be socially mobile. If you think inequality is a problem then in fact you blame the industrious for being industrious and you exculpate the rest. Societies like the US offer lots of opportunities to escape the social class of your parents, and many do in fact escape. So why not you?
This right-wing argument has a certain prima facie appeal. We all believe that effort should be rewarded. And when social mobility is easy and people aren’t artificially held back and tied to the class of their parents, then inequality is the result of skills and effort, the absence of skills and effort, or lifestyle choices. In other words, inequality is what people deserve. If there are few or no obstacles to mobility and people have some level of equal opportunity, then they basically choose their position in society: they choose to develop their skills and invest effort, or they don’t.
However, I find this narrative unpersuasive. It’s not always true that individuals can simply decide to develop their skills and invest effort in their social mobility. Skills are not simply “developed”; some people are born with more talent than other people, or with talents that yield more financial profit than other talents. True, talent requires development and effort, but even effort may be a naturally acquired talent or a talent that requires favorable conditions in early childhood. I think we all agree that a stable and reasonably affluent family life and a good education are indispensable, on average, for the development of talent and of a personal ethic that favors effort and discipline. Many people at the wrong end of inequality can offer this to their children, but to a much lesser degree than the people at the right end. Here are some data on so-called enrichment expenditures:
And it’s not just expenses. The children of wealthy parents have other advantages compared to poor children, advantages they wouldn’t have in a less unequal society, for instance networks, internship opportunities etc. Because of extra expenses in education and other less material advantages, these children are more likely to end up in a high income group as adults. As a result, inequality counteracts social mobility. And we see that in the numbers: the more unequal a society, the less social mobility. The US is a highly unequal society, and a US child born in the top 20 percent has about a two-in-three chance of staying at or near the top. A child born into the bottom 20 percent has a less than one-in-20 shot at making it to the top. Other, more equal societies show greater levels of mobility. That’s the message of Miles Corak’s famous Great Gatsby Curve:
(SOURCE, THE “INTERGENERATIONAL EARNINGS ELASTICITY” IS A MEASURE OF CORRELATION BETWEEN THE INCOME OF GROWN CHILDREN AND THEIR PARENTS—HIGHER VALUES SUGGEST LESS MOBILITY)
Here’s another version showing other countries:
If people argue that income inequality is not really a problem when there is a high level of social mobility and when people have good opportunities to become socially mobile – in other words to climb the social ladder and escape the social class or income group into which they were born – then this is really taking things backward. Social mobility can’t be a solution to inequality because inequality makes mobility very difficult. High levels of social mobility assume that we do something about inequality of opportunity, and only when this inequality is solved will we solve income inequality – or, better, will the remaining income inequality be less of a problem.
So, inequality of opportunity is a bigger problem than income inequality because the latter should be discounted for individual choices and individual effort. Unfortunately, this “solution” – working on inequality of opportunity rather than income inequality – is in fact a dead end. As I’ve argued here, equality of opportunity is a highly problematic concept and not one that we should or can pursue.
More data on income inequality are here.
This can explain the link between inequality and guard labor: