Managing data limitations to construct a global distribution of income

The dynamics of global inequality have attracted growing attention in recent years.1 However, we still know relatively little about how the distribution of global income and wealth is evolving. Available studies have largely relied on household surveys, a useful source of information, but one that does not accurately track the evolution of inequality at the top of the distribution. New methodological and empirical work carried out in the context of WID.world allows a better understanding of global income dynamics.

We stress at the outset that the production of global inequality dynamics is in its infancy and will still require much more work. It is critical that national statistical and tax institutions release income and wealth inequality data in many countries where data are not available currently—in particular, in developing and emerging countries. Researchers also need to thoroughly harmonize and analyze these data to produce consistent, comparable estimates. The World Inequality Lab and the WID.world research consortium intend to continue contributing to these tasks in the coming years.

Even if there are uncertainties involved, it is already possible to produce meaningful global income inequality estimates. The WID.world database contains internationally comparable income inequality estimates covering the entire population, from the lowest to the highest income earners, for many countries: the United States, China, India, Russia, Brazil, the Middle East, and the major European countries (such as France, Germany, and the United Kingdom). A great deal can already be inferred by comparing inequality trends in these regions. Using simple assumptions, we have estimated the evolution of incomes in the rest of the world so as to distribute 100% of global income every year since 1980 (Box 2.1.1). This exercise should be seen as a first step towards the construction of a fully consistent global distribution of income. We plan to present updated and extended versions of these estimates in the future editions of the World Inequality Report and on WID.world, as we gradually manage to access more data sources, particularly in Africa, Latin America, and Asia.

The exploration of global inequality dynamics presented here starts in 1980, for two main reasons. First, 1980 corresponds to a turning point in inequality and redistributive policies in many countries. The early 1980s mark the start of a rising trend in inequality and major policy changes, both in the West (with the elections of Ronald Reagan and Margaret Thatcher, in particular) and in emerging economies (with deregulation policies in China and India). Second, 1980 is the date from which data become available for a large enough number of countries to allow a sound analysis of global dynamics.

We start by presenting our basic findings regarding the evolution of income inequality within the main world regions. Three main findings emerge.

First, we observe rising inequality in most of the world’s regions, but with very different magnitudes. More specifically, we display in Figure 2.1.1a the evolution of the top 10% income share in Europe (Western and Eastern Europe combined, excluding Ukraine, Belorussia, and Russia), North America (defined as the United States and Canada), China, India, and Russia. The top 10% share has increased in all five of these large world regions since 1980. The top 10% share was around 30–35% in Europe, North America, China, and India in 1980, and only about 20–25% in Russia. If we put these 1980 inequality levels into broader and longer perspective, we find that they were in place since approximately the Second World War, and that these are relatively low inequality levels by historical standards (Piketty, 2014). In effect, despite their many differences, all these world regions went through a relatively egalitarian phase between 1950 and 1980. For simplicity, and for the time being, this relatively low inequality regime can be described as the “post-war egalitarian regime,” with obvious important variations between social-democratic, New Deal, socialist, and communist variants to which we will return.

Top 10% income shares then increased in all these regions between 1980 and 2016, but with large variations in magnitude. In Europe, the rise was moderate, with the top 10% share increasing to about 35–40% by 2016. However, in North America, China, India, and even more so in Russia (where the change in policy regime was particularly dramatic), the rise was much more pronounced. In all these regions, the top 10% share rose to about 45–50% of total income in 2016. The fact that the magnitude of rising inequality differs substantially across regions suggests that policies and institutions matter: rising inequality cannot be viewed as a mechanical, deterministic consequence of globalization.

Next, there are exceptions to this general pattern. That is, there are regions—in particular, the Middle East, Brazil (and to some extent Latin America as a whole), and South Africa (and to some extent sub-Saharan Africa as a whole)—where income inequality has remained relatively stable at extremely high levels in recent decades. Unfortunately, data availability is more limited for these three regions, which explains why the series start in 1990, and why we are not able to properly cover all countries in these regions (see Figure 2.1.1b).

In spite of their many differences, the striking commonality in these three regions is the extreme and persistent level of inequality. The top 10% receives about 55% of total income in Brazil and sub-Saharan Africa, and in the Middle East, the top 10% income share is typically over 60% (see Figure 2.1.1c). In effect, for various historical reasons, these three regions never went through the post-war egalitarian regime and have always been at the world’s high-inequality frontier.

The third striking finding is that the variations in top-income shares over time and across countries are very large in magnitude, and have a major impact on the income shares and levels of the bottom 50% of the population. It is worth keeping in mind the following orders of magnitude: top 10% income shares vary from 20–25% to 60–65% of total income (see Figures 2.1.1a and 2.1.1b). If we focus upon very top incomes, we find that top 1% income shares vary from about 5% to 30% (see Figure 2.1.1d), just like the share of income going to the bottom 50% of the population (see Figure 2.1.1e).

In other words, the same aggregate income level can give rise to widely different income levels for the bottom and top groups depending on the distribution of income prevailing in the specific country and time period under consideration. In brief, the distribution matters quite a bit.

What have been the growth trajectories of different income groups in these regions since 1980? Table 2.1.1 presents income growth rates in China, Europe, India, Russia, and North America for key groups of the distribution. The full population grew at very different rates in the five regions. Real per-adult, national income growth reached an impressive 831% in China and 223% in India. In Europe, Russia, and North America, income growth was lower than 100% (40%, 34%, and 74%, respectively). Behind these heterogeneous average growth trajectories, the different regions all share a common, striking characteristic.

In all these countries, income growth is systematically higher for upper income groups. In China, the bottom 50% earners grew at less than 420% while the top 0.001% grew at more than 3 750%. The gap between the bottom 50% and the top 0.001% is even more important in India (less than 110% versus more than 3 000%). In Russia, the top of the distribution had extreme growth rates; this reflects the shift from a regime in which top incomes were constrained by the communist system towards a market economy with few regulations constraining top incomes. In this global picture, in line with Figure 2.1.1, Europe stands as the region with the lowest growth gap between the bottom 50% and the full population, and with the lowest growth gap between the bottom 50% and top 0.001%.

The right-hand column of table 2.1.1 presents income growth rates of different groups at the level of the entire world. These growth rates are obtained once all the individuals of the different regions are pooled together to reconstruct global income groups. Incomes across countries are compared using purchasing power parity (PPP) so that a given income can in principle buy the same bundle of goods and services in all countries. Average global growth is relatively low (60%) compared to emerging countries’ growth rates. Interestingly enough, at the world level, growth rates do not rise monotonically with income groups’ positions in the distribution. Instead, we observe high growth at the bottom 50% (94%), low growth in the middle 40% (43%), and high growth at the top 1% (more than 100%)—and especially at the top 0.001% (close to 235%).

