See Chapter 2. These new findings confirm and amplify earlier results. Not only were these growth rates important from the perspective of individuals, they also matter a lot in terms of global growth. Such figures help make sense of the very high growth rates enjoyed by Indians and Chinese sitting at the bottom of the distribution.
Such a small share of total growth captured by the bottom half of the population is partly due to the fact that when individuals are very poor, their incomes can double or triple but still remain relatively small—so that the total increase in their incomes does not necessarily add up at the global level. But this is not the only explanation. Incomes at the very top must also be extraordinarily high to dwarf the growth captured by the bottom half of the world population. The next step of the exercise consists of adding the populations and incomes of Russia million , Brazil million , and the Middle East million to the analysis.
These additional groups bring the total population now considered to more than 4. The global growth curve presented in Appendix Figure A2. This can be explained by the fact that Russia, the Middle East, and Brazil are three regions which recorded low growth rates over the period considered. The final step consists of including all remaining global regions—namely, Africa close to 1 billion individuals , the rest of Asia another billion individuals , and the rest of Latin America close to half a billion.
In order to reconstruct income inequality dynamics in these regions, we take into account between-country inequality, for which information is available, and assume that within countries, growth is distributed in the same way as neighboring countries for which we have specific information see Box 2.
This allows us to distribute the totality of global income growth over the period considered to the global population. When all countries are taken into account, the shape of the curve is again transformed Figure 2. Now, average global income growth rates are further reduced because Africa and Latin America had relatively low growth over the period considered. This contributes to increasing global inequality as compared to the two cases presented above. The findings are the same as those presented in the right-hand column of Table 2. What is the share of African, Asians, Americans, and Europeans in each global income groups and how has this evolved over time?
Between and , the geographic repartition of global incomes evolved only slightly, and our data allow for more precise geographic repartition in , so it is preferable to focus on this year. In a similar way to how Figures 2. In , Asians were almost not represented within top global income groups. Indeed, the bulk of the population of India and China are found in the bottom half of the income distribution. At the other end of the global income ladder, US-Canada is the largest contributor to global top-income earners.
Europe is largely represented in the upper half of the global distribution, but less so among the very top groups. This indeed reflects the extreme level of inequality of these regions, as discussed in chapters 2. Interestingly, Russia is concentrated between percentile 70 and percentile 90, and Russians did not make it into the very top groups. In , the Soviet system compressed income distribution in Russia.
In , the situation is notably different. The most striking evolution is perhaps the spread of Chinese income earners, which are now located throughout the entire global distribution. India remains largely represented at the bottom with only very few Indians among the top global earners. The position of Russian earners was also stretched throughout from the poorest to the richest income groups.
This illustrates the impact of the end of communism on the spread of Russian incomes. Africans, who were present throughout the first half of the distribution, are now even more concentrated in the bottom quarter, due to relatively low growth as compared to Asian countries. At the top of the distribution, while the shares of both North America and Europe decreased leaving room for their Asian counterparts , the share of Europeans was reduced much more. This is because most large European countries followed a more equitable growth trajectory over the past decades than the United States and other countries, as will be discussed in chapter 2.
Since , the picture is more nuanced but within-country inequality is on the rise. How did global inequality evolve between and ? Figure 2. It was then slightly reduced to Second, it is apparent that high growth in emerging countries since , in particular in China, or the global financial crisis of was not sufficient to stop the rise in global income inequality. When global inequality is decomposed into a between- and within-country inequality component, it is apparent that within-country inequality continued to rise since whereas between-country inequality rose up to and decreased afterwards.
The first one assumes that all countries had exactly the same average income that is, that there was no between-country inequality , but that income was as unequal within these countries as was actually observed. In the second scenario, it is assumed that between-country inequality evolved as observed but it is also assumed that everybody within countries had exactly the same income level no within-country inequality. Prices can be converted from one currency to another using either market exchange rates or purchasing power parities as we did above. This makes them a natural conversion factor between currencies.
The problem is that market exchange rates reflect only the relative purchasing power of money in terms of tradable goods. But non-tradable goods typically services are in fact cheaper relative to tradable ones in emerging economies given the so-called Balassa-Samuelson effect. Therefore, market exchange rates will underestimate the standard of living in the poorer countries. Purchasing power parity is an alternative conversion factor that addresses these problems based on observed prices in the various countries. The level of global income inequality is therefore substantially higher when measured using market exchange rates than it is with purchasing power parity.
Purchasing power parity definitely gives a more accurate picture of global inequality from the point of view of individuals who do not travel across the world and who essentially spend their incomes in their own countries. Market exchange rates are perhaps better to inform about inequality in a world where individuals can easily spend their incomes where they want, which is the case for top global earners and tourists, and increasingly the case for anyone connected to the internet.
