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## Is inequality within countries getting better or worse?

from Jason Hickel

In a recent Twitter post, Max Roser of Our World In Data claimed that the narrative about rising inequality within countries is incorrect. Inequality has been falling in as many countries as it has been rising, he said, “which should be really embarrassing for many news stories that suggest the opposite with great certainty.”

Roser’s tweet referred to an interesting blog post by Joe Hasell, with a graph illustrating the change in the Gini index within countries from 1990 to 2015. Countries above the 45-degree line have seen rising inequality, while countries below the line have seen falling inequality. It’s a pretty even split (although the majority of the world’s population live in countries that have seen rising, not falling inequality).

This seems like good news indeed. So which is it? Is inequality getting better or worse?

What Roser doesn’t mention in his tweet is that the Gini index used here is a relative measure. If the incomes of the poor increase at a faster rate than the incomes of the rich, the Gini index shows a decline in inequality even if the absolute income gap between the rich and poor continues to widen. Hasell is aware of this issue, however, and mentions at the end of his post that calculations of absolute inequality suggest that inequality has been increasing over the same period.

So what’s going on here? Imagine that person A has an income of \$1 per day while person B has an income of \$100 per day. If A’s income grows by 100% (to \$2) while B’s income grows by only 90% (to \$190), the Gini index shows that inequality is decreasing even though the absolute gap between the two has increased substantially, from \$99 to \$188.

We can correct for this by using the absolute Gini: simply take the Gini index and multiply it by the average income of each country. Doing so gives us a very different picture of inequality. The graph below shows that the vast majority of the world’s countries have seen increasing absolute inequality from 1990 to 2015. Click through to explore an interactive version developed by Huzaifa Zoomkawala in conversation with Hasell and me.

There are various ways to calculate the absolute Gini. One can use Gross National Income (GNI) per capita, measured in either constant or PPP terms, or – to be more consistent with the underlying Gini data from Povcal – one can use mean income as captured by household surveys (as in the image above). The interactive graph gives users the option to pick between these various multipliers. But no matter which one you pick, the conclusion is the same: absolute inequality has been getting worse virtually everywhere.

These results are in keeping with recent research showing that the absolute Gini increased for the world as a whole as well as in most world regions from 1975 to 2010.

Keep in mind that the graph above is represented on a logarithmic scale. The linear scale (the default option on the interactive graph) has poor countries clumped together in the bottom left with rich countries soaring away. This skewed distribution is due to the vast differences in average incomes between countries, and illustrates the significant inequality that continues to persist between Western countries and the rest of the world.

There is no “correct” way to measure inequality. Both relative and absolute measures are important. For some reason the relative measure has become the most dominant by far (i.e., in the work of Branko Milanovic and in World Bank reports). But it is misleading to develop a narrative about inequality using the standard Gini index without (a) stating that it is a relative measure, and (b) providing the absolute measure for comparison.

This is important, because in my experience when most ordinary people (i.e., non-experts) think about inequality, they think of income gaps instead of ratios. I tested this recently with an online poll that gave respondents the chance to explain, in their own words, what they think when they hear someone say that inequality is “getting worse” or “diminishing”. Among 174 respondents, the vast majority (some 95%) indicated that they think of inequality in absolute terms.

This needs more formal research, of course; but if these preliminary results are anything to go by, then we risk seriously misleading the public by telling them that inequality is decreasing when in fact, according to common sense definitions, it is getting worse.

1. August 6, 2019 at 1:03 pm

It seems to me that we must be very clear that Gini scores need to be post-tax & post-public transfers, because the logic is that taxes pay for the somewhat income leveling transfers. We also should include money sent home by non-residents who work outside their home countries. The latter includes Eastern Europe, parts of Africa/Latin America/Asia/Middle East, etc. These transfers by non-resident family members.should not be lost in our calculations since they are a vital part of globalization. The residence standard is the taxation standard, but it is not the family welfare standard. Further, there are untaxed activities like babysitting & other part-time work which don’t show up. Life is not so stark when violence is eliminated, as our species has normally survived nicely when disease, extreme weather & violence have been avoided.

2. August 7, 2019 at 4:07 pm

This kind of research is invaluable. I only wish that international statistics permitted the use of median family (and/or households) income before and after taxes, instead of per capita income measures which take no account of the distribution of income in any sense.

James Beckman’s idea of taking into account foreign workers abilities to send monies home to assist their families and relatives has some merit as an ancillary measure of the contribution of global worker mobility to alleviating inequality. It is important to get some grasp on what the inequalities within nations would likely look like in the absence of such international worker mobility with its income transfers home.

3. August 12, 2019 at 12:29 pm

There’s a mythology that America is the land of opportunity for all due to its long history of law and liberty. That with hard work and proper living anyone can be successful. This is a tough mythology to beat as its been central to the American story since the Revolution. But many Americans are becoming disillusioned with the story considering the large and growing economic inequality.

In 2011 sociologists, Michael Norton and Dan Ariely analyzed beliefs about wealth inequality. They asked more than 5,000 Americans to guess the percentage of wealth (i.e., savings, property, stocks, etc., minus debts) owned by each fifth of the population. Next, they asked people to construct their ideal distributions. Imagine a pizza of all the wealth in the United States. What percentage of that pizza belongs to the top 20% of Americans? How big of a slice does the bottom 40% have? In an ideal world, how much should they have? The average American believes that the richest fifth own 59% of the wealth and that the bottom 40% own 9%. The 2011 reality is strikingly different. The top 20% of US households own more than 84% of the wealth, and the bottom 40% combine for a paltry 0.3%. The Walton family, for example, has more wealth than 42% of American families combined.

Americans don’t want to live like this. In an American’s ideal distribution, the top quintile owns 32% and the bottom two quintiles own 25%. As the journalist Chrystia Freeland put it, “Americans actually live in Russia, although they think they live in Sweden. And they would like to live on a kibbutz.” Norton and Ariely found a surprising level of consensus: everyone — even Republicans and the wealthy—wants a more equal distribution of wealth than the status quo.

This research was repeated in 2014, 2015, and 2018. The results did not change.

The economists behind the 2018 World Inequality Report — Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman — lay out an “explanation” of what’s happening. “The income-inequality trajectory observed in the United States is largely due to massive educational inequalities, combined with a tax system that grew less progressive despite a surge in top labor compensation since the 1980s, and in top capital incomes in the 2000s. Continental Europe meanwhile saw a lesser decline in its tax progressivity, while wage inequality was also moderated by educational and wage-setting policies that were relatively more favorable to low and middle-income groups. In both regions, income inequality between men and women has declined but remains particularly strong at the top of the distribution.”

How do non-economists explain the quick and unprecedented increase in American economic inequality? In “The Protestant Ethic and the ‘Spirit’ of Capitalism,’ Max Weber wrote.
“Other things being equal, classes with high social and economic privilege will scarcely be prone to evolve the idea of salvation. Rather, they assign to religion the primary function of legitimizing their own life pattern and situation in the world. This universal phenomenon is rooted in certain basic psychological patterns. When a man is happy, he is not content with the fact of his happiness, but desires something more, namely the right to this happiness, the consciousness that he has earned his good fortune, in contrast to the unfortunate one who must equally have earned his misfortune… . What the privileged classes require of religion, if anything at all, is this psychological reassurance of legitimacy.”

Thus, the sources of economic inequality and the wealthy’s religion.