To better understand the significance of these unequal rates of growth, it is useful to focus on the share of total growth captured by each group over the entire period. Table 2.1.2 presents the share of growth per adult captured by each group. Focusing on both metrics is important because the top 1% global income group could have enjoyed a substantial growth rate of more than 100% over the past four decades (meaningful at the individual level), but still represent only a little share of total growth. The top 1% captured 35% of total growth in the US-Canada, and an astonishing 69% in Russia.

At the global level, the top 1% captured 27% of total growth—that is, twice as much as the share of growth captured by the bottom 50%. The top 0.1% captured about as much growth as the bottom half of the world population. Therefore, the income growth captured by very top global earners since 1980 was very large, even if demographically they are a very small group.

Building a global inequality distribution brick by brick

A powerful way to visualize the evolution of global income inequality dynamics is to plot the total growth rate of each income groups (see Box 2.1.2). This provides a more precise representation of growth dynamics than Table 2.1.1. To properly understand the role played by each region in global inequality dynamics, we follow a step-by-step approach to construct this global growth curve by adding one region after another and discussing each step of the exercise.

We start with the distribution of growth in a region regrouping Europe and North America (Figure 2.1.2). These two regions have a total of 880 million individuals in 2016 (520 million in Europe and 360 million in North America) and represent most of the population of high-income countries. In Euro-America, cumulative per-adult income growth over the 1980–2016 period was +28%, which is relatively low as compared to the global average (+66%). While the bottom 10% income group saw their income decrease over the period, all individuals between percentile 20 and percentile 80 had a growth rate close to the average growth rate. At the very top of the distribution, incomes grew very rapidly; individuals in the top 1% group saw their incomes rise by more than 100% over the time period and those in the top 0.01% and above grew at more than 200%.

How did this translate into shares of growth captured by different groups? The top 1% of earners captured 28% of total growth—that is, as much growth as the bottom 81% of the population. The bottom 50% earners captured 9% of growth, which is less than the top 0.1%, which captured 14% of total growth over the 1980–2016 period. These values, however, hide large differences in the inequality trajectories followed by Europe and North America. In the former, the top 1% captured as much growth as the bottom 51% of the population, whereas in the latter, the top 1% captured as much growth as the bottom 88% of the population. (See chapter 2.3 for more details.)

The next step is to add the population of India and China to the distribution of Euro-America. The global region now considered represents 3.5 billion individuals in total (including 1.4 billion individuals from China and 1.3 billion from India). Adding India and China remarkably modifies the shape of the global growth curve (Figure 2.1.3).

The first half of the distribution is now marked by a “rising tide” as total income growth rates increase substantially from the bottom of the distribution to the middle. The bottom half of the population records growth rates which go as high as 260%, largely above the global average income growth of 146%. This is due to the fact that Chinese and Indians, who make up the bulk of the bottom half of this global distribution, enjoyed much higher growth rates than their European and North American counterparts. In addition, growth was also very unequally distributed in India and China, as revealed by Table 2.1.1.

Between percentiles 70 and 99 (individuals above the poorest 70% of the population but below the richest 1%), income growth was substantially lower than the global average, reaching only 40–50%. This corresponds to the lower- and middle-income groups in rich countries which grew at a very low rates. The extreme case of these is the bottom half of the population in the United States, which grew at only 3% over the period considered. (See Chapter 2.4.)

Earlier versions of this graph have been termed “the elephant curve,” as the shape of the curve resembles the silhouette of the animal. These new findings confirm and amplify earlier results.2 In particular they make it possible to measure much more reliably the share of income growth captured at the top of the global income distribution—a figure which couldn’t be properly measured before.

At the top of the global distribution, incomes grew extremely rapidly—around 200% for the top 0.01% and above 360% for the top 0.001%. Not only were these growth rates important from the perspective of individuals, they also matter a lot in terms of global growth. The top 1% captured 23% of total growth over the period—that is, as much as the bottom 61% of the population. Such figures help make sense of the very high growth rates enjoyed by Indians and Chinese sitting at the bottom of the distribution. Whereas growth rates were substantial among the global bottom 50%, this group captured only 14% of total growth, just slightly more than the global top 0.1%—which captured 12% of total growth. Such a small share of total growth captured by the bottom half of the population is partly due to the fact that when individuals are very poor, their incomes can double or triple but still remain relatively small—so that the total increase in their incomes does not necessarily add up at the global level. But this is not the only explanation. Incomes at the very top must also be extraordinarily high to dwarf the growth captured by the bottom half of the world population.

The next step of the exercise consists of adding the populations and incomes of Russia (140 million), Brazil (210 million), and the Middle East (410 million) to the analysis. These additional groups bring the total population now considered to more than 4.3 billion individuals—that is, close to 60% of the world total population and two thirds of the world adult population. The global growth curve presented in Appendix Figure A2.3 is similar to the previous one except that the “body of the elephant” is now shorter. This can be explained by the fact that Russia, the Middle East, and Brazil are three regions which recorded low growth rates over the period considered. Adding the population of the three regions also slightly shifts the “body of the elephant” to the left, since a large share of the population of the countries incorporated in the analysis is neither very poor nor very rich from a global point of view and thus falls in the middle of the distribution. In this synthetic global region, the top 1% earners captured 26% of total growth over the 1980–2016 period—that is, as much as the bottom 65% of the population. The bottom 50% captured 15% of total growth, more than the top 0.1%, which captured 12% of growth.

The final step consists of including all remaining global regions—namely, Africa (close to 1 billion individuals), the rest of Asia (another billion individuals), and the rest of Latin America (close to half a billion). In order to reconstruct income inequality dynamics in these regions, we take into account between-country inequality, for which information is available, and assume that within countries, growth is distributed in the same way as neighboring countries for which we have specific information (see Box 2.1.1). This allows us to distribute the totality of global income growth over the period considered to the global population.

When all countries are taken into account, the shape of the curve is again transformed (Figure 2.1.4). Now, average global income growth rates are further reduced because Africa and Latin America had relatively low growth over the period considered. This contributes to increasing global inequality as compared to the two cases presented above. The findings are the same as those presented in the right-hand column of Table 2.1.2: the top 1% income earners captured 27% of total growth over the 1980–2016 period, as much as the bottom 70% of the population. The top 0.1% captured 13% of total growth, about as much as the bottom 50%.

The geography of global income inequality was transformed over the past decades

What is the share of African, Asians, Americans, and Europeans in each global income groups and how has this evolved over time? Figures 2.1.5 and 2.1.6 answer these questions by showing the geographical composition of each income group in 1990 and in 2016. Between 1980 and 1990, the geographic repartition of global incomes evolved only slightly, and our data allow for more precise geographic repartition in 1990, so it is preferable to focus on this year. In a similar way to how Figures 2.1.2 through 2.1.4 decomposed the data, Figures 2.1.5 and 2.1.6 decompose the top 1% into 28 groups (see Box 2.1.1). To be clear, all groups above percentile 99 are the decomposition of the richest 1% of the global population.