It is also the case for migrant workers wishing to send remittances back to their home countries. Both purchasing power parity and market exchange rates are valid measures to track global income inequality, depending on the object of study or which countries are compared to one another. In this report, we generally use purchasing power parity for international comparisons, but at times, market exchange rates are also used to illustrate other meaningful aspects of international inequality.
Whether future growth in emerging countries might invert the trend or not is a key question, which will be addressed in Part V of this report. Before turning to that question, one should understand better the drivers of the trends observed since Given that this period was marked by increasing trade integration between countries, it might seem reasonable to seek explanations in economic trade models. The standard economic models of international trade, however, fail to account for dynamics of inequality observed over the past four decades.
Take Heckscher-Ohlin, the most well-known of the two-skill-groups economic trade models. According to it, trade liberalization should increase inequality in rich countries, but reduce it in low-income countries. How does the model reach this conclusion? The underlying mechanism is fairly simple. It is built around the fact that there are more high-skilled workers such as aeronautical engineers in the United States than in China, and more low-skilled workers such as textile workers in China than in the United States.
Before trade liberalization started between these two countries, aeronautical engineers were relatively scarce in China and thus enjoyed relatively high pay compared to textile workers which were abundant. Conversely, in the United States, low-skilled earners were relatively scarce at the time, and the income differential between engineers and textile workers was limited. When the United States and China started to trade, each country specialized in the domain for which they had the most workers, in relative terms.
China thus specialized in textiles, so that textile workers were in higher demand and saw their wages increase, while aeronautical engineers came to be in lower demand and saw their wages decrease. Conversely, the United States specialized in aircraft building, so the aeronautical engineers saw their wages increase, while the textile workers saw their wages decrease.
By virtue of the factor price equalization theorem, the wages of low-skilled workers in China and the United States started to converge, along with the wages of high-skilled workers. While inequality did rise in the United States, as this model predicts, it also sharply rose in China, as well as in India and Russia, as seen in F igure 2. Regardless of whether the Heckscher-Ohlin is otherwise valid or not, it cannot account for the evolution of global inequality.
How can we account for these empirical findings? As Table 2. It seems necessary to carefully look at these trajectories as well as the institutional and policy shifts which may have occurred in various regions of the world over the past forty years. Understanding the drivers of global income inequality requires a thorough analysis of the distribution of national income growth within countries.
These dynamics are explored in the following chapters.
Is income inequality rising around the world?
National income is more meaningful than GDP to compare income inequalities between countries. However, this measure is of only limited use in measuring national welfare. GDP measures the value of all goods and services sold in an economy, after having subtracted the costs of materials or services incurred in production processes. These limitations have led many statistical agencies, and a growing number of governments, to develop and use complementary indicators of economic performance and well-being.
Beyond the fact that the GDP framework is not meant for the analysis of inequality within countries, it has two other important limitations when the focus is on income inequality between countries. The first one is that gross domestic product, as its name indicates, is a gross measure: it does not take into account expenses required to replace capital that has been deteriorated or that has become obsolete during the course of production of goods and services in an economy. Machines, computers, roads, and electric systems have to be repaired or replaced every year.
This has been termed capital depreciation or consumption of fixed capital CFC. Subtracting it from GDP yields the net domestic product, which is a more accurate measure of true economic output than GDP. Consumption of fixed capital actually varies over time and countries Table 2. Countries that have an important stock of machines in their overall stock of capital tend to replace higher shares of overall capital. On the contrary, economies that possess relatively fewer machines and a higher share of agricultural land in their capital stock tend to have lower CFC values.
CFC variations thus modify the levels of global inequality between countries. Such variations tend to reduce global inequality, since the income dedicated to replacing obsolete machines tends to be higher in rich countries than in low-income countries. In the future, we plan to better account for the depreciation of natural capital in these estimates.
GDP figures have another important limitation when the need is to compare income inequality between countries and over time. At the global level, net domestic product is equal to net domestic income: by definition, the market value of global production is equal to global income. At the national level, however, incomes generated by the sale of goods and services in a given country do not necessarily remain in that country.
This is the case when factories are owned by foreign individuals, for instance. Taking foreign incomes into account tends to increase global inequality between countries rather than reduce it. Rich countries generally own more assets in other parts of the world than poor countries do. This figure in fact hides strong disparities within the European Union. On the other hand, Latin America annually pays 2. Interestingly, China has a negative net foreign income.
