World Income Inequality

by on January 31, 2011 at 12:21 pm in Data Source, Economics | Permalink

Here, courtesy of Catherine Rampell of Economix, is a remarkable chart from Branko Milanovic's book The Haves and Have Nots. Along the horizontal axis are within-country income percentiles running from the bottom 5% (1st ventile) to the top 5% (20th ventile). Along the vertical axis are world income percentiles.

Economix-28milanovic-custom1
The graph shows that the bottom 5% of Brazilians are among the poorest people in the world but the top 5% are among the richest. Thus the vertical range of the curve tells us about within-country inequality.

Comparing between countries we see that the poorest 5% of Americans are among the richest people in the world (richer than nearly 70% of other people in the world). The poorest 5% of Americans, for example, are richer than the richest 5% of Indians.

Richard January 31, 2011 at 8:24 am

Is this adjusted for purchasing power?

Ken Rhodes January 31, 2011 at 8:44 am

Percentile scales don't show magnitude.

Six Ounces January 31, 2011 at 9:02 am

An immediately impressive chart, demonstrating the reality that the poor in America live far better than the "middle class" in many other countries – far better indeed when you consider the value of public goods, in kind transfers, income enhancements not included in reportable income, low-income discounts, and subsidies.

But when I got to the last sentence that says the bottom 5% of Americans are richer than the richest 5% of Indians, I choked on my coffee. This is obviously not adjusted for purchasing power.

The choice between being poor in Detroit or rich in Delhi – cultural preferences aside, which would you rather be?

Steven H. Noble January 31, 2011 at 9:22 am

How does height of the vertical range rank order with Gini?

dirk January 31, 2011 at 9:37 am

"The choice between being poor in Detroit or rich in Delhi – cultural preferences aside, which would you rather be?"

The top 5% in Delhi must not be very rich. Perhaps you have to go to the top 1% in Dehli to find the rich. Or the top .1%. Or the top .01%

Andrew January 31, 2011 at 9:45 am

It's income not wealth. In a higher income country it also costs more to buy services.

Lou January 31, 2011 at 9:56 am

Depending on how small you want to break down the categories, you might find that Mexico has the worst inequality because Carlos Slim is so rich while in rural areas there are still people living fairly primitive lifestyles. But does it really matter from a policy perspective how rich certain individuals become? As long as it doesn't happen at the expense of others, in which case it probably involves some activity that's already illegal, who cares if Bill Gates is a zillion times richer than me? What if you just looked at the top half and the bottom half inthe US? My guess is there would not be much difference at all, especially compared to the rest of the world. It's clearly not the case that there is a lower caste of Americans based on socioeconomic status who live in abject poverty with no chance of ever improving. That should be the beginning and the end of the inequality debate. Although we are coming close to that in the case of illegal immigrants and urban children who are forced to attend schools racked by rent-seeking teachers' unions. And note that those schools' existence is thanks to the same idiots who sit around whining about how rich some people are.

jn January 31, 2011 at 10:07 am

The reason people are getting hung up when dealing with the richest is that the rich PPP is rarely accurate. In the US, they are buying services that don't get counted well in the CPI (expensive housing, other positional goods, or personal services) so we overestimate rich people's wealth here. Conversely, the rich in poorer countries (esp where political influence is more strongly tied to wealth) can more easily buy personal services, political favors, and things like housing location or elite school choice are not fully priced in the market (because social connections determine who gets what/where much more than nominal price relative to the US). [For example, elite Russians can exclude lower income groups from Moscow more easily than Americans who have to pay up to escape to the suburbs. In most countries CEOs and top politicians receive perks that have to be bought on the open market in the US.] Thus raw income figures are liable to be inaccurate when comparing consumption for the top 5% of different countries because positional and social goods are a much larger fraction of their market basket.

Thus, these PPP adjustments probably make more sense for the middle or middling poor. At the lowest income levels, in kind transfers and public goods matter a lot.

lan January 31, 2011 at 10:27 am

The vertical access of the portion of the World's Income is quite unconventional for reporting on inequality. The graph without its corresponding methodology is confusing at best and misleading at worst. By starting the US at 65-69% of the world's income, it appears to be making use of durable investments. Moreover, the lesser countries are concave up, which is expected for inequality graphs, while the US curve is concave down. This reporting employs at minimum a unique approach to analysing incomes around the world.

Andrew January 31, 2011 at 10:59 am

I suspect PPP doesn't capture what I'm thinking about, although that would take some thinking.