In 1990, Asians were almost not represented within top global income groups. Indeed, the bulk of the population of India and China are found in the bottom half of the income distribution. At the other end of the global income ladder, US-Canada is the largest contributor to global top-income earners. Europe is largely represented in the upper half of the global distribution, but less so among the very top groups. The Middle East and Latin American elites are disproportionately represented among the very top global groups, as they both make up about 20% each of the population of the top 0.001% earners. It should be noted that this overrepresentation only holds within the top 1% global earners: in the next richest 1% group (percentile group p98p99), their share falls to 9% and 4%, respectively. This indeed reflects the extreme level of inequality of these regions, as discussed in chapters 2.10 and 2.11. Interestingly, Russia is concentrated between percentile 70 and percentile 90, and Russians did not make it into the very top groups. In 1990, the Soviet system compressed income distribution in Russia.

In 2016, the situation is notably different. The most striking evolution is perhaps the spread of Chinese income earners, which are now located throughout the entire global distribution. India remains largely represented at the bottom with only very few Indians among the top global earners.

The position of Russian earners was also stretched throughout from the poorest to the richest income groups. This illustrates the impact of the end of communism on the spread of Russian incomes. Africans, who were present throughout the first half of the distribution, are now even more concentrated in the bottom quarter, due to relatively low growth as compared to Asian countries. At the top of the distribution, while the shares of both North America and Europe decreased (leaving room for their Asian counterparts), the share of Europeans was reduced much more. This is because most large European countries followed a more equitable growth trajectory over the past decades than the United States and other countries, as will be discussed in chapter 2.3.

Since 2000, the picture is more nuanced but within-country inequality is on the rise

How did global inequality evolve between 1980 and 2016? Figure 2.1.7 answers this question by presenting the share of world income held by the global top 1% and the global bottom 50%, measured at purchasing power parity. The global top 1% income share rose from about 16% of global income in 1980 to more than 22% in 2007 at the eve of the global financial crisis. It was then slightly reduced to 20.4% in 2016, but this slight decrease hardly brought back the level of global inequality to its 1980 level. The income share of bottom half of the world population oscillated around 9% with a very slight increase between 1985 and 2016.

The first insight of this graph is the extreme level of global inequality sustained throughout the entire period with a top 1% income group capturing two times the total income captured by the bottom 50% of the population—implying a factor 100 difference in average per-adult income levels. Second, it is apparent that high growth in emerging countries since 2000, in particular in China, or the global financial crisis of 2008 was not sufficient to stop the rise in global income inequality.

When global inequality is decomposed into a between- and within-country inequality component, it is apparent that within-country inequality continued to rise since 2000 whereas between-country inequality rose up to 2000 and decreased afterwards. Figure 2.1.8 presents the evolution of the global 10% income share, which reached close to 50% of global income in 1980, rose to 55% in 2000–2007, and decreased to slightly more than 52% in 2016. Two alternative scenarios for the evolution of the global top 10% share are presented. The first one assumes that all countries had exactly the same average income (that is, that there was no between-country inequality), but that income was as unequal within these countries as was actually observed. In this case, the top 10% share would have risen from 35% in 1980 to nearly 50% today. In the second scenario, it is assumed that between-country inequality evolved as observed but it is also assumed that everybody within countries had exactly the same income level (no within-country inequality). In this case, the global top 10% income share would have risen from nearly 30% in 1980 to more than 35% in 2000 before decreasing back to 30%.

Measured at market exchange rate, global inequality is even higher

Prices can be converted from one currency to another using either market exchange rates or purchasing power parities (as we did above). Market exchanges rates are the prices at which people are willing to buy and sell currencies, so at first glance they should reflect people’s relative purchasing power. This makes them a natural conversion factor between currencies. The problem is that market exchange rates reflect only the relative purchasing power of money in terms of tradable goods. But non-tradable goods (typically services) are in fact cheaper relative to tradable ones in emerging economies (given the so-called Balassa-Samuelson effect). Therefore, market exchange rates will underestimate the standard of living in the poorer countries. In addition, market exchange rates can vary for all sorts of other reasons—sometimes purely financial and/or political—in a fairly chaotic manner. Purchasing power parity is an alternative conversion factor that addresses these problems (based on observed prices in the various countries). The level of global income inequality is therefore substantially higher when measured using market exchange rates than it is with purchasing power parity. It increases the global top 1% share in 2016 from 20% to 24% and reduces the bottom 50% share from nearly 10% to 6% (Figure 2.1.9).

After a historical decline from the 1920s to the 1970s, income inequality is on the rise in most regions of the world

Income inequality was sharply reduced in the first half of the twentieth century—more precisely, between the 1920s and the 1970s—in most countries of the world, but it has been on the rise almost everywhere since the late 1970s. In Europe and North America, the long-run decline in income inequality was due to the combination of political, social, and economic shocks already discussed. These included the destruction of human and physical capital led by the World Wars, the Great Depression, nationalization policies, and government control over the economy. After the Second World War, a new policy regime was put in place, including the development of social security systems, public education, social and labor policies, and progressive taxation. This combination of factors severely affected very high fortunes, and enabled the rise of a patrimonial middle class and a general decline in inequality in Europe—and to a lesser extent, in North America.⁷

In emerging economies, political and social shocks led to an even more radical reduction of income inequality. The abolition of private property in Russia, land redistribution, massive investments in public education, and strict government control over the economy via five-year plans effectively spread the benefits of growth from the early 1920s to the 1970s. In India, which did not undergo a communist revolution but implemented socialist policies after gaining its independence, income inequality was also severely reduced over the same period. For most of the global population, the first three-quarters of the twentieth century corresponded to a very strong compression in the distribution of national incomes. The economic elite captured a much smaller share of economic growth in the late 1970s than it did at the beginning of the century.

The trend was then reversed in most countries—even though there are notable exceptions deserving attention. Countries did not all follow the same path. Large emerging countries, as they underwent profound deregulations of their economies, saw inequalities surge as they opened up and liberalized but followed different transition strategies. In rich countries, inequality levels also varied largely according to changes in institutional and policy contexts, with sharp income inequality rises in the Anglo-Saxon world and more moderate increases in continental Europe and Japan. Certain Western European and Northern European countries almost contained the rise in income inequality.

