Thursday, November 5, 2009

Income inequality across the world

In a recent NBER working paper, Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez examined the top income shares time series over the long-run for more than 20 countries using income tax statistics and uncovers several interesting results.

They find that "over the last 30 years, top income shares have increased substantially in English speaking countries and in India and China but not in continental Europe countries or Japan. This increase is due in part to an unprecedented surge in top wage incomes. As a result, wage income comprises a larger fraction of top incomes than in the past." Here are a few graphics from their findings.

Interestingly, in case of India, the share of the top percentile continued to fall till about 1982-83. Subsequently, coinciding with the first phase of deregulation and liberalization and the consequent , the share of the top percentile has been continuously on the rise.

The share and composition of US national income of the top 0.1% of population.

Income is defined as market income including capital gains (excludes all government transfers). Salaries include wages and salaries, bonus, exercised stock-options, and pensions. Business income includes profits from sole proprietorships, partnerships, and S-corporations. Capital income includes interest income, dividends, rents, royalties, and fiduciary income. Capital gains includes realized capital gains net of losses.

The authors also find that most countries experienced a sharp drop in top income (mostly capital income, as against labor income, for the top percentile) shares in the first half of the 20th century concentrated around the World Wars and the Great Depression. However, the increase in top income shares in recent decades has been quite concentrated with most of the gains accruing to the top percentile with much more modest gains (or even none at all) for the next 4% or the second vingtile. Further, a significant portion of the gains in most countries in post-War era has been due to an increase in top labor incomes (especially wages and salaries), whose share in the top percentile is much higher today than earlier in the 20th century.

Update 1
Maxim Pinkovskiy and Xavier Sala-i-Martin have an interesting article that claims world poverty as falling faster than expected and from 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa.

Update 2
Jonathan Heathcote, Fabrizio Perri, and Gianluca Violante find that recessions (including the current one) raise earnings inequality and income inequality, absent mitigating government transfer programmes. However, during the current recession, thanks to the consumption-rich being disproportionately hurt by declining asset prices, consumption inequality has surprisingly declined.

Update 3 (8/3/2011)

See excellent graphical comparison of the evolution of inequality across a few countries between 2005 and 2009.

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