Block 2: INEQUALITY

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 Inequality

1. What do we mean by inequality in economics?

2. How can we measure it?

3. Long term patterns in inequality

4. Explaining inequality patterns

 Defining “Inequality”

 How can we define “inequality”?

?

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 Defining “Inequality”

 How can we define “inequality”?

 Cambridge Dictionary
 “The unfair situation in society when some people have more
opportunities, money, etc., than other people”
 NB: generally speaking, “people” can be “countries,” “regions,”
etc.
 Yet, inequality of what? (We are economists, after all)
 …

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 How do we measure inequality?

 First, we must define inequality of what

 Typically, economists study inequality in wealth and/or
income
 Yet, inequality can pertain anything concerning
wellbeing
 Learning outcomes (education)
 Health
 Nutrition
 Access to financial resources (credit)
 Wages
 Etc.

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 How do we measure Inequality?

Some common inequality measures:

 Range of variation
 The Coefficient of Variation
 The Gini Coefficient
 Income or wealth ratios
 Top income shares
 Range of variation
The range is simply the difference between the highest and lowest
observations.
Number of employees Salary

2 $1,000,000

4 $200,000
6 $100,000

6 $60,000

$45,000
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8 $24,000

Range of variation = $1,000,000-$24,000 = $976,000

 The Coefficient of Variation
The Coefficient of Variation is a distribution’s standard
deviation divided by its mean.

Both distributions above have the same mean, 1, but the standard
deviation is much smaller in the distribution on the left, resulting in a
lower coefficient of variation.
 Gini coefficient and Lorentz curve
 The Gini Coefficient has an intuitive, but possibly unfamiliar
construction.
 To understand the Gini Coefficient, one must first understand the Lorenz
Curve.
 The Lorenz Curve orders all observations and then plots the cumulative
percentage of the population against the cumulative percentage of the
resource.
 The Gini
Coefficient
 The Gini coefficient can then be thought of
as the ratio of the area that lies between the
line of equality and the Lorenz curve (A)
over the total area under the line of equality
(marked A and B in the diagram )
 G = A / (A + B).
It can be also defined in this way as A + B = 0.5
and the axes scale from 0 to 1:
 G = 2A

 When there is perfect equality, the Lorenz

curve is the equality diagonal, and the value
of the Gini Coefficient is zero.
 When one member of the population holds
all of the resources, the value of the Gini
Coefficient is one.
The further a Lorenz curve deviates from the perfectly equal straight line (which
represents a Gini coefficient of 0), the higher the Gini coefficient and the less equal
the society.
Gini = 2*A = 2 *[(A+B)-B) ]= 2*[(1/2)-B]

By construction A+B =½. When B tends to zero:

Gini = 2*[(1/2)-0] = 1
• Gini = 1 absolute inequality. All income or wealth in the hands of one individual only.
• Gini = 0 perfect equality. All individuals have the same income or wealth. B tends to
1/2
• Thus, the Gini ranges from 0 and 1
 Income (or wealth) ratios

 E.g., the Top 10/Bottom 50 ratio

 Used by the United Nations Development Programme, Human
Development Report
 It compares the ratio of the income of the richest 10 per cent of the
population to the income of the poorest 50 per cent of the
population

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 Top income (or wealth) shares

 Top X percent income / wealth share

 Measure the percentage of total income / wealth that is
possessed by the top X-percent (e.g., 1, 10 percent)
earners
 Very useful when information on the whole distribution is
hard to find, particularly for comparative perspectives
 Economic historians and long-term analyses often rely
on this!

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 From within-country inequality
to global inequality
Milanovic (2013)
 How do we measure global inequality?
 Need to overcome the within-country vs between-country
paradigm
 How do “I” compare with other world citizens?
 Increasingly relevant in a world that is highly connected,
where markets (labour, capital, goods) are increasingly
integrated

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 Three ways to measure inequality

 Inequality 1: Between Nations, Unweighted

 Inequality measured using country per-capita GDPs or mean incomes.
 These data used to get Gini coefficient, NOT weighted
 China and Luxembourg same “weight”

 Inequality 2: Between Nations, Weighted

 Inequality measured using country per-capita GDPs or mean incomes
 These data used to get Gini coefficient, yet weighted by population
 Patterns very different (we’ll see)

 Inequality 3: Individual Global Inequality

 Inequality measured using individual incomes irrespective of country
 Rich Chinese may be richer than poor Americans
 Difficult to get to the right data (surveys on individual incomes)
 Household surveys only started around 1980s in most countries
 So, estimation and assumptions involved for going further back
Three ways to measure inequality
since the 1950s

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Global inequality: Comparing the 3 concepts

The mother of all inequality disputes.