Given the multitude of trends presented in this chapter, it would be imprudent to seek a single story line behind the rise of inequality across countries. Our findings show that national cultural, political, and policy contexts are key to understanding the dynamics of income inequality. In this chapter, we largely focus on the evolution of top-income shares, as they are now available for a very large set of countries. In the country-by-country chapters that come next, the focus will be more detailed and we will shift the attention to bottom-income groups.

Bottom-income groups were shut off from economic growth in the United States, while top incomes surged in the Anglo-Saxon world

Top 1% income shares have been steadily increasing in Anglo-Saxon countries since the early 1980s, after a historical decline throughout the first part of the twentieth century (see Figure 2.3.1). Inequality exploded in the United States: the top percentile income share there was less than 11% in 1980, and it was slightly above 20% in 2014. Britain’s top percentile share rose from less than 6% in the late 1970s to nearly 14% in the mid-2010s. Britain had the same level of top 1% income share as Ireland in the late 1970s, but is now nearly on a level with Canada, where the top share increased from less than 9% in 1980 to almost 14%. Australia and New Zealand, with levels of inequality much lower throughout the entire period (around 5% in the early 1980 and rising to less than 10%) also show a broadly similar pattern.8 The impact of the financial crisis is visible on top-income shares, which exhibit a marked declined after 2007. Novel data suggest that top incomes have either recovered their shares or are progressively recovering them.

The rise in labor income inequality played an important role in the rise of inequality in Anglo-Saxon countries, and particularly in the United States before the turn of the century, as discussed in chapter 2.4. This phenomenon is owing to the “rise of super managers”—that is, the rise in super wages received by CEOs of large financial and nonfinancial firms. This evolution was also accompanied by an increased polarization of income between low-wage and high-wage firms. This contrasted with European countries, where the dynamics at the top of the distribution have been more moderate. New estimates also show that the upsurge in top incomes has mostly been a capital income phenomenon after 2000 in the United States, shedding new light on the process of unequal growth generation.

Our novel estimates also allow a better understanding of the dynamics at the bottom of the distribution—at least for certain countries. In the United States, the bottom 90% of the population benefited from a large share of growth in the three decades following the Second World War. Total per-adult pre-tax income growth for the bottom 50% and for the middle 40% was higher than 100%, while total growth for the top 10% earners was less than 80%. But since the 1980s, the bottom 50% was shut off from national income growth. While average per-adult pre-tax incomes increased by 60%, growth was close to zero for the bottom 50% of the population. The bottom 50% did benefit from a very modest post-tax income growth, thanks to redistribution, but this has been eaten up by rising health spending. Government provided little support to help low-income individuals cope with the situation.

The comparison of inequality trajectories between the United States and Western Europe is particularly striking. The two regions had similar levels of inequality in 1980 (top 1% share at 10–11% and bottom 50% share at 21–23%). However, today, the situations are radically different as the relative positions of the bottom 50% and top 1% group in the United States have been inverted (see Figure 2.3.2a).

Inequality in enlarged Europe (with a population of 520 million) is now substantially smaller than in the United States (320 million)

We also compare in Figures 2.3.2b through 2.3.2c the evolution of income inequality between the United States, Western Europe, and enlarged Europe (that is, including Eastern Europe). Enlarged Europe includes ex-communist East European countries with lower average incomes than West European averages, leading to higher inequality levels. However, it is striking to see that inequality levels in enlarged Europe remain much smaller than in United States. In particular, in spite of Europe’s bigger size and potential heterogeneity (520 million for enlarged Europe, 320 million for the United States), the bottom 50% income share is substantially larger in Europe: 20–22% of total income at the end of the period versus 12% in the United States.

This conclusion would likely be exacerbated if we were to compare enlarged Europe to enlarged North America (including not only Canada but also Mexico), which we plan to do in the near future as new data become available for Mexico. Another important issue for future research is to better understand which part of Europe’s lower inequality level can be attributed to redistributive policies at the regional level (including EU regional development funds), as opposed to national factors (such as the relatively egalitarian legacy of Eastern European countries and the fact that the transition from communism was not as abrupt as in Russia).

Continental European countries were more successful in preventing the rise of incomes at the top and the stagnation of incomes at the bottom

In western continental Europe, inequality has also been on the rise since the late 1970s, though both the levels of inequality and the rise in inequality were less striking than in the United States. The German top 1% income share rose from slightly less than 11% in the early 1980s to 13% today, as described in chapter 2.6. In France, the top 1% pre-tax income share increased from approximately 7% in 1983 to nearly 11% in 2014, as discussed in more detail in chapter 2.5. Spain displays a different picture. The impact of the financial crisis and the bursting of the real estate bubble in 2007–2008, which represented a substantial share of national income, severely hampered incomes at the bottom of the distribution, but also at the top: the top 1% income share decreased from close to 13% in 2006 to less than 9% in 2012, and still shows no sign of recovery. (Figure 2.3.3)

For France, new estimates also allow us to track the dynamics of growth at the bottom of the distribution. While growth was higher than average at the bottom 50% and middle 40% during the postwar period and up to the early 1980s, the situation was reversed afterwards. The “thirty glorious years”—as the high-growth 1950–1980 period is commonly referred to in France—continued after the 1980s, but only for the top income earners. This increase in inequality is characterized by rises in both labor and capital income. However, the bottom half of the population was not shut off from growth after the 1980s. This part of the population enjoyed close to average income growth rates—a strikingly different picture than in the United States.

Northern European countries had among the lowest levels of income inequality in the world in the early 1980s. Growth has been more unequal in these countries after 1980 than before, yet income concentration at the top of the distribution remains limited. Top 1% income earners capture less than 10% of total income in Denmark, Finland, Norway, and Sweden. In Denmark and in the Netherlands, the rise in top percentile share has been small, from about 5% to 6% since the 1980s. As we can see, many European countries have been able to generate relatively high average income growth rates and maintain the rise in income inequality (Figure 2.3.4).

In Russia, China, and India, income inequality surged after the 1980s

Income concentration and wealth concentration were particularly high in tsarist Russia before the Soviet revolution of 1917 (see chapter 2.8 on Russia), and in colonial India (see chapter 2.9 on India). In Russia, the communist revolution led to an extreme compression of money incomes. During the entire communist period, the top 1% income share represented around 5% of national income, down to less than 4% in the seventies (see Figure 2.3.5). It is worth stressing, however, that this extremely low level of monetary inequality is partly artificial. Soviet inequality took other, non-monetary forms, such as privileged access to particular shops and vacation centers for the political elite, and brutal political repression for large segments of the population.

In India, the top percentile income share decreased from around 20% at the end of the colonial period to 6% in the early 1980s, after four decades of socialist-inspired policies aiming at reducing the economic power of the elite, including nationalizations, government control over prices, and extreme tax rates on top incomes. The implosion of the Soviet block and “shock policies” in Russia, and deregulation and opening policies in India from the 1980s onwards, contributed to strong increases in top percentile income shares. The top 1% share increased to 26% in 1996 in Russia and is now at 20%. In India, the top percentile is now around 22%.