It pays close to 0. By definition, at the global level, net foreign income should equal zero: what is paid by some countries must be received by others. However, up to now, international statistical institutions have been unable to report flows of net foreign incomes consistently. At the global level, the sum of reported net foreign incomes has not been zero.
The World Inequality Report relies on a novel methodology which takes income flows from tax havens into account. Our methodology relies on estimations of offshore wealth measured by Gabriel Zucman. Taking into account missing net foreign incomes does not radically change global inequality figures but can make a large difference for particular countries. This constitutes a more realistic representation of income inequality between countries than figures generally discussed. Asian growth contributed to reduce inequality between countries over the past decades. Using MER values, gaps between rich countries and the global average are reinforced: United States and Canada are five times richer than the world average whereas the EU is close to three times richer.
This marks a sharp contrast with the situation in Indeed, per-adult income in Western Europe was in the same as ten years before, before the onset of the financial crisis.
Part II | World Inequality Report
Despite a reduction of inequality between countries, average national income inequalities remain strong among countries. Developing and emerging countries did not all grow at the same rate as China. Average North Americans earn close to ten times more than average sub-Saharan Africans.
Diverging forces were also at play in certain parts of the world, such as sub-Saharan Africa and Latin America. Huge inequalities persist among countries but, in some cases, they actually worsened. Certain low- to middle-income regions are relatively worse off today than four decades ago.
This growth trend, marked by a combination of political and economic crises and wars, is not limited to the poorest region of the world. After a historical decline from the s to the s, income inequality is on the rise in most regions of the world. Income inequality was sharply reduced in the first half of the twentieth century—more precisely, between the s and the s—in most countries of the world, but it has been on the rise almost everywhere since the late s.
In Europe and North America, the long-run decline in income inequality was due to the combination of political, social, and economic shocks already discussed. These included the destruction of human and physical capital led by the World Wars, the Great Depression, nationalization policies, and government control over the economy. After the Second World War, a new policy regime was put in place, including the development of social security systems, public education, social and labor policies, and progressive taxation. This combination of factors severely affected very high fortunes, and enabled the rise of a patrimonial middle class and a general decline in inequality in Europe—and to a lesser extent, in North America.
In emerging economies, political and social shocks led to an even more radical reduction of income inequality. The abolition of private property in Russia, land redistribution, massive investments in public education, and strict government control over the economy via five-year plans effectively spread the benefits of growth from the early s to the s. In India, which did not undergo a communist revolution but implemented socialist policies after gaining its independence, income inequality was also severely reduced over the same period.
For most of the global population, the first three-quarters of the twentieth century corresponded to a very strong compression in the distribution of national incomes. The economic elite captured a much smaller share of economic growth in the late s than it did at the beginning of the century. The trend was then reversed in most countries—even though there are notable exceptions deserving attention. Countries did not all follow the same path. Large emerging countries, as they underwent profound deregulations of their economies, saw inequalities surge as they opened up and liberalized but followed different transition strategies.
In rich countries, inequality levels also varied largely according to changes in institutional and policy contexts, with sharp income inequality rises in the Anglo-Saxon world and more moderate increases in continental Europe and Japan. Certain Western European and Northern European countries almost contained the rise in income inequality. Given the multitude of trends presented in this chapter, it would be imprudent to seek a single story line behind the rise of inequality across countries. Our findings show that national cultural, political, and policy contexts are key to understanding the dynamics of income inequality.
5.1 What is the future of global income inequality?
In this chapter, we largely focus on the evolution of top-income shares, as they are now available for a very large set of countries. In the country-by-country chapters that come next, the focus will be more detailed and we will shift the attention to bottom-income groups. Bottom-income groups were shut off from economic growth in the United States, while top incomes surged in the Anglo-Saxon world.
Novel data suggest that top incomes have either recovered their shares or are progressively recovering them. The rise in labor income inequality played an important role in the rise of inequality in Anglo-Saxon countries, and particularly in the United States before the turn of the century, as discussed in chapter 2. This evolution was also accompanied by an increased polarization of income between low-wage and high-wage firms. This contrasted with European countries, where the dynamics at the top of the distribution have been more moderate.
New estimates also show that the upsurge in top incomes has mostly been a capital income phenomenon after in the United States, shedding new light on the process of unequal growth generation. Our novel estimates also allow a better understanding of the dynamics at the bottom of the distribution—at least for certain countries. Government provided little support to help low-income individuals cope with the situation.
The comparison of inequality trajectories between the United States and Western Europe is particularly striking. Inequality in enlarged Europe with a population of million is now substantially smaller than in the United States million. We also compare in Figures 2. Enlarged Europe includes ex-communist East European countries with lower average incomes than West European averages, leading to higher inequality levels.
