global economy lecture 2009: the global distribution of

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A B Atkinson, University of Oxford

Global Economy Lecture 2009

The global distribution of income: past trends and future prospects

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“Controversy centres on whether inequality has increased or decreased in the recent past. The direction and magnitude of change have been highly charged questions with some authors arguing that globalization has benefited the rich disproportionately, while others argue that it has reduced world income inequalities” (Anand and Segal, page 57).

S Anand and P Segal, “What do we know about global income inequality?”, Journal of Economic Literature 2008

Reasons for disagreement:• Different concerns• Data shortcomings• Different movements at different points in the distribution

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1. Conceptual issues: what are we concerned with?

2. The international distribution of income: convergence following divergence?

3. Within-country inequality over the twentieth century: a Great U-turn?

4. The global distribution: combining between- and within-country inequality

5. Underlying explanations

6. Where are we headed?

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4. The global distribution: combining between- and within- country inequality



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Distribution among whom?International

Distribution (among countries)

•Country A

•Country B

•Country C …

World

Distribution (among people)

WORLD

CITIZENS

Household incomes

GDP per head

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Distribution of what?

STANDARD ANSWER = Potential living standards, measured by annual disposable income among households adjusted for household composition and for differences in purchasing power across countries and across time.

Inequality typically measured by standard inequality measures, such as Gini coefficient

Implies that international distribution is an intermediate step, not a final concern

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Distribution of what?

ALTERNATIVE ANSWER = Economic power of countries measured by total national income measured at exchange rates (what can buy on world market)

Measured by concentration measures (such as share of top 12 countries)

Implies that international distribution is a final concern

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DATA: How do we measure the international distribution of income?

Angus Maddison data set on gross domestic product per capita AD1-AD2006

BUT• Official National accounts only started post

1945• Need to compare across time (price indices)• Need to compare across countries (purchasing

power adjustments)

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Between-country differences: GDP per capita (PPP adjusted) in India and UK

Divergence

Convergence

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Figure 2 International Lorenz curves 1820-2000

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0 10 20 30 40 50 60 70 80 90 100

Shar

e of

tota

l inc

ome

per c

ent

1820

1900

1950

1980

2000

Diagonal

World population in increasing order of GDP per head of country

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Top 12 countries concentration ratio

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1970 1980 1990 2000 2006

Perc

enta

ge o

f tot

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orld

inco

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in U

S $

TOP 12

exc USSR

Geo-political concerns

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INTERNATIONAL DISTRIBUTION: Summary

• Long period of divergence following Industrial Revolution – up to mid-century.

• Large countries now becoming middle income.

• BUT leaving poorest countries behind.

• Rich countries as a whole still pulling away.

• Geo-political concentration among countries not falling appreciably.

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2. The international distribution of income: convergence followingdivergence?

3.Within-country inequality over the twentieth century: a Great U-turn?




DATA: How measure the within-country distribution of income?

Household surveys and/or administrative recordsBUT• Surveys relatively recent innovation, and

suffer from non-response;• Administrative data reflect administrative

purpose;• Sources differ across time and across

countries.

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Look at two aspects of the distribution:

• Overall inequality, measured by Gini coefficient:

A divided by (A+B) Lorenz curve

Gini of 25 per cent means that if take 2 people at random, then on average difference between their incomes is 50 per cent of the average income.

• Share of top 1 per cent in total income.

A B

17Financial crises

Data are patchwork

18Is US U and UK U ?

19Germany Gini ↑ 4-5 percentage points 1999-2007

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WITHIN-COUNTRY INCOME INEQUALITY (OECD COUNTRIES)

• Long period of substantial decline in inequality, both overall Gini and top income shares.

• Rise in last 30 years in both overall inequality and top shares in Anglo-Saxon countries.

• Later rise in both overall inequality and top shares in Nordic countries and in overall inequality in Germany.

• Upward movement less evident in Netherlands (and France and Italy).

CONCLUDE: Evidence for U, but not to same extent, nor at same time, and need to distinguish U from U.

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4.The global distribution: combining between- and within- country inequality



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Approached issue by considering separately international distribution and within-country distribution. Need to combine, but not straightforward.

- Need comparable distributional data across countries (no fixed effect)

- Need to go from GDP per capita to average household disposable income. Differences include:

• income paid abroad (Ireland)

• government sector and imputed benefits from government spending (India)

• retained profits of corporations

• income of pension funds

• imputed rent of owner-occupied housing

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Conclusions on separate elements

∩ +

√

?Probable

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5.Underlying explanations6. Where are we headed?

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Explanations?

Why no Kuznets inverse-U for within-country inequality?Model of structural change: workers paid more in advanced sector

Second part to Kuznets = concentration of capital and factors counteracting.

∩∩

Early industrialisers

Later industrialisers

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SINGAPORE Earnings distribution and Top incomes 1965-2006

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% s

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Decile ratio of earnings

Quintile ratio of earnings

Share of top 1% of incomes (RH axis)

Moving outside the OECD

Financial crisis

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Earnings and Capital shares in UK 1923-2003

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1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

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Long fall in top wealth share

Steep rise in top pay share

Some recovery of top wealth share

Earlier fall in top pay share

Negative shocks to capital but also progressive income and capital taxation.

Earnings and capital income: UK Case Study

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6.Where are we headed?

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What can we learn from the past? Between-country distribution

Source: Maddison data for 42 countries

OS

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1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

FRA

UK

US

CA

AUS

GER

NL

JA

FI

NOR

Within-country distribution 1929-39: Share of top 1% (0.1% in UK) Not all depressed.

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Gini coefficient and Banking-crisis induced recessions

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Share of top 1% and Banking-crisis induced recessions

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Conclusions• We are increasingly thinking in global terms, but we need to clarify underlying source of concern with inequality.• Empirical data greatly improved, but still important gaps in knowledge.• International distribution diverged in a major way, but limited convergence to date.• Within-country inequality fell substantially, but now U-turn.• Grounds for concern about the distributional impact of economic crisis.

global economy lecture 2009: the global distribution of

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