However, it's still income, not wealth. People present these charts for the implications, and we get the idea that the US is a rich country so we can (a) help our own poor and (b) help the world's poor. Well, we are partly rich because our poor are relatively rich, and they probably aren't too keen on sending some of their wealth overseas.

dirk January 31, 2011 at 11:12 am

"I'm sure the words "richest," "poorest," and, possibly, "5%" have highly technical meanings for economists compared to their common-parlance definitions."

What is so hard to understand about 5%? This isn't sneaky statistics. 5% means 5%. Richest in the world means richest in the world. Poorest in the world means poorest in the world. If you quibble that income isn't more or less a good proxy for wealth and standard of living, you are the one imposing highly technical definitions.

Let's all agree to agree on plain English.

Andrew January 31, 2011 at 11:26 am

It's not the most intuitive chart format I've seen. How can two countries both have 100% of the world income distribution?

I'm not sure why the first time I've ever seen the word 'ventile' is on a chart. It's probably not intended for a broad audience, not that I'm a broad, but I didn't know the word. I get the feeling people try to make charts novel.

k January 31, 2011 at 11:43 am

poverty in india: 1 meal a day if lucky, protein once a week if lucky

poverty in the US: not having a laptop

i'm joking, but not much. I read "Gangster for a Day", and the "living conditions" of the supposedly worst area ever in the US are marginally better than the guy who drives your taxi in Delhi.

But that does not mean I would rather be a gangster in Chicago than a taxi driver in Delhi. Life may be more of a pain in the ass in tropics (literally for those with a weak stomach) but it sure is a lot more wholesome.

Andrew January 31, 2011 at 12:40 pm

If the label of your X-axis is not a real word, yoooooouuuuu might be an economist.

Stuart January 31, 2011 at 12:58 pm

People who can't figure out what a ventile is have obviously not been to Starbucks.

Jim January 31, 2011 at 1:44 pm

"shows the US to have a dramatically more equal distribution than is usually assumed."

But is there truly anyone, anywhere, that honestly believes that income inequality in the USA is a pressing problem?

It is used all the time as an excuse for more Government power, of course. But I do not see anyone sincerely trying to care about it.

Cheap Clothing January 31, 2011 at 4:21 pm

Well this isn't that surprising.

L2P January 31, 2011 at 4:40 pm

There's something seriously wrong either with the numbers underlying that chart, or with the definition of "among the richest." Here's "one of the world's richest people" living in a cardboard box (http://theiowarepublican.com/home/wp-content/uploads/2010/09/homeless-person1.jpg) in Culver City; I don't think this sort of "poorest American" is buying Guchi bags in China (http://genychina.com/wp-content/uploads/2009/11/china_shopping_article.jpg).

It's simply not true. The poorest Americans struggle to get enough to eat; they don't buy designer handbags. I could understand saying it's "relatively easy" to be poor in America, but to say the are "among the richest people in the world" is just gibberish. Unless the richest people in the world are living in cardboard boxes and eating spam.

rob January 31, 2011 at 5:04 pm

L2P,

What do you not understand about 5% ventiles? No one is saying there do not exist some people in the US who are poorer than the richest person in China/India/Brazil. Obviously a homeless man in a box is in the lowest .01% of the American income distribution, while millionaires in China are in the top .1%.

The graph compares 5% bands, not .1% bands.

sanjiv January 31, 2011 at 6:55 pm

"The poorest 5% of Americans, for example, are richer than the richest 5% of Indians"

This cannot be true.

rob January 31, 2011 at 7:22 pm

http://timesofindia.indiatimes.com/india/India-ha

"Noted economist Nancy Birdsall, president of the Center for Global Development, has proposed a new definition of the middle class for developing countries in a forthcoming World Bank publication, Equity in a Globalizing World. Birdsall defines the middle class in the developing world to include people with an income above $10 day, but excluding the top 5% of that country. By this definition, India even urban India alone has no middle class; everyone at over $10 a day is in the top 5% of the country. "

The top 5% of India aren't as rich as you seem to think.