However, it is striking to see that inequality levels in enlarged Europe remain much smaller than in United States. This conclusion would likely be exacerbated if we were to compare enlarged Europe to enlarged North America including not only Canada but also Mexico , which we plan to do in the near future as new data become available for Mexico. Continental European countries were more successful in preventing the rise of incomes at the top and the stagnation of incomes at the bottom.
In western continental Europe, inequality has also been on the rise since the late s, though both the levels of inequality and the rise in inequality were less striking than in the United States. Spain displays a different picture. For France, new estimates also allow us to track the dynamics of growth at the bottom of the distribution. This increase in inequality is characterized by rises in both labor and capital income.
However, the bottom half of the population was not shut off from growth after the s. This part of the population enjoyed close to average income growth rates—a strikingly different picture than in the United States. Northern European countries had among the lowest levels of income inequality in the world in the early s. Growth has been more unequal in these countries after than before, yet income concentration at the top of the distribution remains limited.
As we can see, many European countries have been able to generate relatively high average income growth rates and maintain the rise in income inequality Figure 2. Income concentration and wealth concentration were particularly high in tsarist Russia before the Soviet revolution of see chapter 2. In Russia, the communist revolution led to an extreme compression of money incomes. It is worth stressing, however, that this extremely low level of monetary inequality is partly artificial. Soviet inequality took other, non-monetary forms, such as privileged access to particular shops and vacation centers for the political elite, and brutal political repression for large segments of the population.
The Chinese opening-up policies established from discussed in chapter 2. China shows a substantial rise in inequality the top share rose from 6. Since , inequality at the top has stagnated. In China and to a lesser extent in India, the rise in inequality occurred in the context of high average income growth, enabling important growth at the bottom of the distribution.
In Brazil, wage inequality has decreased over the past twenty years in particular due to rising minimum wage and there have been important and often lauded cash-transfer systems to the poor. As discussed in chapter 2. But in contrast to Brazil and the Middle East, inequality increased significantly over the past decades in South Africa.
The trade and financial liberalization that occurred after the end of apartheid, coupled with the failure to redistribute land equally, can help to explain these dynamics - yet more research will be required to better track and understand recent South African income inequality dynamics. This is yet another inequality-generating mechanism: the geography of oil property and the frontier system have led to extreme inequality in this region. In low-income countries, inequality is likely to be higher than previously thought, but data is scarce.
We still know very little about the evolution of income inequality in the rest of the developing and emerging world. The first explanation for this situation is that there is a lack of proper income-tax data, either because governments have not shared it, or because the data simply do not exist anymore, or because the data are still decentralized and not digitized. In the absence of administrative data, most of what we know is based on survey estimates. As discussed in Part I, survey-based estimates of inequality can have a number of limitations.
Surveys are often more sporadic in time, lack consistency with national accounts estimates, and miss top incomes. As demonstrated in this report, for numerous emerging countries, these weaknesses can lead to significant underestimation of inequality levels. See chapters 2. At this stage, however, we have only limited access to adequate data. Collectively, these factors mean that we can assess the evolution of income inequality for only a few developing countries in the years before the s, and over a short or interrupted time period.
Given that most individuals earned below the first income-tax threshold, our analysis is also restricted to a tiny fraction of the population. While this may appear surprising, it is worth remembering that in the early days of the US personal income tax — , the proportion of taxpayers was 0. Nevertheless, some lessons can be drawn from this data. In Africa, from the mids until the early s, the income share of the top 0.
But compared to European levels over the same period, income inequality was much higher in these African countries, and even reached the most extreme levels. In , the richest 0. Income inequality was, however, seemingly lower in West African countries such as Nigeria and Ghana, where the top 0. Interestingly, this pattern of geographical differences in inequality is still evident in survey data that has been collected in recent decades.
This dominance is likely to have been mitigated in recent decades, but it is still important in former settlement colonies such as South Africa. Available data for Latin American countries show that income inequality in the region is generally higher than the levels seen in European and Asian countries. Interestingly, when only survey data have been used to estimate inequality in the region, the results suggest that income inequality has decreased significantly, while WID.
In conclusion, the scarcity of available data makes it challenging to develop a conclusive picture of inequality levels in lower-income countries. From the data that are available, however, inequality estimations suggest that in most cases the distribution of income is more concentrated than previously thought in low-income countries. While important efforts have been made in the past years to produce and analyze consistent inequality estimates in emerging countries which are presented for the first time together in this report the study of the analysis of income inequality based on sound and consistent data in low-income countries is still only in its infancy.