The Chinese opening-up policies established from 1978 (discussed in chapter 2.7 on China), which included important privatization plans, had a lesser effect on inequality than reforms had in Russia or India. China shows a substantial rise in inequality (the top share rose from 6.5% to 14% in twenty years). However, as compared to Russia, China’s transition to a liberalized, open economy was less abrupt and more gradual. Since 2006, inequality at the top has stagnated. In China and to a lesser extent in India, the rise in inequality occurred in the context of high average income growth, enabling important growth at the bottom of the distribution.

Brazil, South Africa, and the Middle East can be characterized as “extreme inequality” regimes: they have the highest inequality levels observed

In Brazil, South Africa, and the Middle East, income has been historically highly concentrated (see Figure 2.3.6). In Brazil, wage inequality has decreased over the past twenty years (in particular due to rising minimum wage) and there have been important and often lauded cash-transfer systems to the poor. However, due to a large concentration of business profits and capital incomes, the top 10% national income share reaches 55% in Brazil today and this value has not changed significantly for the past twenty years as is shown in chapter 2.11. Together with huge regional inequalities, the legacy of racial inequality still plays an important role; Brazil was the last major country to abolish slavery, back in 1887, at a time when slavery made up a very large fraction of the population, up to about 30% of the population in certain regions.

The extreme inequality evident in South Africa can obviously be linked to the historical legacy of the apartheid regime (only fully abolished in 1994), seen today in the country’s dualistic economy and society. As discussed in chapter 2.12, the top 10% is largely made up of whites. This group earns more than 60% of national income and enjoys income levels similar to those of Europeans, while the bottom 90% live with incomes comparable to those of low-income African countries. But in contrast to Brazil and the Middle East, inequality increased significantly over the past decades in South Africa. The trade and financial liberalization that occurred after the end of apartheid, coupled with the failure to redistribute land equally, can help to explain these dynamics - yet more research will be required to better track and understand recent South African income inequality dynamics.

Despite its much larger racial and ethno-cultural homogeneity, levels of inequality in the Middle East are similar to (or possibly even higher than) those in Brazil and South Africa, with a top 10% share above 60%. As discussed in chapter 2.10, regional income and wealth is largely concentrated in in the hands of a small group that is located in the Gulf countries and Saudi Arabia. This is yet another inequality-generating mechanism: the geography of oil property and the frontier system have led to extreme inequality in this region.

In 2014, the top 10% French earners captured 33% of national income

In 2014, the average national income per adult in France was €33 400. This average, however, disguises significant variations among groups within the distribution. The bottom 50% earned around €15 000 on average in 2014, notably less than half the national average, and thus their share of total French income was less than a quarter (22.5%). The middle 40% had an annual average income of almost €37 500, and accordingly held a 45% share of national income, while the top 10% received approximately €109 000, more than three times the national average. These relative differences grow ever larger for the richest, with the top 1% having an 11% share in national income, and the top 0.1% and 0.01% having incomes 37 and 129 times the national average, as shown in Table 2.5.1.

Income inequality in France has varied significantly since the start of the twentieth century

While income inequality in France is by no means insignificant today, it has fallen notably since 1900. At the beginning of the twentieth century, the top 10% of the income distribution (which can be thought of as the “upper class”) received 50% of total national income, while the middle 40% (the so-called “middle class”) had around 35%. Meanwhile, the bottom 50% (the “lower class”) had less than 15% of national income. The increased shares for the middle (+10 percentage points) and lower class (+8 percentage points) between 1900 and 2014 have thus come at the expense of the richest in roughly equal amounts. This reduction in inequality has taken place, however, in a haphazard and disorderly manner, undergoing numerous evolutions over the last century that are the result of a complex mix of historical events and political decisions.

To better comprehend recent developments in income inequality in France, it is first important to analyze how average income evolved from 1900 to 2014. Per-adult national income has risen approximately sevenfold over the last century in France, from around €5 500 in the year 1900. However, this growth in national income per adult was far from steady. Between 1900 and 1945, per-adult national income declined on average by -0.1% per year, but then increased at an average of 3.7% during the postwar period until 1980; dubbed les trente glorieuses. These “thirty glorious years” were followed by a period in which per-adult national incomes grew four times slower than previously, averaging 0.9% per annum from 1980 to 2014. This pattern was not unique to France, however. Similar trends were experienced in most European countries and Japan, and to a lesser extent in the United States and in the UK, where the shocks created by the First and Second World Wars were less damaging than in Continental Europe.

The evolution of income inequality over the last century can be broken down into three broad periods. The first of these periods was from the start of the First World War to the end of the Second World War. As visualized in Figure 2.5.1, the share of income of the top 10% of earners fell abruptly during the 1914–1945 period, from more than 50% of total income on the eve of the First World War to slightly above 30% of total income in 1945. This decline was mainly due to the collapse of capital income, which was hit by a number of negative shocks. Capital income generally makes up a significantly higher proportion of income for the richest 10% of the population, and particularly the top 1%, than it does for other groups. Both wars involved the destruction of capital stocks, and bankruptcies were not infrequent. They led to a collapse in gross domestic product (GDP), which lost 50% of its value between 1929 and 1945. Inflation reached record levels (the price index was multiplied by more than a hundred between 1914 and 1950), severely penalizing individuals with bond holdings and, more broadly, with fixed income assets. The control of rents during the period of inflationism led to a tenfold fall in their real value, and additionally, nationalization and the high level of taxation of certain assets in 1945 contributed to a sharp fall in capital income. The result for the top 1%—that is, those earning the most income from capital—was to see their share of national income halved in around thirty years.

The second period, between 1945 and 1983, was characterized by a struggle between labor and capital to share the fruits of growth, which reached very high levels (+3.3% per year on average). From 1945 to 1968, the inequality in wages that had existed before the world wars was rebuilt and the share of capital in the French economy also rose, leading to a period of rising income inequality. As illustrated by Figure 2.5.1, the income share of the top 10% had risen from around 30% to 38% during this twenty-three-year period, while the share of the bottom 50% fell from approximately 23% to 17%. Following the events of May 1968, however, this trajectory of rising inequality abruptly stopped.

