Worldwide Income Inequality

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I’ve highlighted the decline in global income inequality several times before. A new working paper suggests that this trend will continue into the near future:

Considerable recent research has focused on changes in income inequality within countries [Atkinson, Piketty, and Saez 2011; Alvaredo et al. 2013; Saez and Zucman 2016; Assouad, Chancel, and Morgan 2018; Novokmet et al. 2018]. There is substantial variation in income inequality within countries. Income inequality after taxes and transfers is relatively low in Canada, Japan and most western European countries and quite high in Brazil, Egypt, India, Mexico, and South Africa [Solt 2016]. Moreover, within-country income inequality has increased in recent decades in several large economies, including China, Russia, and the United States [Assouad, Chancel, and Morgan 2018].

Recent scholarly research has also addressed cross-country and worldwide income inequality [Bourguignon and Morrisson 2002; Sala-i-Martin 2006; Hellebrandt and Mauro 2015; Milanovic 2013; Bourguignon 2015; Milanovic 2016]. This article makes three major contributions to the literature on global income inequality. First, development as a process is integrated into the analysis of income inequality. Researchers have generally ignored the impact of the development process on demographic changes and income inequality. Changes in demographic factors as countries move through different phases of the development process will be examined and their impact on economic growth and income inequality analyzed. Second, Gini coefficient measures are developed for cross-country income inequality from 1820 to 2015 and for each of the three types of income inequality for 1960 to 2015. Third, the impact of development as a process and changes in other factors that influence economic growth, are used to project future changes in income inequality.

During 1960-2000, demographic changes accompanying the development process contributed to the sizeable increases in cross-country and worldwide income inequality. However, beginning in the 1990s, changing demographic factors accompanying the development process led to a reversal of this situation. Increasingly, developing countries have moved into phases of development associated with high rates of economic growth, while the high-income countries have moved into a development phase that results in slower growth. As a result, there has been a dramatic reduction in income inequality during 2000-2015. Moreover, it is a virtual certainty that the demographic factors underlying the recent reductions in inequality will continue for at least a couple more decades, leading to further reductions in global income inequality (pg. 2-3).

In an interview, Nobel economist Angus Deaton noted, “I both love inequality and am terrified of it. Inequality is partly a marker of success, so that if someone thinks of something, some new innovation that benefits us all, and the market works properly, they get richly rewarded for that. And that’s just terrific. And that creates inequality. So some of the greatest inequalities in the world have come from the greatest successes.” This seems to fit with the phases of development discussed above.