In , the distribution of US national income exhibited extremely high inequalities. As illustrated by table 2. The incomes of those in the top 0. As shown by Table 2. Income inequality in the United States in was vastly different from the levels seen at the end of the Second World War. Indeed, changes in inequality since the end of that war can be split into two phases, as illustrated by Table 2. As shown by Figure 2. The pre-tax share of income owned by this chapter of the population increased in the s as the wage distribution became more equal, in part as a consequence of the significant rise in the real federal minimum wage in the s, and reached its historical peak in However, this is not the case for the United States.
Thirdly, despite the rise in means-tested benefits, government redistribution has not enhanced income growth for low- and moderate-income, working-age Americans over the last three decades. This, along with the real level of pre-tax inequality, indicates that there are clear limits to what taxes and transfers can achieve in the face of such massive changes in the pre-tax distribution of income as have occurred in the United States since This combination of factors supports the view that policy discussions should focus on how to equalize the distribution of primary assets, including human capital, financial capital, and bargaining power, rather than merely focus on ex-post redistribution.
Pre-tax income inequality has risen notably since the s, slightly more than post-tax income inequality. The trends described above should also be put into their longer historical context. An analysis of data going as far back as indicates that there have been considerable changes in income inequality in the United States over the last century. As shown in Figure 2. The shares of income attributed to top earners, after accounting for taxes and transfers, have also followed a U-shaped evolution over time, though they exhibit a less marked upward swing in recent decades than do the pre-tax figures.
This difference is mainly due to the smaller size of government a century ago, and lower tax rates relative to the present day, which meant the difference between pre- and post-tax incomes was less pronounced in the early s. Although post-tax inequality has increased significantly since , it has risen at a slower rate than pre-tax inequality.
As can be seen in Figure 2. Significant tax increases implemented in for those with the largest incomes may have played a role in the slower growth of post-tax top-income shares relative to pre-tax income shares over the last few years. Overall, redistributive policies have prevented post-tax inequality from returning all the way to pre—New Deal levels as discussed in more detail below. Further reducing taxes on top earners, as envisioned by the current administration and congress, could sharply increase post-tax income inequality in coming years.
Box 2. Despite fluctuations, the share of aggregate capital in total pre-tax income has remained relatively stable over the last century. Significantly larger concentrations of earnings continue to be derived from capital, rather than labor, as one moves up the income distribution. Fluctuations in the share of income coming from capital have been remarkable for those with the highest incomes. Early in the twentieth century, the top 0. Since the turn of the twenty-first century, however, capital has bounced back, with a surge in profits from corporate equities.
This rise in wealth inequality led to an increase in capital income concentration, which then reinforced wealth inequality itself as top capital incomes were saved at a high rate. Consequently, as the twenty-first century progresses, the working rich of the late twentieth century may increasingly live off their capital income, or could be in the process of being replaced by their offspring who can live off their accumulated inheritance.
The progressivity of the US tax system has declined significantly over the last few decades, as illustrated in Figure 2. Effective tax rates have become more compressed, however, across the income distribution. The gap in was much smaller. The tax reforms partly reversed the long-run decline in top tax rates. In this chapter, we present estimates of pre- and post-tax income inequality for the USA, which are two complementary concepts for the analysis of inequality. Comparing pre- and post-tax income inequality allows to better assessing the impact of personal taxes and in-kind transfers on the dynamics of income inequality.
In the WID. In contrast, post-tax income refers to incomes measured after all taxes in particular, after direct personal and wealth taxes and after all government transfers cash and in-kind. It is important to note that pensions and unemployment insurance represent the vast majority of cash transfers in the United States and more generally in rich countries.
Therefore our notion of pre-tax income inequality which we used in previous chapters to make international comparisons already includes most cash redistribution. In practice, other cash transfers tend to be relatively small. This means that the poor contribute about as much to taxes than they benefit from them in cash transfers other than pensions and unemployment insurance and this has not changed in fourty years. That being said, it is critical to study post-tax inequality and not only pre-tax inequality, first because in-kind transfers in particular access to free education and health services play a very important role for bottom groups, and next because post-tax incomes can be substantially smaller than pre-tax incomes at the top of the distribution at least in countries with highly progressive tax systems.
Unfortunately, the United States is the only country for which complete pre- and post-tax income inequality estimates are available in this Report. Would focusing on post-tax income inequality in other countries modify the general conclusions of the Report? Based on the findings of this chapter and on preliminary results for other countries, it seems likely that focusing on post-tax incomes would tend to comfort our main conclusions.
