Sunday, November 14, 2010

Trends in income inequality

Preparing for the "policy forum" about Wilkinson and Pickett's "The Spirit Level" I mentioned here, I found Deiniger and Squire's 1996 dataset on income inequality, which presents historical estimates of income inequality (in some cases going as far back as 1890) for a large number of countries. They simply looked up every study that tried to measure income inequality in particular countries and put it into their dataset, with some notes regarding the quality of the underlying data and the sources; not every study is of very high quality, but there is sometimes more than one study for a given year and country, and the resulting data probably gives you a good picture of overall trends. So I thought of looking at the trends in inequality in the countries Wilkinson and Pickett look at, and comparing it to trends in inequality in the communist countries for the period 1960-1993 (where Deiniger and Squire have data).

Here's the result:

"Rich countries" means rich today, and includes I think all of the countries that Wilkinson and Pickett look at, plus Hong Kong and Taiwan: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, UK, USA. "Communist" includes Bulgaria, China, Cuba, Czechoslovakia, Hungary, Poland, Romania, Soviet Union, and Yugoslavia. For some of these countries there are only 3-4 estimates, for others there are long series for many years. I simply average all estimates for a country for a given year for rich and communist countries. (This is probably a terrible idea, but I'm just an amateur. I expect correction from irate statisticians, and shall be grateful for it.)

A scatterplot with the point estimates (as well as information about the original sources) is here:

Income inequality has probably gone up since then in many countries (not just rich ones); I haven't tried to merge Deiniger and Squire's estimates with later data, but I suspect we would see an upward trend after 1990 or so. (There are some fuller estimates available here; I might try to make a graph with them later).

Interpretations? Perhaps the threat of communism made rich countries engage in more redistribution than otherwise? (Following something like Acemoglu and Robinson's argument: the rich allowed more redistribution in the period 1960-1990 because of the potential threat of communist revolution). Or perhaps there was some feature of the world economy that tended to reduce inequality in advanced capitalist economies, but is now tending to increase it? (Something about finance capital, perhaps?) Pointers?