1 The global distribution of income: past trends and future prospects A B Atkinson, University of Oxford Inequality and poverty in the global economy, Mannheim Workshop March 2009

2 1. Conceptual issues: distribution of what among whom? 2. The international distribution of income: convergence following divergence? 3.Within-country inequality over the twentieth century: a Great U-turn? 4.Sources of inequality: capital replaced by labour? 5.Prospects for the 21 st century: what can we learn from the past?

3 1.Distribution of what among whom? Distribution of annual income among households MISSING Social dimensions of inequality Public goods Life-course and inequality of opportunity MISSING Non-household population (homeless) Within-household distribution (gender)

4 International Distribution (among countries) Inequality between countries first rose, and then fell World Distribution (among people) Inequality within countries first fell, and then rose ∩ U?+

5 2. The international distribution of income: convergence following divergence? Percent of world population (assuming no inequality within countries)

6 International inequality reduced: Convergence of GDP per capita within the EU (purchasing power parities, EU27 = 100)

7 INTERNATIONAL DISTRIBUTION Long period of divergence following Industrial Revolution – up to mid-century. Now, large countries becoming middle income. Some equalisation within EU. BUT leaving poorest countries behind. Rich countries as a whole still pulling away.

8 Financial crises 3. Within-country inequality over the 20 th century

9 Is US U and UK U ?

10 Germany Gini ↑ 4-5 percentage points

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12 Moving outside the OECD Financial crisis

13 WITHIN-COUNTRY INCOME INEQUALITY (OECD COUNTRIES) Long period of decline in inequality, both overall Gini and top income shares. Rise in last 30 years in both overall inequality and top shares in Anglo-Saxon countries. Later rise in both overall inequality and top shares in Nordic countries and in overall inequality in Germany. Upward movement less evident in France, Italy and the Netherlands. Local financial crises not associated with fall in top shares. CONCLUDE: Evidence for U, but not to same extent, nor at same time, and need to distinguish U from U.

14 Share of top X% = Proportion of earned income x Share of top X% of earners x Alignment coefficient for earnings + Proportion of capital income x Share of top X% with capital income x Alignment coefficient for capital income Alignment coefficient = Share in earnings of top X% of income recipients / Share of top X% of earners (less than 1) 4. Sources of inequality Literature has largely focused on earnings distribution

15 Declining Share of top 1% = Proportion of earned income (rises) x Share of top 1% of earners x Alignment coefficient for earnings + Proportion of capital income (falls) x Share of top 1% with capital income (falls) x Alignment coefficient for capital income

16 Long fall in top wealth share Steep rise in top pay share Some recovery of top wealth share Earlier fall in top pay share Negative shocks to capital but also progressive income and capital taxation. UK Case Study

17 Rise and then fall in share of labour

18 U mirrors lagged effect of cuts in top tax rate

19 SUM UP: Share of top 1% in UK over C20 Proportion of earned income (rose then fell) x Share of top 1% of earners (fell then rose) x Alignment coefficient for earnings + Proportion of capital income (fell then rose) x Share of top 1% with capital income (fell then rose) x Alignment coefficient for capital income BOLD marks most important, but others play a role.

20 5. Prospects for the 21st century: what can we learn from the past? Between-country distribution Source: Maddison data for 42 countries

21 Dispersion of country incomes reduced by Great Depression

22 Within-country distribution : Share of top 1% (0.1% in UK) Not all depressed.

23 Key role of public policy in preventing ↑ in market income inequality leading to ↑ in disposable income inequality. Unemployment in UK went from 6% to 12% Scaling back welfare state

24 Conclusions The distribution of income is complex phenomenon! Need to integrate into macro-economics of growth and depression (effect on international inequality and effect of factor shares on within-country inequality). Crisis may be equalising across countries, but no reason to expect equalising within countries. Key role of policy: progressive taxation and social protection. Policy initiatives: stress-test the welfare state and consider employer of last resort schemes.