Posts

Latest Post

Will we see absolute inequality start to decline at some point in the future?

The evidence we are seeing of falling relative inequality between countries has left some observers optimistic about the prospects of falling absolute inequality. (Relative inequality is about the ratios of incomes—typically normalized by the mean—while absolute inequality is about the absolute gaps, such as the $ gap in consumption between “rich” and “poor”.) Based on evidence from economic research, some observers anticipate the prospect of a far more equal world ahead. In this vein, Zanny Minton Beddoes wrote a few years ago that: “The gap between the world’s rich and poor will be far narrower in 2050.” 

Is that right? We are not talking here about countries (as in the recent paper by Johnson and Papageorgiou). We are talking about people. The answer then depends on what absolute gaps we focus on within the distribution of global incomes and whether relative inequality is declining. If we are talking about the world’s richest 1% (say) and the poorest 1% then it is plain from what we know that we will not see a declining absolute gap in the foreseeable future if recent trends continue, since we are not even seeing falling relative inequality between the two groups of people.

However, there is a range of “middle” incomes for which recent trends do suggest declining absolute inequality over the next few decades. Compare the world’s middle incomes—the 50-60th percentiles, say (just above the global median)—with the income of the 80-90th percentiles, i.e., the group that Branko Milanovic identifies as the rich world’s “middle class.” Branko’s famous “elephant graph” shows that the former group has seen its incomes growing strongly at 3.6% per annum over 1988-2008, while the latter group has seen little growth (0.23% per annum). The ratio of mean incomes in 2008 was 5.7 (based on Lakner and Milanovic, Table 3). Then it can be readily verified that absolute inequality between the two will decline, though it will take 53 years for the two income levels to converge if recent trends continue.

One might question whether a near zero growth rate of the rich world’s middle class is sustainable. Suppose instead that this income group sees a 1% per annum growth rate, with all else unchanged. Then absolute divergence between the rich world’s middle class and the world’s middle will rise for the next 20 years, and only then start to fall, vanishing after about 70 years.

Of course, such calculations should be taken with a grain of salt. Here they only serve to illustrate that absolute inequality is very likely to persist for some time even with falling relative inequality. Indeed, with current trends, the gap will rise between the world’s richest and poorest, and may well also do so between the rich world’s middle classes and the new middle class of the developing world.

 Further reading

Bourguignon, Francois, 2016, The Globalization of Inequality, Princeton: Princeton University Press.

Lakner, Christoph, and Branko Milanovic, 2016, “Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession,” World Bank Economic Review 30(2): 203-232.

Milanovic, Branko, 2016, Global Inequality: A New Approach for the Age of Globalization. Cambridge, Mass: Harvard University Press.

Johnson, Paul, and Chris Papageorgiou, 2018, “What Remains of Cross-County Convergence?,” Journal of Economic Literature, forthcoming.

Ravallion, Martin, 2010, “The Developing World’s Bulging (but Vulnerable) Middle Class,” World Development 38(4): 445-454.

______________,, 2018, “Inequality and Globalization: A Review Essay,” Journal of Economic Literature 56(2): 1-23.

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 119 other followers

Enter your email address to follow this blog and receive notifications of new posts by email.