Next, we know that tax progressivity was reduced, rather than increased, in most countries since the s see chapter 5. Taking into account post-tax estimates therefore tends to reinforce the rise in inequality observed in pre-tax series. In France, for instance, effective tax rates are lower for the very rich than for the middle class, and new tax legislations will further decrease these rates for the richest see chapter 2. The exact magnitude of these variations remains unknown at this stage. This is an exciting agenda for economic research and future editions of this Report will present new results and progresses made along these lines.
While taxes have steadily become less progressive since the s, one major evolution in the US economy over the last fifty years has been the rise of individualized transfers, both monetary and in-kind. Other important transfers include refundable tax credits 0. Perhaps surprisingly, individualized transfers tend to target the middle class. See Figure 2. The reduction in the gender wage gap has been an important counterforce to rising US inequality.
The reduction in the gender gap has been an important force in mitigating the rise in inequality that has largely taken place after To examine this process, the data must be analyzed on an individual rather than on a tax-unit basis such as a couple or a family. The overall gender gap has been almost halved over the last half-century, but it has far from disappeared.
The more comprehensive way to measure the gender gap is to compute the ratio of average labor income of working-age men aged 20—65 to average labor income of working age women aged 20—65 , regardless of whether and how much they work. As illustrated in Figure 2. Still, considerable gender inequalities persist, particularly at the top of the labor income distribution, as illustrated by Figure 2. Their representation, however, grows smaller at each higher step along the distribution of income.
There has been only a modest increase in the share of women in top labor income groups since The glass ceiling is still far from being shattered. This average, however, disguises significant variations among groups within the distribution. Income inequality in France has varied significantly since the start of the twentieth century. While income inequality in France is by no means insignificant today, it has fallen notably since This reduction in inequality has taken place, however, in a haphazard and disorderly manner, undergoing numerous evolutions over the last century that are the result of a complex mix of historical events and political decisions.
To better comprehend recent developments in income inequality in France, it is first important to analyze how average income evolved from to However, this growth in national income per adult was far from steady. Between and , per-adult national income declined on average by This pattern was not unique to France, however. Similar trends were experienced in most European countries and Japan, and to a lesser extent in the United States and in the UK, where the shocks created by the First and Second World Wars were less damaging than in Continental Europe.
The evolution of income inequality over the last century can be broken down into three broad periods. As visualized in Figure 2. This decline was mainly due to the collapse of capital income, which was hit by a number of negative shocks. Both wars involved the destruction of capital stocks, and bankruptcies were not infrequent. Inflation reached record levels the price index was multiplied by more than a hundred between and , severely penalizing individuals with bond holdings and, more broadly, with fixed income assets.
The control of rents during the period of inflationism led to a tenfold fall in their real value, and additionally, nationalization and the high level of taxation of certain assets in contributed to a sharp fall in capital income. From to , the inequality in wages that had existed before the world wars was rebuilt and the share of capital in the French economy also rose, leading to a period of rising income inequality. As illustrated by Figure 2.
Following the events of May , however, this trajectory of rising inequality abruptly stopped. May was a volatile period of civil unrest in France, punctuated by demonstrations, general strikes, and protester occupations of universities and factories across the country. This marked the beginning of a period of steady increases in the minimum wage and of the purchasing power of the poor between and These factors led to a compression in the distribution of wages and reduced income inequality more generally.
However, the rise in unemployment that started during the mids also marked the beginning of a new period. The program was an attempt to combat high inflation rates and rapid deteriorations in the budget and trade deficits between and that could have seen France leave the European Monetary System. Taxes were also increased, subsidies to state-owned enterprises were reduced, and social security and unemployment insurance payments were restrained. During this period, inequality was relatively stable except at the top of the distribution.
Very top incomes increased substantially. One way to better understand the magnitude of the turning point that occurred in the s is to look at the total growth curve by income group. That is, we can ask: What was the change in the average income of each group over the different time periods?
However, actual total growth was not the same for all income groups, as illustrated by the impressive upward slope on the right hand of the — growth curve in Figure 2. The contrast between — and — in terms of the total growth rates of income groups is particularly stark. Another way to measure these diverging evolutions is to compare the shares of total economic growth going to the different income groups. Summing up, although the rise of inequality was less pronounced in France and to a large extent in Europe than in the United States, the break between the — period, when bottom groups enjoyed larger growth than the top, and the — period, when the exact opposite pattern prevailed, is very visible.
Recent growth at the top is due to higher salaries and returns on capital assets. As stated above, this trend of rising inequality among the highest earners is even more pronounced for the top 0. The difference between the average national income before tax and those of top earners has almost doubled over the preceding thirty years. Why has there been a rise in top incomes over the recent period? In the case of France, top earners have experienced significant increases in their incomes from both labor and capital.
