The Rising Tide of Absolute Global Income Inequality During 1850–2010

What is it about?

This paper is the first to decompose absolute global income inequality into its within-country and between-country component. The results show a continuous increase of absolute global inequality during 1850–2010, which can be separated into three distinct phases: (1) between 1850 and 1929, within-country inequality explained up to 76 % of absolute global inequality, yet the growth rates of within- and between-country inequality were very similar; (2) a sharp increase in the importance of between-country inequality occurred during the 1929–1950 period, which was followed by a period during which the within- and between-country components were approximately equally relevant; and (3) after 1985, the growth in absolute global inequality was driven primarily by the accelerated growth of within-country income differences. Currently, within-country inequality explains 70 % of absolute global market inequality, a figure close to that of the year 1850. Additional findings include that absolute income convergence between countries took place after 2005, that it is possible to reduce absolute inequality and to grow simultaneously, and that recently within-country net inequality has grown faster than market inequality. The main findings are preserved when different absolute decomposable inequality measures, sample sizes, and purchasing power parity exchange rates are used.

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Why is it important?

Empirical studies of the global evolution of income inequality concentrate almost exclusively on relative inequality. Several authors argue that this focus on relative inequality is unduly restrictive given that there is little obvious reason for assuming that it is the relative inequalities in incomes (rather than absolute inequalities) that matter instrumentally to valued social outcomes. Indeed, differences in perceptions partly explain conflicting views about the distributional outcomes of globalization. Moreover, previous studies suggest that absolute inequality increases likelihood that crimes are committed, augments the potential lobbying power of elites and thus likely influences democratic decision-making processes, and affects the demand for assets and thus influences their prices.