May 1968 was a volatile period of civil unrest in France, punctuated by demonstrations, general strikes, and protester occupations of universities and factories across the country. The French government, under Charles De Gaulle’s presidency, introduced a number of conciliatory policies in the following month in an attempt at appeasement, including a boost in the real minimum wage of approximately 20%. This marked the beginning of a period of steady increases in the minimum wage and of the purchasing power of the poor between 1968 and 1983. The purchasing power of those with lower wages rose substantially more than did GDP, which itself grew by a noteworthy 30%. These factors led to a compression in the distribution of wages and reduced income inequality more generally. In the early 1980s, the top 10% had their lowest share of pre-tax national income recorded, at 30%, while the middle 40% had an historic high of approximately 48%, and the bottom 50% accounted for 23%. However, the rise in unemployment that started during the mid-1970s also marked the beginning of a new period.

The third period, marked by a substantial reduction in income growth rates (1% per year on average), began in 1982–1983 when successive governments decided to end the policy of indexing wages to prices and therefore reduced the rate of wage increases for the low-paid.¹⁷ This was initially part of an austerity program known as the tournant de la rigueur (austerity turn), introduced by President Mitterrand’s then newly elected left-wing government. The program was an attempt to combat high inflation rates and rapid deteriorations in the budget and trade deficits between 1981 and 1983 that could have seen France leave the European Monetary System. Taxes were also increased, subsidies to state-owned enterprises were reduced, and social security and unemployment insurance payments were restrained.¹⁸ The overall effect of these policy choices was an increase in the pay gaps between those who earned the lowest wages and others. During this period, inequality was relatively stable except at the top of the distribution. Very top incomes increased substantially.

The end of the “thirty glorious years” for the bottom 95%, but not for those at the top

One way to better understand the magnitude of the turning point that occurred in the 1980s is to look at the total growth curve by income group. That is, we can ask: What was the change in the average income of each group over the different time periods? Between 1983 and 2014, average national income per adult rose by 35% (1% per annum) in real terms in France. However, actual total growth was not the same for all income groups, as illustrated by the impressive upward slope on the right hand of the 1983–2014 growth curve in Figure 2.5.2. Total growth between 1983 and 2014 was 31% on average (0.9% per annum) for the bottom 50% of the distribution, 27% for next 40% (0.8% per annum), and 49% for the top 10% (1.3% per annum). Moreover, total growth remained below the economy-wide average until the ninety-ninth percentile, and then rose steeply, up to as much as 98% growth over the thirty-one-year period (2.2% per annum) for the top 0.1% and 144% for the top 0.001% (2.9% per annum).

The contrast between 1950–1983 and 1983–2014 in terms of the total growth rates of income groups is particularly stark. As Table 2.5.2 and Figure 2.5.2 show, growth rates were very high for the bottom 99% of the population during the “thirty glorious years” between 1950 and 1983, at around 200%, while growth for the top 1% was markedly lower at 109% (2.3% per annum). Growth rates were even lower at the very top, at around 80% (1.8% per annum) for the top 0.1 and 0.01%.

Another way to measure these diverging evolutions is to compare the shares of total economic growth going to the different income groups. Between 1950 and 1983, 25% of total growth went to the bottom 50% of the population, versus only 6% to the top 1%. Between 1983 and 2014, 21% of total growth went to the bottom 50%, as much as the share of growth which went to the top 1%.

Summing up, although the rise of inequality was less pronounced in France (and to a large extent in Europe) than in the United States, the break between the 1950–1983 period, when bottom groups enjoyed larger growth than the top, and the 1983–2014 period, when the exact opposite pattern prevailed, is very visible.

Recent growth at the top is due to higher salaries and returns on capital assets

As a result of the unequal distribution of growth, the share of income attributed to the top 1% has seen a notable increase between 1983 and 2007, rising from less than 8% of total income to over 12% over this period—that is, rising by over 50%. Between 2008 and 2013, the income share of the top 1% fluctuated between 10% and 12%, remaining significantly larger than when income inequality was at its lowest point in the early eighties (see Figure 2.5.1). As stated above, this trend of rising inequality among the highest earners is even more pronounced for the top 0.1% and the top 0.01% (see Figure 2.5.3). The difference between the average national income before tax and those of top earners has almost doubled over the preceding thirty years. The top 0.1% average income increased from 21 times above average in 1983 to 37 times in 2014, while the figure increased from 71 times average to 129 times for the top 0.01%.

Why has there been a rise in top incomes over the recent period? In the case of France, top earners have experienced significant increases in their incomes from both labor and capital. Between 1983 and 2013, the labor income of the top 0.01% rose 53%, while their capital income increased by 48%. It is difficult for standard explanations based on technical change and the changing supply and demand of skills to explain rising income concentration at the very top, whether around the world or in France specifically.19 The rise of labor incomes at the top is more likely to be the result of evolutions in institutional factors governing pay-setting pro­cesses for top managerial compensation, including changes in corporate governance and the decline of unions and collective bargaining processes. Evolutions in top marginal tax rates have also likely had an impact on labor income inequality. Reduced top income tax rates can affect wage-setting at the top; as top earners expect less taxes, they may be more inclined to ask for increases in wages.²⁰ Top income tax rates were above 60% during the trente glorieuses and rose to 70% in the early 1980s. They fell to about 50% in the late 2000s. Effective tax rates (total taxes paid on total income) are actually inferior for very top income groups than for the middle class.²¹ Recent tax legislation supported by the current government are about to further reduce tax rates at the top, in particular due to reduction in tax rates on capital.

Increases in top labor income inequality have in certain cases been correlated with increases in top capital income inequality. Top managers, for example, have benefitted first from very high labor incomes through large bonuses or stock options (some of which have been largely mediatized) and then from very high capital incomes derived from improvements in the price of the stocks that they have come to own. Top capital incomes have also been rising due to the rising share of macroeconomic capital in a context of declining labor bargaining power and privatization policies.

Gender pay gaps may be falling, but men are still paid approximately 50% more than women

While income inequality has increased since the 1980s, gender gaps have been declining since the 1970s. Still, gender gaps remain very high in France today. In the 1970s (the “age of patriarchy”) men earned 3.5 to 5 times the labor income of women, and women’s labor force participation rate was around 45%. The share of working women rose dramatically to 80% in 2012 and the women-to-men pay ratio decreased to 1:1.5 on average. There are, however, strong variations in gender income gaps over age groups. As can be seen in Figure 2.5.4a, in 2012, men earned 1.25 times more on average than women at the age of 25, and 1.64 times more at age 65.