Rahul January 31, 2011 at 8:39 pm

This obviously does not account for the prominent black economy aspect in developing nations. If that were accounted for, the average richest 5% of Indians would probably be close to average richest 15-20% of Americans.

fructose January 31, 2011 at 10:20 pm

The extent to which the commenters do not understand this graph is amusing, and slightly disheartening. To put this in perspective, per capita GDP (at PPP) in India is $3,300. In USA it is $48,000. Since income is approximately a bell curve, most of the people in India's top 5% are not quite living the life-style of America's bottom 5%, who after all have significant amounts of government income transfers at the state, local and federal levels (which places a lower bound on the level of poverty these people experience).

fructose January 31, 2011 at 10:34 pm

Actually, Eivind, that is the case. From a global perspective, America's poorest people are upper-middle class.

Andrew February 1, 2011 at 12:50 am

It's both and neither. If the poor lived in India, they'd be rich, but they don't. And if they lived in India, they'd be poor anyway. Both Warren Buffett and Joe Sixpack owe their absolute status to the system and their relative status to themselves.

a February 1, 2011 at 1:13 am

"But is there truly anyone, anywhere, that honestly believes that income inequality in the USA is a pressing problem?"

Yes. A lot of people do. For instance, me.

JSK February 1, 2011 at 3:13 am

@rob:

"Obviously a homeless man in a box is in the lowest .01% of the American income distribution,"

How could that be, as almost 2 million Americans are homeless? http://en.wikipedia.org/wiki/Homelessness_in_the_

Tom February 1, 2011 at 3:23 am

So, moral of your point-
America's poor should just shut up and let the rich keep rigging the system so that get an even bigger share?

Andrew February 1, 2011 at 5:31 am

By the way, do you personally know any of these exploiters? I don't think I do. What I do know is a lot of professors, for example, collecting rents on the vile academic system. But raising their taxes isn't going to fix the system.

Woofcat February 1, 2011 at 8:59 am

I've lived in some of the poorest areas of Chicago and DC as well as half a dozen developing countries, and to me it's always been absolutely self-evident and uncontroversial that the bottom 10 percent of the income distribution in America live lives that would be comfortably upper-middle class or above anywhere else. When poverty is positively correlated with obesity and health problems associated with sedentary lifestyles, it's pretty clear you've shifted the goalposts on what 'poverty' means.

Authentic February 1, 2011 at 10:11 am

The real difference between the poor in much of the world and the poor in America is that the poor in America get assistance from their government whereas in many of the other countries this is not the case.

Lee February 1, 2011 at 12:26 pm

Can wealth really just be measured in income per capita? This article suggests it is far more complex than that

http://marketsandculture.blogspot.com/2011/01/fre

'In conclusion, being part of the market process appears to be as important as having needs satiated. The implications for social cohesion are clear. Consider two economies which happen to have equal provision of the same type of goods. One has them provided by the market, the latter via centralized control. The one that has it provided via the market mechanism is likely to have a happier population than the latter. '

Nellie February 1, 2011 at 2:38 pm

Since about 80 % of the world population live on less than 10 dollar a day, and 50 % on something like two dollars a day – it doesn’t take that much to be above average.

Rahul February 2, 2011 at 3:32 am

1. The plot would have looked a lot different if they had used percentiles rather than ventiles.

2. Another way of making it easier to understand is to use absolute numbers instead of percentiles. Then statements would translate to: "The bottom 1 million poorest people in the US are richer / poorer than the top 1 million Indians"

3. The income distributions are flatter at the bottom and steeper at the top. The comparison of the poorest of one country to the richest of another uses this. The poorest are more homogeneous group than the richest.

stickman February 3, 2011 at 2:16 am

Touching on the subject of inequality, here's an interesting discussion an fractal inequality, the idea that we perceive inequality within any group (at work, in neighbourhoods, etc) no matter the absolute level of income: http://blogs.reuters.com/felix-salmon/2011/01/31/

Listening, I was reminded of the following aphorism:

"Wealth" is earning 50% more than your brother-in-law.

Kirk February 3, 2011 at 12:38 pm

There seems to be a lot of confusion about this article that could be summed up by these two comments that have ALREADY BEEN MADE:

The extent to which the commenters do not understand this graph is amusing, and slightly disheartening. To put this in perspective, per capita GDP (at PPP) in India is $3,300. In USA it is $48,000. Since income is approximately a bell curve, most of the people in India's top 5% are not quite living the life-style of America's bottom 5%, who after all have significant amounts of government income transfers at the state, local and federal levels (which places a lower bound on the level of poverty these people experience).

Q. Is this adjusted for purchasing power?

A. Yes -Alex Tabarrok, the one who posted the article.

Henry February 7, 2011 at 2:53 am

As Brazilian I would say that my country sucks as hell.
And it will always be like that.

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