Between and , the labor income of the top 0. It is difficult for standard explanations based on technical change and the changing supply and demand of skills to explain rising income concentration at the very top, whether around the world or in France specifically. Evolutions in top marginal tax rates have also likely had an impact on labor income inequality. Reduced top income tax rates can affect wage-setting at the top; as top earners expect less taxes, they may be more inclined to ask for increases in wages. Effective tax rates total taxes paid on total income are actually inferior for very top income groups than for the middle class.
Increases in top labor income inequality have in certain cases been correlated with increases in top capital income inequality.
Top managers, for example, have benefitted first from very high labor incomes through large bonuses or stock options some of which have been largely mediatized and then from very high capital incomes derived from improvements in the price of the stocks that they have come to own.
Top capital incomes have also been rising due to the rising share of macroeconomic capital in a context of declining labor bargaining power and privatization policies. While income inequality has increased since the s, gender gaps have been declining since the s. Still, gender gaps remain very high in France today. There are, however, strong variations in gender income gaps over age groups. Gender inequalities are also particularly high among higher paying jobs. Despite moderate improvements since , women still do not have equal access to them. Investigating the evolution of inequality using German income tax data has a long tradition, as particularly Prussian and Saxon tax data are internationally praised for their accuracy.
The early introduction of modern income taxation in German states at the end of the nineteenth century offers a special opportunity to compute inequality series from the industrialization phase until today. The series presented in this chapter are based on pre-tax income data from historical German income-tax statistics collected by Charlotte Bartels.
One should note, however, that the impressive length of the period covered in Germany comes with a price, in that changing territories are covered by the series. The two world wars of the twentieth century, the division of Germany after the Second World War, and its reunification in leave the researcher with income tax systems applying across time to quite differently sized territories and populations.
The evolution of income inequality from to can be split into five periods. The first period starts with the foundation of German Reich in , which unified German states, and ends with the First World War. The top percentile was the greatest beneficiary of this industrialization period. The sharp increase observed during that war might have been the result of extraordinarily high profits from military spending.
Strong unions and the rise of collective bargaining contributed to an increase in wages which resulted in lower labor income inequality. Hyperinflation eroded financial assets and greatly reduced capital incomes during this period. Additionally, industrial firms generated very low profits throughout the s, if any at all, and mostly did not pay out dividends. After , the Statistical Office stopped publishing income tax statistics so it is impossible to know how income distribution changed during the Second World War. As in most rich countries, economic recovery after the Great Depression started in in Germany.
Industrial firms saw their profits rise sharply between and Ferguson and Voth find evidence that firms with strong ties to the Nazi party disproportionately benefited from the recovery, which probably contributed to further concentration of incomes at the top. The post-war period is marked by a relatively stable but high top percentile income share. The German postwar period is characterized by a comparably high income concentration at the top, paralleled by a rather compressed wage distribution.
This finding is particularly striking as the policies especially nationalizations and rent control after the Second World War and destructions during the Second World War are generally seen as long-lasting equalizing forces both in Germany and in other war-participating countries. The currency reform in eradicated capital incomes from financial assets for the second time in the twentieth century, while leaving business assets and real estate untouched.
Savings accounts were reduced to about a tenth of their former value. As rents were heavily regulated, top incomes stemmed from business profits. On the other hand, strong labor demand and the high national income growth rates of the German Wirtschaftswunder coincided with powerful unions, low unemployment, and a rather compressed wage distribution. It was not until the s that top wage earners increasingly entered top-income groups and the wage distribution became increasingly unequal.
The fifth and last period corresponds to reunified Germany. The first years after reunification were marked by exceptionally high national income growth rates for the reunified German economy. Industrial production quickly collapsed in the East and unemployment rose accordingly. Those keeping their jobs benefitted from an unprecedented jump in real wages, thanks to bargaining by the Eastern German labor unions that aimed to reach parity with West German wage levels in Highly qualified employees like engineers, lawyers, and doctors have benefitted from high wage growth and have been increasingly present in top-income groups.
However, very top incomes are still exclusive to business owners, and profits fluctuate with business cycles. It suffered large shocks in the German unification crisis in the mids, the burst of the new economy bubble in the early s, and the Great Recession in During the first stage of reform, market principles were introduced into the agricultural sector through the de-collectivization of production. While foreign investment and entrepreneurship were permitted under state guidance, the vast majority of industry remained state-owned until the mids.
