Income inequality since 1820

by

Michail Moatsos, Utrecht University,

Joery Baten, Tuebingen University and

Peter Foldvari, Bas van Leeuwen and Jan Luiten van Zanden, Utrecht University

This chapter focuses on income inequality as measured by gross (i.e. pre-tax) household income across individuals within a country. It builds upon a number of large-scale initiatives to chart income inequality trends over time, supplementing them with data on wages and heights for the earlier period. Income inequality trends follow a U-shape in most Western European countries and the Western Offshoots. It declined between the end of the 19th century until about 1970, followed by a rise. In Eastern Europe, communism resulted in strong declines in income inequality, followed by a sharp increase after its disintegration in the 1980s. In other parts of the world (China in particular) income inequality is on the rise recently. The chapter also provides evidence on the global income distribution, i.e. assuming all people belong to the same community. This distribution was unimodal in the 19th century, became increasingly bi-modal between 1910 and 1970 and suddenly reverted back into a unimodal distribution between 1980 and 2000.

Introduction

The importance of income inequality at the local, regional and global scale hardly needs to be stressed: the enormous increase of income inequality on a global scale is one of the most significant - and worrying - features of the development of the world economy in the past 200 years (van Zanden, et al., 2013). Several international organisations and commentators have drawn attention to the increase in income inequality in a number of developed and emerging countries in the run-up to the recent global financial crisis. For these reasons, the subject has become one of the most discussed topics in the social sciences; in particular, the debate on the measurement and interpretation of recent trends in global inequality - is it still increasing? and why or why not? - has attracted considerable attention (Anand and Segal, 2008; Bourguignon and Morrisson, 2002; Deininger and Squire, 1996; Jones, 1997; Milanovic, 2002 and 2007).

Levels and trends in income inequality are very relevant for people’s and societies’ well-being. In a sense, the information that income inequality provides is additional and complementary to that referring to average personal income. Since an increase in GDP per capita, by itself, gives us information only about average income gains, income inequality provides more detailed insights about how much the benefits of economic growth in a society or region are spread. It tells us who is getting the benefits of economic growth, and in what proportions. Besides this connection with well-being, an extensive literature investigates the impact of income inequality on a range of social outcomes, such as trust, crime, social mobility, health and educational achievement (Wilkinson and Pickett, 2007).

In what follows, we address and document the long-run trends in income inequality. First we present a new long-run dataset on income inequality (van Zanden et al., 2013) that has the benefit of internal consistency, but also makes it possible to describe, for the first time, historical developments in income inequality on a global scale spanning about two hundred years. Second, we use this dataset to describe historical developments in income inequality both within and between countries.