CHAPTER 10: INEQUALITY

INDEX

I. GETTING THE FACTS RIGHT

II. THEORY OF INEQUALITY

III. GLOBAL INEQUALITY

I. GETTING THE FACTS RIGHT

From the Roman Empire to today

 Although we don’t have much information regarding inequality during this period, we know
that usually inequality has been marked by huge economic shocks motivated by plagues,
wars, etc. This shocks usually reduced inequality, as diseases killed many people and left the
same resources for less people. (As we saw in the first chapters: Malthusian Trap).

 Today this doesn’t happen anymore, as crisis and recessions almost always increase
inequality levels.

General overview of income inequality in the last 2 centuries

 The pattern of income inequality over the past 2 centuries (in the Anglophone countries) is a
U, meaning that inequality was very high before WWI, and then after the Great Depression
and the World Wars it decreased. Then, since the 1980s inequality has started to increase
again. (Ex: inequality in the US is very similar now than it was before WWI.)

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  In non-Anglophone countries like Spain, Germany, Italy or France inequality levels have
followed a similar pattern, but not so intensely. As can be seen in the graph, the increase of
inequality since the 1980s hasn’t been so sharp as in Anglophone countries.

 In the following graph we plot the top 1% vs the bottom 50% national income shares in the
US. This is an estimate, because although we have rich data on the 1% percent, we don’t have
much data on the bottom percentages (because many people are beggars that don’t even exist
in the public records). As can be seen, the top 1% accounts for 20% of national income, while
the bottom 50% account for 13,5% of national income.

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  However, in Western Europe the situation is much less unequal. As can be seen in the graph,
the bottom 50% earners earn much more relative from the national income than the top 1%.

 In other emerging countries, such as China, India or Russia, inequality is increasing

dramatically over the past decades. As can be seen, inequality levels in Russia soared after
the end of the communist regime.

Wealth inequality

 Until now we have analysed income inequality, not wealth inequality. Wealth inequality
captures the stock of assets that people have, not only income, as income inequality does.

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  Whereas income inequality in the US and in Europe was very similar at the beginning of the
20th century, wealth inequality was higher in Europe than in the US in the same period. This
was due to the big share of landowners in Europe that didn’t exist in the US. Nevertheless,
nowadays there has been a wealth inequality reversal, as the US has now more wealth
inequality than Europe. (This increase in the US wealth inequality levels has been driven by
the 0,1% of the population, super rich people like bill gates, etc.)

Measuring inequality

 Relative factor incomes: which measures the wages of skilled and unskilled labor (skill
premium), the capital and labor ratio, etc.

 Gini coefficient: The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing
perfect equality and 1 representing perfect inequality.

 Income and wealth shares: top 10% / 1% / 0,1% , etc

 All these measures capture different aspects of inequality and are not necessarily correlated.
Also, it is counterproductive to focus on just one measure. (For example, the top income and
wealth shares tell us what’s happening with the rich, but completely ignores the majority of
the population. We cannot know with this measure how middle classes are doing, for
instance.)

 Additionally, experts can select different sources to measure inequality. The most extended
ones are (1) Household budget surveys, (2) tax records and (3) population and GDP statistics.
All these sources underestimate inequality, because for example the poorest people don’t pay
taxes (nor the rich many times).

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 II. THEORY OF INEQUALITY

Is inequality a problem?

 Inequality can be good because:

- It´s a signal for successful individuals and companies

- Might motivate people to work harder

- Richer individuals have a greater marginal propensity to save and invest. (Elon
musk will invest better $1 than I would, for instance).

 Inequality can be bad because:

- Inequality is tightly related to social mobility. Social mobility is the movement of

individuals, families, households, or other categories of people within or
between social strata in a society. High levels of inequality prevent many people
from improving their social status.

- It can be politically toxic.

Causes of inequality

1. The Kuznets Curve:

Kuznets’ work on economic growth and income distribution led him to hypothesize that
industrializing nations experience a rise and subsequent decline in economic inequality,
characterized as an inverted "U"—the “Kuznets curve."

He thought economic inequality would increase as rural labor migrated to the cities, keeping
wages down as workers competed for jobs. But according to Kuznets, social mobility increases
again once a certain level of income was reached in “modern” industrialized economies, as the
welfare state takes hold.

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 2. Skill-biased technical change:

This argument affirms that the technological revolution increases demand for high-skilled
workers (engineers, etc) and damages unskilled workers (janitors, contruction laborers, etc).
(contar el rollo)

3. Migration:

Migration can increase the relative supply of skilled or unskilled labour. For example, in the US,
there has been large unskilled migration, causing inequality.

4. Trade:

More exposure to trade affects the demand for domestically produced goods. This will affect
demand for labour (skilled or unskilled), hence their wages.

5. Institutions:

• Tax Policy
• Minimum wages
• Welfare payments and benefits
• Unions, Employer organizations
• Wage setting arrangements

6. Piketty’s explanation:

Piketty argues that inequality will always rise because the return on capital (r) is always greater
than economic growth (g).

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 The Great Compression (1930-1980)

 World Wars and Great Depression led to decimation of top capital incomes and decline in
inequality. People claimed for fairness and demanded a heavier taxation for the rich. As a
result, progressive taxes and inheritance taxes were introduced.

 The wars and socialism were the main drivers of this decline in inequality.

The recent increase of inequality (1980 -)

Since the 1980s. there has been a much higher increase of inequality in the US than in Europe.
Why?

- In the US: stagnant minimum wage, rising elitism in education, reduced tax
progressivity, etc.

- In Europe: they kept the welfare state, retained quality public education, extensive
social transfer system, etc.

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 III. GLOBAL INEQUALITY

Until now we have discussed inequality within countries, but it is possible to create an income
distribution for the entire world to understand global inequality.

Has global inequality been increasing or decreasing over time?

0.68
0.66
Global Gini Coefficient on Income

0.64
0.62
0.6
0.58
0.56
0.54
0.52
0.5
1800 1850 1900 1950 2000 2050
Year

 Since 1850 to the 2000s there has been a massive increase in income inequality, however,
since then inequality has been decreasing slightly.

Is global inequality caused by income differences between countries or within countries?

 In 1820 inequality was caused by income differences within countries, now it is driven by
income differences between countries.

 Income differences WITHIN countries are defined by the class in which you are born, if your
family is wealthy, etc.

 Income differences BETWEEN countries are defined by the country in which you are born
in.

 Thereby, Marxist thesis won’t have much sense nowadays.

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CONCLUSIONS

• During the 20th century, inequality has dramatically decreased between 1930-1980, and
rebounded since
• But, there are very important differences between countries.
• This suggests that institutions and policy matter a great deal
• Global inequality has levelled off since about 1980, attributed to rise of East Asia (China)
• Changes in growth and internal inequality in rich societies an important part of this
development

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