Gender inequalities are also particularly high among higher paying jobs. Despite moderate improvements since 1994, women still do not have equal access to them. In 2012, the female share of the top 50% of earners was 42%, while women made up just 30% and 12% of the top 10% and top 0.1% earners, respectively. If current trends continue, women can expect to make up the same proportion as men of the top 10% and top 0.1% shares by 2102 and 2144, respectively. (See Figure 2.5.4b)

Chinese average incomes grew ninefold since 1978

The Communist Party of China, then led by Deng Xiaoping, implemented a series of policies in the People’s Republic of China starting in December 1978 to reform and open up the Chinese economy, as the Party sought a new economic model based on the principle of “socialism with Chinese characteristics.” The transition away from the communist model of the previous decades ushered in gradual but nevertheless wide-reaching reforms, expanding geographically from special economic zones in coastal cities towards inland provincial regions, and in sectoral waves. During the first stage of reform, market principles were introduced into the agricultural sector through the de-collectivization of production. While foreign investment and entrepreneurship were permitted under state guidance, the vast majority of industry remained state-owned until the mid-1980s. The following decades saw a second stage of deeper reforms implemented. Soviet-style central planning in industry was dismantled through the privatization and contracting out of state-owned enterprises, though the state maintained its control of monopolies in some sectors, including banking and petroleum. Furthermore, liberalization of markets over this period saw the lifting of price controls and the reduction of protectionist policies and regulations, aiding the dramatic growth of the private sector. These changes were particularly evident in the country’s housing market. The private housing stock rose from roughly 50% in 1978 to over 95% in 2015. For other forms of domestic capital, the public share declined, though it is still around 50%.

The subsequent impacts of these privatization and opening reforms have been of great interest worldwide, particularly given the significant growth the country has experienced over the last forty years and its accompanying improvements in poverty rates. Indeed, between 1978 and 2015, China moved from a poor, low-income country to the world’s leading emerging economy. Despite the decline in its share of world population, China’s share of world national income increased from less than 3% in 1978 to 19% in 2015, and real per-adult national income multiplied more than ninefold. Indeed, average national income adult was about €1 400 per year in 1978 (less than 15% of global average), but exceeded €13 100 in 2015 (close to 90% of the global average).

In a recent paper, Thomas Piketty, Li Yang, and Gabriel Zucman analyze how this exceptional growth was distributed across the Chinese population (reported below), and the impact that privatization policies had on the country’s capital-income ratios (see chapter 3.3 of the report).23 To form distributional national accounts, the authors combine survey data, national accounts, and recently released income tax data on high-income taxpayers. They find a significant increase in per-adult pre-tax income inequality from 1978 to 2015.24 These results largely increase existing official inequality statistics and probably represent a lower bound to inequality, as they remain imperfect.

The shares of the top 10% and bottom 50% diverged after the opening-up reforms

As China began its privatization process (as also discussed in chapter 3.4 on Chinese public and private wealth dynamics), the share of national income going to the top 10% of the population was 27%, equal to the share going to the bottom 50%. Put in another way, these groups captured the same amount of total income, but the former had a population five times smaller than the latter. The average income of the bottom 50% was thus one-fifth of the top 10%. In 1978, the income share of the middle 40% represented just over 46% of national income; their average income was only slightly higher than the national average. The past four decades show a large divergence in the shares of the bottom 50% and the top 10% income earners (see Figure 2.7.1).

The income share of the bottom 50% in 2015 was just below 15%, a twelve-percentage-point fall since 1978. The share of the top 10% had increased to 41%. In 2015, the average income of the bottom 50% (€3 900 or ¥17 000) was approximately 13.5 times smaller than that of the richest 10% in 2015 (€54 500 or ¥238 000). The bottom 50% consequently earned roughly 3.4 times less than the average national income per adult in China of €13 100 or ¥57 000 in 2015, while the top 10% earned around four times more than the average income. The share of national income going to the middle 40% is only marginally different than in 1978 at almost 44%. The average income of this middle class (€14 400 or ¥63 000) was slightly higher than the average Chinese adult’s income in 2015. (Table 2.7.1)

Income inequality stabilized after 2006

While the incomes of the top 10% and the bottom 50% in China began to diverge in 1978, the greatest divergence took place from 1998 to 2006. This coincided with the eight-year period that saw the Chinese government introduce a new set of policies for the privatization of state-owned enterprises, mainly in the tertiary sector. Part of the resulting effect was a reduction in the bottom 50% share of national income from 20% to 15%, and an increase in the share of the top 10% from around 34% to 43%. Income inequality apparently stabilized thereafter, with the shares of all three of the main income groups in 2015 remaining pretty much similar to their levels in 2006. This stabilization of inequality since 2006 should be regarded with caution as it could partly reflect data limitations, due in particular to the lack of national data made available on high-income taxpayers since 2011.²⁵ Still, this trend is considered valid by a number of researchers who speculate that a turnaround took place around 2006 as a result of two factors: new policies that reflected changing priorities towards more equitable growth; and the slowdown of structural transformations, such as a shrinking rural labor force, which caused wages to grow more rapidly than output.²⁶

Comparing Piketty, Yang, and Zucman’s inequality series to the survey-based estimates used by the Chinese government, two remarks are in order. First, the official survey data also show a strong rise in the national income share of the top 10% and a strong decline in the top 50% income share from 1978 to 2015. Second, both the level and the rise of inequality are larger in the aforementioned corrected series than in the official series. The top 10% income share rises 14 percentage points over the observed period (from 27% to 41% of national income)—which is 6 percentage points more than that seen in the official statistics—while the upward correction for the top 1% sees their share of total income for 2015 rise to 14%, versus 6.5% in the raw surveys. Most of the difference between these estimates and the raw surveys comes from the finer level of precision among top income earners enabled by income tax data. In 2015, for example, the raw surveys identify the income share of the top 1% to be 6.5%, but this reaches 11.5% after factoring in data from high-income taxpayers, and 14% following the inclusion of undistributed profits and other tax-exempt income.

Since 1980, Chinese top-income groups benefitted from quadruple-digit growth rates

The new data series constructed by Piketty, Yang, and Zucman on the distribution of national income also allow a decomposition of national income growth by income group. This in turn enables a quantitative assessment of the extent to which various groups of the population have benefitted from the enormous growth China has experienced since 1980. (See Table 2.7.2 and Figure 2.7.2)

Average national income per adult has grown close to ninefold between 1980 and 2015, corresponding to an average annual increase of 6.4% and a total growth rate of 780%. This growth has not been equally shared; the higher the income level, the higher the rate of growth over the time period considered. Growth for the bottom 50% over the period was 390%, while it was 730% for the middle 40%, and 1 230% for the top 10%. Within the top 10%, growth was also unequally shared. The top 1% experienced total income growth of 1 800%—a huge figure, but notably less than the increases of over 2 270%, 2 920%, and 3 520% for the top 0.1%, top 0.01%, and top 0.001%, respectively.

By contrast, average national income per adult rose by just 63% and 38% in the United States and France over the same period, respectively—approximately fourteen and twenty-one times less than in China. The difference in income growth across the distribution was also markedly different at the bottom of the distribution; the cumulative national income growth of the bottom 50% was 3% for Americans, while for French citizens, it rose at 33%, i. e. less than the average. However, the same pattern, by which income growth rates rise more quickly the higher up the distribution one goes, was evident for all countries.