The following decades saw a second stage of deeper reforms implemented. Soviet-style central planning in industry was dismantled through the privatization and contracting out of state-owned enterprises, though the state maintained its control of monopolies in some sectors, including banking and petroleum. Furthermore, liberalization of markets over this period saw the lifting of price controls and the reduction of protectionist policies and regulations, aiding the dramatic growth of the private sector.
The subsequent impacts of these privatization and opening reforms have been of great interest worldwide, particularly given the significant growth the country has experienced over the last forty years and its accompanying improvements in poverty rates. They find a significant increase in per-adult pre-tax income inequality from to As China began its privatization process as also discussed in chapter 3. Put in another way, these groups captured the same amount of total income, but the former had a population five times smaller than the latter.
This coincided with the eight-year period that saw the Chinese government introduce a new set of policies for the privatization of state-owned enterprises, mainly in the tertiary sector. Income inequality apparently stabilized thereafter, with the shares of all three of the main income groups in remaining pretty much similar to their levels in This stabilization of inequality since should be regarded with caution as it could partly reflect data limitations, due in particular to the lack of national data made available on high-income taxpayers since Second, both the level and the rise of inequality are larger in the aforementioned corrected series than in the official series.
Most of the difference between these estimates and the raw surveys comes from the finer level of precision among top income earners enabled by income tax data. Since , Chinese top-income groups benefitted from quadruple-digit growth rates. The new data series constructed by Piketty, Yang, and Zucman on the distribution of national income also allow a decomposition of national income growth by income group.
This in turn enables a quantitative assessment of the extent to which various groups of the population have benefitted from the enormous growth China has experienced since See Table 2. Average national income per adult has grown close to ninefold between and , corresponding to an average annual increase of 6. This growth has not been equally shared; the higher the income level, the higher the rate of growth over the time period considered. However, the same pattern, by which income growth rates rise more quickly the higher up the distribution one goes, was evident for all countries.
The urban-rural gap continues to grow, but it is within-region inequality that spurs overall growth in inequality. What role has the urban-rural gap played in the evolution of Chinese inequality? This question is important as inequality could be driven mainly by growing differences between cities and rural areas and not by inequality among individuals within areas. Policy implications are indeed dependent on which force dominates in the mix.
Inequalities in longevity by education in OECD countries Inequalities which surface in the job-market are often entrenched during education, which puts those at the bottom at a serious disadvantage. Poorer students struggle to compete with their wealthier classmates and go on to lower levels of educational attainment, smaller salaries, and most strikingly, shorter lives. Data from 15 OECD countries shows that, at age 30, people with the highest levels of education can expect to live, on average, six years longer than their poorly educated peers.
Investing in education and training will pay long-term dividends for the economy, for individual well-being, and for the overall prosperity of our societies. Reaching excellence through equity is possible. For that, we need to develop more ambitious education and skills policies. They also demonstrate that there are major potential benefits to equip disadvantaged groups, such as low social-background students and low-skilled workers, to acquire better skills and compete for better-paying jobs. Innovation and entrepreneurship are major potential sources of growth with strong spillover benefits across the economy.
But in the past, innovation policies have generally been assessed in terms of their impact on aggregate income growth. As a result, it is essential to consider the social, industrial and territorial implications of innovation policies as well. This is especially important if the changes inherent in the innovation process exacerbate income disparities by creating opportunities primarily for high-skilled workers.
Inclusive innovation policies — such as implementing well-designed policies to support young firms, simplify registration procedures for start-ups, and improve access to finance and other essential business services — can help mitigate these costs. Innovation Policies for Inclusive Growth Inequality is closely linked to where people live and work. The economic crisis has widened inequalities across regions within countries. The spatial concentration of income inequality has been increasing everywhere. In advanced economies, income inequality is highest within large cities, with large disparities in income from one area of a city to another.
Addressing regional disparities is a key element of a strategy to reduce inequality and increase well being. So, the policy responses must also be locally targeted. Policies that take better account of regional problems and needs may have a greater impact on improving well-being for the country as a whole by tackling the sources of inequality more directly. But to effectively target policies, governments need the tools to fully understand local conditions and the expectations of their citizens. The publication " How's Life in Your Region ", which will be launched in September , will help policy makers to:.
It exposes divisions according to age, gender, education, and wealth, and reveals pockets of inequality in all OECD countries. It also brings to light the many well-being disadvantages that migrants face in adapting to life abroad. It notably shows gender inequalities in well-being and well-being disparities due to socio-economic gaps.
Inequality can no longer be treated as an afterthought. We need to focus the debate on how the benefits of growth are distributed. On the contrary, the opening up of opportunity can spur stronger economic performance and improve living standards across the board! Inequality and