An age of rising inequality? No, but yes

Ravi Kanbur 21 September 2020

a

A

Are we living in an age of rising inequality? To read the public discourse, the answer appears to be an unequivocal yes. As conventionally quantified, headline measures of income and consumption inequality like the Gini coefficient or the mean log deviation have been rising over the last three decades in large economies like the US, China, and India. 

The work of Piketty and Saez (2003) on the US was seminal among economists in galvanising interest and attention. The Asian Development Bank (2012) in its flagship report highlighted the fact that over 80% of developing Asia’s population lived in countries where inequality had risen between the 1990s and the 2000s (Asian Development Bank 2012). China is the leading example: as my co-authors and I show in Kanbur et al. (2017), the Gini coefficient for China increased from 0.35 to 0.53 between 1995 and 2010.

However, these numbers belie a more nuanced and intricate pattern of inequality change across the world. For 15 years starting from about the mid-1990s, inequality in most Latin American countries fell (Lopez-Calva and Lustig 2010, Gasparini and Lustig 2011, Lustig 2014). These declines are related to purposive policy: redistributive taxes and spending, minimum wages, and increased supply of workers with a secondary-school education. We will return to policy action presently.

The Latin American experience is reasonably well known. But even for China, in Kanbur et al. (2017) we argue that the trend towards inequality has plateaued from around 2010 onwards, with some indications of a small downturn, and this pattern is again closely related to policy directed at mitigating rising inequality. For sub-Saharan Africa, the inequality picture has also been mixed. As a recent World Bank report (Beegle et al. 2016) concludes:

For the subset of 23 countries for which surveys are available with which to assess trends in inequality, half the countries experienced a decline in inequality and the other half saw an increase. No clear patterns are observed by countries’ resource status, income status, or initial level of inequality. (p. 15)

Similar nuances have to be taken on board for other parts of the world including the Middle East and North Africa (Krishnan et. al. 2016: 3). 

Overall, as Hasell’s (2018) review concludes: “It’s a mistake to think that inequality is rising everywhere. Over the last 25 years, inequality has gone up in many countries and has fallen in many others.”

Inequality within countries has thus not been rising everywhere. There are significant parts of the world where it has been stable or declining. However, there is one sense in which inequality in the world is definitely falling: inequality between countries has decreased as poorer countries have, on average, grown faster than richer countries over the past two or three decades. The differential annual growth rates of China (around 10%) and the US (around 2%) serve to make the point, but the point holds for the world as a whole and in general. 

The result is that the fraction of inequality between the citizens of the world that can be attributed to inequality between countries has been falling. The mean log deviation decomposition by Lakner and Milanovic (2016) shows that by 2008 the between-nations inequality component had fallen to 76.7%, down from its 1988 share of 83.2%. Still very high of course, but much lower than it was before, thanks to the rapid growth of poorer countries relative to rich countries.

The overall effect on world inequality of these different trends can be debated, depending on the exact data sources and exact measures. On the one hand, the 2019 Human Development Report (United Nations Development Programme 2019) concludes that:

The decline in between-country inequality has not been enough to counter the rise of within-country inequality since 1980 or 1990. (p. 113)

But Lakner and Milanovic (2016) conclude that the Gini coefficient measure of inequality fell from 0.72 in 1988 to 0.70 in 2008. At the very least, one can say that world inequality has not risen as much as inequality in some countries. It has been stable and perhaps even fallen. Thus, if we mean by ‘an age of rising inequality’ that inequality is rising everywhere, such a claim is easily dismissed empirically. 

However, I have argued in Kanbur (2019) that there is indeed a sense in which we are living in an age of rising inequality: the trend of technological progress is to displace basic labour in favour of skilled labour and capital. 

Such labour-saving technical change, also called skill-biased technical change, has been the hallmark of the world economy for at least the last three decades and looks set to continue in the decades to come (Acemoglu and Autor 2011, Autor 2014, Acemoglu and Restrepo 2018, Chau and Kanbur 2018). This creates a strong tendency to widen the wage gap between low-skilled and high-skilled labour. Such human capital trends take us beyond the Piketty (2014) argument that physical capital accumulation also has strong built-in inequality-increasing tendencies.

If the fundamental economic forces of capital accumulation and technical change are raising inequality on a business-as-usual basis, what are the appropriate policy responses to mitigate the rise? In Kanbur (2018, 2019), I have characterised some canonical responses to the underlying forces. First, policies could respond to the labour-demand effects of technical change by increasing the supply of skilled labour, through education and training policy. This is sometimes called ‘predistribution’. Second, to the extent that this is insufficient and inequality nevertheless increases, redistribution can be brought in through tax and expenditure, and through market regulation.

