Tuesday, October 11, 2011

Income Inequality: Is Society as Polarized as We Think?

When I first started working in the corporate world, I knew that the executive team who were responsible for the day-to-day operations of the company that had employed me were well compensated for their efforts and responsibilities.  Thirty years ago, the income disparity between the executive class and the sweaty masses was large but not unfathomably so.  Today, things in many nations around the world are far different.  The compensation packages paid to the executive class, particularly those dwelling in the corner office on the top floor, appears to make the executive class of yesteryear look positively underpaid by comparison.  One has to wonder if there really is greater income inequality today than there was in decades past or if it's just a figment of our imaginations.  To that end, the Conference Board of Canada recently released a report on world income inequality.  In this study, they look at how income is divided among the world's wealthiest and poorest and how income inequality varies by nation.

Here's a quote from Richard Freeman, a Professor of Economics at Harvard University:

"The triumph of globalization and market capitalism has improved living standards for billions while concentrating billions among the few. It has lowered inequality worldwide but raised inequality within most countries."

To open this posting, let's take a look at how the other half lives (perhaps I should rephrase that to "...how the other one percent lives...").  Every year, Forbes magazine releases its latest list of the world's richest.  This year's list broke the record for the number of billionaires (1210) and their total net worth ($4.5 trillion).  China has doubled the number of its billionaires and Moscow has the world's greatest concentration of billionaires.  The world's richest man is Carlos Slim Helu, a Mexican billionaire who is the Chairman of Telmex, a telecommunications company headquarter in Mexico City that provides telecommunication services throughout many Latin American countries.  Mr. Helu's net worth?  A cool $74 billion, up $20.5 billion from last year due to a rise in the Mexican stock market and a stronger peso among other things.  This puts him WELL ahead of number 2 on the list, one Bill Gates, non-executive Chairman of Microsoft, the purveyor and beta tester of such wonderful products as Windows Vista among others.  His net worth?  A comparatively small $59 billion of which he has generously donated $28 billion to various philanthropic endeavours.  Despite my lack of fondness for his product line, I have to give him credit where credit is due.

I think we've now got a general idea of how wealthy one can be with just a wee bit of effort.

The Conference Board study divides the 215 nations in the world into income groups based on the level of income or gross national income per capita using the World Bank income divisions.  Here is a brief look at how the World Bank divides the world based on income with some examples of each group:

For the purposes of their study, the Conference Board analyzes world income inequality in three ways:

1.) They calculate the income gap between the world's rich and poor countries using the World Bank groupings noted above and track the difference between rich and poor nations over time.

2.) They calculate the overall world income inequality using the Gini Coefficient measure.  The Gini Coefficient is a measure of the inequality of a distribution with a value of 0 (zero) showing that there is total equality and a value of 1 (one) showing that there is maximum inequality.  In other words, a low Gini Coefficient (close to zero) means that income distribution across is population is relatively more equal and a high Gini Coefficient (close to one) means that income distribution across a population is less equal.  A Gini Coefficient of zero means that all people in a given population have exactly the same income and a Gini Coefficient of one means that one person in a given population receives all of the income with everyone else receiving none.  If a Gini Coefficient is equal to 0.55, that means that 55 percent of the population's income would have to be redistributed so that the entire population received the same income.  I hope that's as clear as mud!

3.) Lastly, the Conference Board calculates the income inequality of each country and then compares them to each other.  Since income inequality may be increasing at the same time as the gap between the average income for that country and the average income of richer countries is shrinking, the Conference Board felt that it was necessary to look at changes to income inequality within each country.

To keep this posting to a reasonable length, let's focus on the world's income inequality by looking at the gap between the world's richest and poorest nations followed by a look at which nations have the greatest and least income inequality and where that inequality is growing.

First, let's take a look at whether there is income inequality between rich and poor nations in the world and whether this gap is growing.  Obviously, there is a higher level of per capita income in richer countries than in poorer countries.  What is changing over time is that the middle income groups in the world's two most populous nations, China and India, is rising quickly.  China was recently reclassified by the World Bank as an upper-middle income nation with its per capita income rising by an annual average of 5.9 percent over the 10 year period from 2000 to 2010.  India, which still remains as a lower-middle income country, has seen its per capita income rising by an average of 5.1 percent over the same time period.  In contrast, average per capita incomes grew by an average annual rate of 3.7 percent in low-income countries and a rather paltry 0.5 percent per year in high-income countries.  This relationship can be seen on this graph:

Is the gap between the world's richest nations and the poorest growing?  The answer depends on how far back in time researchers look.  The gap between high income and low income countries grew from $18,500 in 1980 to $32,900 in 2007 but then fell slightly to $32,100 in 2010.  As well, the gap between high income countries and both lower-middle and upper-middle income countries rose between 1980 and 2007 but fell in 2010.

Looking at the global distribution of income, all 128 countries in the study were lined up in order of income per capita from poorest to richest and then split into 10 groups or deciles of equal population (640 persons per decile).  In the decile with the lowest per capita income, there are 24 nations whose annual per capita income ranges from $185 (Zimbabwe) to Kenya ($1370).  Multiplying each of the nation's income per capita by their respective population gave researchers the total income for each of the deciles.  When all the data is manipulated in this fashion for each of the deciles, researchers found that the poorest 10 percent of the world's population accounted for only $632 billion of income or 1 percent of the world's total annual income.  In contrast, the group with the highest per capita incomes consisted of 16 nations (including Canada, Japan and the United States) accounted for $25.9 trillion of income or 42 percent of the world's total annual income.

