CHAPTER 11:
INEQUALITY AMONG AND
WITHIN NATIONS:
PAST, PRESENT,
FUTURE
WHAT IS INEQUALITY?
• Unequal access to welfare
– E.g. consumption, health, life expectancy, schooling
• Usually measured by inequality in income, but this is just a means to an end
• Thus income is a poor measure of inequality, since many aspects of welfare not linked to it, for example:
– Since 1950 world income inequality increased, but inequality in literacy fell sharply
– Child mortality declined, welfare states, cultural subsidies
THE SOURCES OF INCOME INEQUALITY
• Sources of income:
– Work, acquired or inherited wealth
– From 20th century: transfers such as pensions
• Much inequality related to skills acquired
• But discrimination can distort relationship between skill and reward
• Property income not necessarily related to past effort
SOURCES OF WORLD INCOME INEQUALITY
• Poor in poor countries usually poorer than poor in rich countries
• Rich in poor countries almost as rich as those in rich countries, but not as numerous
• Income mean differs due to
– Unequal access to good government, technology, skills – Insufficient savings and investment
– Foreign exploitation? Actually little foreign investment or trade with poor countries
DOES INCOME INEQUALITY HAVE ROOTS IN COLONIAL PAST?
• Artificial country borders, gave endemic border conflicts
• Property rights acquired by colonial corporations unfavourable to indigenous people
• Colonial trade patterns left countries specialized in a few commodities from extractive industries which see wide fluctuations in prices
• Specialization in primary products not necessarily bad, but the rich world protects agriculture
MEASURING INEQUALITY
• Gini coefficient: measures extent of inequality relative to equal income distribution
• = 0: all households earn the same
• = 1: maximum inequality (only theoretical possibility)
• Can be illustrated graphically using Lorenz curves
– Cumulative share of households against cumulative percentage of total income
– Straight line illustrates maximum inequality, e.g. 10% of households get 10% of income, 20% get 20%, etc.
GINI COEFFICIENTS IN ECONOMIES
FROM 10,000 BCE TO THE PRESENT
MAXIMUM FEASIBLE INEQUALITY
• Maximum feasible inequality gives the maximum inequality possible given the average income
• E.g. if an elite of 0.1% of the population receives all income above subsistence, then 99.9% must survive on 400$PPP / head
• Higher average income higher max. inequality
• Gini coefficients in Rome in 14 CE equal to those in the US in 2000, 0.40. But Rome was almost as unequal as possible
ACTUAL GINI COEFFICIENT AS A
SHARE OF MAX. GINI OVER TIME
DECLINE OF INEQUALITY IN EUROPE OVER TIME
• Before industrialization the richest 5% earned around 35% of total income
• Only half this by the end of the 20th century
• Due to rise of mass education, higher school leaving age
• This due to spread of democracy, demands from more complex production technology
• Compatible with idea of Kuznets curve: inequality increases early in modernization, then declines
GENDER INEQUALITY
• Women usually earned half of men in pre-industrial times: reflected lower physical strength, different jobs
• Gender gap today between 10-30%: mainly due to differences in occupation, education, experience
• Discrimination? In the past women dropped out of the labour market after birth of first child
• Much of present gap due to labour market interruptions, gives less incentive to invest in on-the-job training
© Paul Sharp and Cambridge University Press
IS GENDER INEQUALITY DUE TO DISCRIMINATION?
• Pure discrimination perhaps 5-10% (same skills etc.)
• Goldin: Due to employers’ tendency to see average
attributes? Average length of on-the-job training of men greater than for women
• Others argue that bigger problem is that women are directed towards low-paid occupations
• But women today more likely to invest in long educations due to availability of contraceptives, childcare, etc.
IS INEQUALITY ON THE RISE AGAIN?
• Since around 1980 (historical low), inequality increasing again in Europe and around the world
• Large variation 1980-2005:
– Increased from 0.2 to 0.25 in Scandinavia – Increased from 0.25 to 0.35 in UK and US
• Probably not due to taxes and income transfers
• Impact of property income – rich get richer
• Increase in ‘normal’ unemployment rate – poor get
INTRA- AND INTER-GENERATIONAL SOCIAL MOBILITY
• More unequal societies, such as the US, have less
mobility for individuals between income groups over time
• Little difference in ability to transmit income differences from generation to generation across countries
• But in the US children of poorer parents have less opportunity to become richer
• Scandinavia is at the other extreme, Germany somewhere in between
WORLD INCOME DISTRIBUTION
• Until 1800, mean income varied between 1-5 subsistence incomes
• In 1870 per capita income of richest country 9 times that of the poorest
• In 1990 per capita income of richest country 45 times that of the poorest
• Why? Not all economies have benefited from modern economic growth
HOW TO MEASURE WORLD INCOME INEQUALITY
• Global inequality would look at the income of all citizens of all nations in the world!
• Use instead un-weighted income inequality: Gini of income per head in each nation
– Increase in Gini from 0.45 to 0.55 from 1950-2000
• Or weighted income inequality: Weights per capita incomes by population
– Decrease in Gini from 0.55 to 0.5 from 1950-2000
• Due to growth in populous countries, e.g. China
WITHIN COUNTRY INEQUALITY
• Inequality has fallen because of the growth of large countries: China, India, Vietnam, Indonesia
• But increase in per capita GDP may conceal inequality within a fast-growing nation
• Kuznets hypothesis
– Early in modernization, educated labour is scarce, so premium high
• Is some evidence that inequality has increased in China
HUMAN DEVELOPMENT INDEX (HDI)
• We have focused on incomes
• The UN developed HDI to measure broader welfare
• HDI weights per capita income, education and life expectancy
• Somewhat arbitrary! But reveals that health and education is converging, even if incomes are not
HDI AND GDP PER HEAD 1870-2000
SPECULATIONS ABOUT FUTURE INCOME INEQUALITY
• Depends on three questions:
1. Will all nations obtain modern economic growth?
2. Will latecomers initially grow much faster?
3. Will new industrializing countries eventually become less unequal?
• We can be optimistic
– Given the experience of Europe and Asian latecomers
– Given the historical experience of institutional convergence and
SUMMARY
• European economies have converged over time, both absolutely and in terms of maximum possible
• But recent trends towards more inequality
• Major factor for reducing domestic inequality is education
• Major factor for reducing international inequality is technology transfer
• More populous nations now joining ‘growth club’
