Measuring world inequality over time.

Why world inequality is falling and not rising

by Tomas J. Philipson

Incorporating the value of health into national measures of well-being such as GDP drastically alters conclusions about whether the world is becoming more unequal or not.

There has been much discussion of rising inequality both domestically and internationally, particularly following the publication of Tomas Piketty’s recent best-seller, “Capital in the Twenty-First Century,” a book that continues a long running research agenda on the rise in US income and wealth inequality. When assessing inequality, it is important to distinguish between inequality within countries, e.g. how do the poor and rich compare in the US, and across countries, as in how poor nations compare to rich ones.

When it comes to comparing inequality across countries, the measure most commonly used is some version of gross domestic product, or GDP. It roughly measures the aggregate dollar amount of market transactions in an economy – how much buyers pay and sellers receive across all recorded goods and services. Economists interested in inequality have long studied whether poorer countries catch up to richer ones in GDP per capita. This only occurs if poorer countries grow faster in percentage terms than richer ones. If China experienced 8% growth rates compared to US rates of 3%, for example, China may become more similar to the US even though the level of per-capita GDP in the US currently is much higher. Economists refer to faster GDP growth in poorer countries as “convergence” in incomes when poorer countries catch up to richer ones in their levels of incomes

Many economic studies have investigated the trends of inequality in income across countries, and the overall finding is that there is a lack of such convergence in the sense that poorer countries do not tend to grow faster than richer ones. More precisely, various measures of inequality have not indicated a reduction in income inequality across countries from the 1960s onward. During the 1990s and 2000s, economic booms in China and India, paired with their huge populations, somewhat reduced the world inequality in income per capita. Yet, outside of these two countries, measurements pointed to increasing inequality between 1960 and 1990 that stabilized around 2000.

Economists, however, have long recognized that the per capita GDP measure of economic well-being is incomplete for many reasons. For instance, per capita GDP only measures the dollar amounts of market or government transactions; thus, there are things that are highly valued, yet not captured. For example, leisure time away from work is not counted in GDP, nor is raising a family or any type of activity that takes place at home without a formal transaction taking place. Perhaps most importantly, GDP is a flow measure at a given year, and therefore poorly incorporates the lifetime value of extended health through lower mortality and morbidity. The inability to incorporate the lifetime value of health is a major issue as most people consider their health more important and valuable than anything else.

Therefore, in research that has since been replicated, my colleagues and I investigated the impact that health has on measuring world inequality over time.

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