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Global inequality today: country
comparisons

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 Global inequality today:
focus on Italy

Divide the world population into groups of 5%. (ventiles)

 Global Income Inequality, 1820-2020
 Chancel, L., & Piketty, T. (2021). Global income inequality, 1820–2020: the
persistence and mutation of extreme inequality. Journal of the European
Economic Association, 19(6), 3025-3062.

 New world income distribution estimates from 1820 to 2020:

https://wid.world/
 Estimates for 33 and sub-regions for years 1910, 1920, 1930, 1940, 1950, 1960,
and 1970.
 These series are then linked to the annual 1980–2020 series available in
WID.
 The coverage is much weaker for the period going from 1820 and 1910,
which is why they only provide estimates for 1820, 1850, 1880, and 1910.
 Population and income series mostly from Maddison (2001)

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Top 10, Middle 40, Bottom 50%

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Ratio T10/T50

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Gini Coefficient

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 Between vs Within
Global Income Inequality

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The Elephant curve of Global Inequality

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The growth incidence curve 1820-2020

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Regional Patterns (top 10%)

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Regional Patterns (bottom, 50%)

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 Global Income distribution in 1820

FIGURE 16. Global income distribution, 1820-2020. Interpretation: The graph shows the size and geographical repartition
of the global population at different levels of the income distribution. The relative size of each color wedge is proportional
to the relative population in a region. Incomes are measured after pension and unemployment insurance transfers and
before income and wealth taxes. Note: Distribution of per pretax, post replacement per capita incomes. Sources and series:
Chancel and Piketty (2021). See wid.world/longrun. Sources and series: wid.world/longrun.

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 Global Income distribution in 1910

FIGURE 16. Global income distribution, 1820-2020. Interpretation: The graph shows the size and geographical repartition
of the global population at different levels of the income distribution. The relative size of each color wedge is proportional
to the relative population in a region. Incomes are measured after pension and unemployment insurance transfers and
before income and wealth taxes. Note: Distribution of per pretax, post replacement per capita incomes. Sources and series:
Chancel and Piketty (2021). See wid.world/longrun. Sources and series: wid.world/longrun.

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 Global Income distribution in 1950

FIGURE 16. Global income distribution, 1820-2020. Interpretation: The graph shows the size and geographical repartition
of the global population at different levels of the income distribution. The relative size of each color wedge is proportional
to the relative population in a region. Incomes are measured after pension and unemployment insurance transfers and
before income and wealth taxes. Note: Distribution of per pretax, post replacement per capita incomes. Sources and series:
Chancel and Piketty (2021). See wid.world/longrun. Sources and series: wid.world/longrun.

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 Global Income distribution in 1980

FIGURE 16. Global income distribution, 1820-2020. Interpretation: The graph shows the size and geographical repartition
of the global population at different levels of the income distribution. The relative size of each color wedge is proportional
to the relative population in a region. Incomes are measured after pension and unemployment insurance transfers and
before income and wealth taxes. Note: Distribution of per pretax, post replacement per capita incomes. Sources and series:
Chancel and Piketty (2021). See wid.world/longrun. Sources and series: wid.world/longrun.

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 Global Income distribution in 2020

FIGURE 16. Global income distribution, 1820-2020. Interpretation: The graph shows the size and geographical repartition
of the global population at different levels of the income distribution. The relative size of each color wedge is proportional
to the relative population in a region. Incomes are measured after pension and unemployment insurance transfers and
before income and wealth taxes. Note: Distribution of per pretax, post replacement per capita incomes. Sources and series:
Chancel and Piketty (2021). See wid.world/longrun. Sources and series: wid.world/longrun.

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 Explanations
Within country inequality
 1810-1910: global within-countries inequality was rising
 1910 and 1980: Enormous decline. Rising social spending, progressive taxation, institutional change => balance
of power between capital and labor was considerably transformed, thanks to worker mobilization,
redistributive policies (rise of the welfare state, progressive taxation of income and wealth).
 1980-2007: Within-countries inequality started to rise again. Demise of state-led socialism in China and Russia
and the conservative revolution in the West
 2008-2020: 2008 financial crisis, neoliberal policies became less and less attractive and within countries
inequality seems to have reached a plateau.

Between-countries inequality
 1810-1910: global between-countries inequality was rising
 1910-1980: between-countries inequality continued increasing. Colonial empires collapsed after 1950-60, north
golden age of growth (gap vs south increases), it took a few decades for the newly independent
 countries to emerge from independence wars and civil unrest and to design suitable development strategies.
 1980-2007: between-countries inequality declined (the rise of China, the Four Asian Tigers).
 2008-2020: the decline in between-countries inequality accelerated (due in part to a relatively poor growth
performance of rich countries post-2008, especially in Europe, as compared to developing and emerging
countries).

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 Taking stocks

 Evolution of global income inequality from 1820 to 2020.

 Was this evolution the same at the top, middle, bottom of
the distribution?
 Between vs Within inequality
 The elephant curve and the growth incidence curve
 Regional patterns
 Determinants

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