Now let’s look at the gap between the richest and the poorest in each of the world's nation using the aforementioned Gini Coefficient.  The Conference Board notes that the extent of income inequality varies widely from country to country.  The Gini Coefficient ranges from a low of 0.24 in Slovenia (meaning that 24 percent of the population's income would have to be redistributed to get perfect equality) to a high of 0.74 in Namibia.  The United States has a Gini Coefficient of 0.38 (62nd place) and Canada has a Gini Coefficient of 0.32 (32nd place).  As economies develop, countries first experience high income inequality which drops over time; as economies mature and countries join the ranks of higher income countries, their income inequality declines.  It is countries that are becoming more developed that generally have the highest income inequality (highest Gini Coefficients meaning that the rich are controlling a greater portion of the country's wealth).

Here is a map showing the countries with the highest income inequality:

Here is a map showing that most of the countries where my readers reside live in countries where income inequality is moderate:

If we look at how income inequality is changing, Conference Board Researchers found that 71 percent of the world's population live in countries where income inequality is increasing.  The countries on this list include India, China, Russia, Canada and the United State as shown on this map:

Only 22 percent of the world's population lives in countries where income inequality is declining including Brazil, Argentina, the United Kingdom and Mexico.

The United States actually has the highest income inequality among a peer group of 16 relatively similar developed nations selected by the Conference Board, mainly due to a massive increase in the incomes of the very rich.  Researchers have noted that the total share of income received by the richest one percent of income earners more than doubled between 1970 and 2008 with their incomes rising by 197 percent between 1980 and 2007 alone.  In 2008, the richest one percent of Americans received just under 18 percent of the total income of the entire United States, up from 8 percent in 1980.

It is interesting to see that what many of us suspected about income inequality all along is not something that we are imagining.  Those of us who live in Canada and the United States, in particular, are experiencing a concentration of our country's wealth in the hands of fewer and fewer people.  One need look no further than the executive compensation pages of corporate annual reports to see a form of income inequality in action.  When CEOs make over 300 times the salary that their average workers make, up from roughly 30 times in the 1970s, one would have to say that it certainly appears that the system is looking out for the few at the expense of the many.


  1. Nice post, it's my first time on your blog and I'm impressed with this and the other articles I've looked at.
    You mixed the concepts of wealth (accumulated over a lifetime) and income (a flow over a year), but I'll forgive you. This debate always gets mired in technical mumbo-jumbo that just turns off the casual reader.
    The approach of taking a Forbes-type list to estimate the incomes of the top segment of the population is one that interests me, since the odds of sampling (and getting a response from) one of these mega-rich is slim to none, and income surveys are quite restricted in how finely they slice and dice the data due to confidentiality concerns.
    Saez and Pinketty (sp?) have done very interesting work in the US showing how it's not just the top 20% or the top 10% driving the inequality increase, it's the top 1%. A chap at McMaster is doing similar Canadian research, I recall. The secret to getting this fine a cut of the diamond is to use tax data (with the tie-in to social benefits from tax forms, the data is that much more complete at the bottom end of the income scale).
    Finally, it seems, people are connecting the dots between the economic malaise we find ourselves in and the years of steadily growing inequality. The global aspect of inequality is much more profound, and frankly immoral.

  2. Hi Political Junkie. I read your blog last night, and I read this just now. http://www.lifeslittlemysteries.com/5-facts-about-the-wealthiest-1-percent-2086/4

    Something's wrong, and I'm betting on you, except if Live Science (who I normally find quite trustworthy) is using 2009 data and you are using 2010 data, how is it that income inequality is increasing? Please help me make sense of all of this!


  3. Jenn

    If you look at the Conference Board report, they have a graph showing income inequality over time both weighted to population and unweighted. The weighted inequality is increasing with time and the other is not. Does that help? I didn't include that in my posting because it was simply too long!

  4. Ahh. Yes, I expect it does. Thanks!


  5. Ok PJ ,if you were CEO of McCain Oil an Gas,what is your top pay you would want? An that pension you have now,you don't really need it,so why do you still take it? What has really happen world Gov. have given to the Gov. Unions what they want,an the unions have made sure Gov. keeps giving. But spending didn't match Tax Rev. because the Gov. new the non union tax payer could not pay those higher taxes. But you Knew that right?

  6. Good post, showing that one can quantify the degree of income inequality and its trends over decades. A few observations:

    a) The blue-shaded map labeled "showing the countries with the highest income inequality" actually does show countries with decreases in income inequality. (For example, Namibia, the country with the highest Gini, is not highlighted in this map.)

    b) "The United States has a Gini Coefficient of 0.38" (assuming from context that it's Gini of income inequality). However, in 2009, the US had a Gini of income inequality of 0.46. See Wikipedia on income inequality and its sources.

    Income inequality in the US has been growing since the 80's. And movements like OccupyWallStreet seem to indicate that there is growing discontent about it. That said, translating such observations and quantifications on inequality into sensible policy positions seems to be tricky, as we can observe in the US Republican Party's Presidential Candidates Campaigns.

    I like the Richard Freeman quote at the beginning of the post. It suggests that worldwide globalization is helping more than hurting.

    If you're interested, I have posted more on inequality and Gini on my own Blog here: http://visualign.wordpress.com/2011/09/22/visualizing-inequality/