The details of specific policies under these headings, for example on Universal Basic Income or Conditional Cash Transfers, will be debated. Such policies have been used and explain some of the nuanced variations in inequality outcomes discussed earlier. However, I have argued in Kanbur (2019) that these policies face global constraints of a type that did not burden national governments quite as much half a century ago. In particular:

  • Mobility of capital. Corporate taxation, to manage rising inequality directly or to raise revenue for expanding education and training, is restricted in the absence of global agreements on minimum corporate tax rates. There will be a race to the bottom on these taxes, and tax havens will flourish.
  • Mobility of skilled labour. Taxation of high incomes from skilled labour is constrained in the same way as capital taxation.
  • Mobility of low-income unskilled labour. If increased transfer benefits at the lower end, brought in to address displacement of basic labour, induce in-migration of basic labour, this will increase the fiscal costs of the redistribution policy.
  • Regulation and labour standards. There will again be a race to the bottom as governments put in lower standards, or enforce standards less vigorously.

The third canonical response to technological change laid out in Kanbur (2018), following the inspiration of Atkinson (2015), is to not take the technological trend and forces as given but to try and change them through public investment and public action. This will not be easy, but let us also remember that technology is what it is today – whether it is the internet, high-yielding agriculture, or genome research – because of past government action. However, such action faces the usual public goods problem that one party incurs the costs but the benefits are widely shared, leading to underinvestment.

All of the above challenges to national policy arise from cross-border spillovers, which have intensified in the last few decades. In the absence of international cooperation, they narrow the scope for national action and lead to worse outcomes for each country. The effects are well understood and appreciated in the management of the environment, financial contagion, and infectious diseases, but less so for policies to address the forces raising inequality. 

Our international institutions are no longer fit for purpose to address these issues of cross-border spillover and global public goods. In Kanbur (2017), I have elaborated on this point through the lens of a particular institution, the World Bank, whose instrument and governance reflect the realities of three-quarters of a century ago – of 1945, not 2020.

My answer, then, to the question of whether we are ‘living in an age of rising inequality’ is ‘no, but yes’. The answer is ‘no’ simply because empirically we do not see inequality rising everywhere. 

But the answer is ‘yes’ for three reasons. First, the fundamental forces of capital accumulation and technical change are pulling towards rising inequality on a business-as-usual scenario. Second, unlike half a century ago, national policies to mitigate these forces face global constraints because of cross-border spillovers. Third, our international institutions are woefully inadequate to provide the coordination needed to open up national policy space for an adequate response to rising inequality. 

So yes, we are living in an age of rising inequality.

References

Acemoglu, D, and D Autor (2011), “Skills, tasks and technologies: Implications for employment and earnings”, Handbook of Labor Economics, Vol. 4, Amsterdam: Elsevier-North.

Acemoglu, D, and P Restrepo (2018), “The race between man and machine: Implications of technology for growth, factor shares and employment”, American Economic Review 108(6): 1488–542.

Asian Development Bank (2012), “Asian development outlook 2012: Confronting rising inequality”, Mandaluyong City, Philippines: Asian Development Bank.

Atkinson, A B (2015), Inequality: What can be done? Cambridge MA: Harvard University Press.

Autor, D (2014), “Skills, education, and the rise of earnings inequality among the ‘other 99 percent’”, Science 344(6186): 843–51.

Beegle, K, L Christiaensen, A Dabalen and I Gaddis (2016), “Poverty in a rising Africa”, Washington DC: World Bank.

Chau, N, and R Kanbur (2018), “Employer power, labor saving technical change, and inequality”, Cornell University, Dyson Working Paper 2018-04.

Hasell, J (2018), “Is income inequality rising around the world?”, Our World in Data, blog post, 19 November. 

Kanbur, R, Y Wang and X Zhang (2017), “The great Chinese inequality turnaround”, CEPR Discussion Paper 11892.

Kanbur, R (2017), “The World Bank in the era of Trump”, VoxEU.org, 13 June.

Kanbur, R (2018), “On three canonical responses to labour saving technical change”, VoxEU.org, 8 January.

Kanbur, R (2019), “Inequality in a global perspective”, Oxford Review of Economic Policy 35(3): 431–44.

Krishnan, N, G Lara Ibarra, A Narayan, S Tiwari and T Vishwanath (2016), “Uneven odds, unequal outcomes: Inequality of opportunity in the Middle East and North Africa”, Directions in Development—Poverty, Washington DC: World Bank.

Lakner, C, and B Milanovic (2016), “Global income distribution: From the fall of the Berlin Wall to the Great Recession”, The World Bank Economic Review 30(2): 203–32. 

Piketty, T, and E Saez (2003), “Income inequality in the US, 1913–1998”, Quarterly Journal of Economics 118(1): 1–39, series updated to 2010 in March 2012.

Piketty, T (2014), Capital in the twenty-first century, Cambridge MA: Harvard University Press.

United Nations Development Programme (2019), Human development report 2019: Beyond income, beyond averages, beyond today: Inequalities in human development in the 21st century, New York: UNDP.

a

A

Topics:  Labour markets Poverty and income inequality

Tags:  developing countries, Digital technology, Gini coefficient, globalisation, Inequality, international cooperation, labour, measures of inequality, technology, wealth inequality

T. H. Lee Professor of World Affairs, International Professor of Applied Economics and Management, Professor of Economics at Cornell University and CEPR Research Fellow

Events

CEPR Policy Research