The urban-rural gap continues to grow, but it is within-region inequality that spurs overall growth in inequality

What role has the urban-rural gap played in the evolution of Chinese inequality? This question is important as inequality could be driven mainly by growing differences between cities and rural areas and not by inequality among individuals within areas. Policy implications are indeed dependent on which force dominates in the mix. To answer this question, it is first important to identify how the populations of urban and rural areas has changed post 1978, as this will in part determine the urban and rural shares in national income. In the urban areas of China, the adult population rose from 100 million in 1978 to almost 600 million in 2015. During this same period, the adult rural population remained roughly stable, rising from 400 million in 1978 to almost 600 million by the mid-1990s, before declining to less than 500 million in 2015. Secondly, the income gap between urban and rural China has always been large and it has grown over time. Urban households earned twice as much income on average as rural households in 1978, but in 2015 they earned 3.5 times as much. Thus, while the urban share in the adult population has grown from 20% in 1978 to 55% in 2015, the urban share in national income has increased from 30% to 80%.

Despite the increase of inequality both in urban and rural China, the level of income inequality in China as a whole is markedly higher at the national level (where the bottom 50% captures only 15% of total income) than it is within rural China (where the figure is 20%) or urban China (25%) considered alone.²⁷ As evidenced in the previous sections, the trend for the top 10% largely mirrored that of the bottom 50%, but in the opposite direction, with rising income shares for the top 10%. Combining this data also demonstrates that there has always been more inequality within rural areas than within urban China, and this will remain the case if current trends continue. (Figure 2.7.3)

India entered the digital age without inequality data

India introduced an individual income tax with the Income Tax Act of 1922, under the British colonial administration. From that date up to the turn of the twentieth century, the Indian Income Tax Department produced income tax tabulations, making it possible to track the long-run evolution of top incomes in a systematic manner. Given the profound evolutions in India’s economy since the country’s independence, this provides a rich data resource for researchers to access.41 Research has shown that the incomes of the richest—the “top incomes”—declined significantly from the mid-1950s to the mid-1980, but this trend was reversed thereafter, when pro-business, market deregulation policies were implemented.

Little has been known, however, about the distributional impacts of economic policies in India after 2000, when real income growth was substantially higher than in previous decades. This is largely because the Indian Income Tax Department stopped publishing income tax statistics in 2000, but also because self-reported survey data often do not provide adequate information concerning the top of the distribution. In 2016, the Income Tax Department released tax tabulations for recent years, making it possible to track the evolution of income inequality during the high average income growth years post-2000.

Inequality rose from the mid-1980s after profound transformations of the economy

Over the past four decades, the Indian economy has undergone profound evolutions. In the late seventies, India was recognized as a highly regulated, centralized economy with socialist planning. But from the 1980s onwards, a large set of liberalization and deregulation reforms were implemented. Liberalization and trade openness became recurrent themes among Indian policymakers, epitomized by the Seventh Plan (1985–1990) led by Prime Minister Rajiv Gandhi (1984–1989). That plan promoted the relaxation of market regulation, with increased external borrowing and increased imports. These free-market policy themes were then further embedded in the conditions attached to the International Monetary Fund’s assistance to India in its balance of payment crisis in the early 1990s, which pushed further structural reforms for deregulation and liberalization. This period also saw the tax system undergo gradual transformation, with top marginal income tax rates falling from as high as 97.5% in the 1970s to 50% in the mid-1980s.

The structural changes to the economy along with changes in tax regulation, appear to have had significant impact on income inequality in India since the 1980s. In 1983, the share of national income accruing to top earners was the lowest since tax records started in 1922: the top 1% captured approximately 6% of national income, the top 10% earned 30% of national income, the bottom 50% earned approximately 24% of national income and the middle 40% just over 46% (see Figure 2.9.1a and b). But by 1990, these shares had changed notably with the share of the top 10% growing approximately 4 percentage points to 34% from 1983, while the shares of the middle 40% and bottom 50% both fell by 2 percentage points to around 44% and 22%, respectively.

What came to be known as the first set of economic reforms were implemented from 1991 to 2000 and in practice were the continuation of the mid 1980s policy shift. These reforms placed the promotion of the private sector at the heart of economic policies, via denationalizations, disinvestment of the public sector and deregulation (de-reservation and de-licensing of public companies and industries)⁴², weighing the economy substantially in favor of capital above labor. These reforms were implemented both by the Congress government and its Conservative successors. As illustrated by Figure 2.9.1, these reforms were concomitant with a dramatic rise in Indian income inequality by 2000. The top 10% had increased its share of national income to 40%, roughly the same as that attributable to the middle 40%, while the share of the bottom 50% had fallen to around 20%.

Indian income inequality by 2000. The top 10% had increased its share of national income to 40%, roughly the same as that attributable to the middle 40%, while the share of the bottom 50% had fallen to around 20%.

These pro-market reforms were prolonged after 2000, under the 10th and subsequent five-year plans. The plans ended government fixation of petrol, sugar and fertilizer prices and led to further privatizations, in the ­agricultural sector in particular. Inequality trends continued on an upward trajectory throughout the 2000s and by 2014 the richest 10% of the adult population shared around 56% of the national income. This left the middle 40% with 32% of total income and the bottom 50%, with around half of that, at just over 16%.

Indian inequality was driven by the rise in very top incomes

Inequality within the top 10% group was also high. The higher up the Indian income distribution one looks, the faster the rise in their share of the national income has been since the early 1980s. As depicted by Figure 2.9.2, the income share of India’s top 1% rose from approximately 6% in 1982–1983 to above 10% a decade after, then to 15% by 2000, and further still to around 23% by 2014. The latest data thus shows that during the first decade after the millennium, the share of national income attributable to the top 1% grew to be larger than that pertaining to the bottom 50%. By 2014, the national income share of the bottom 50%—a group of approximately 390 million adults—was just two-thirds of the share of the top 1%, who totaled 7.8 million. An even stronger increase in the share of national income was experienced by the top 0.1% and top 0.01%, whose shares grew fivefold and tenfold, respectively, from 2% and 0.5% to almost 10% and 5%, between 1983 and 2014. Income growth rates at the very top were extreme, as shown by Table 2.9.1.

These evolutions are consistent with the dynamics of Indian wealth inequality, which exhibit a strong increase in the top 10% wealth share in the recent period, in particular after 2002.⁴³ Highly unequal income growth at the top mechanically drives wealth inequality across the population, which in returns fuels income concentration.

The recent surge in inequality mirrors inequality declines from the 1940s to the 1980s

After independence, Jawaharlal Nehru implemented a set of socialist policies, with strict government control over the economy, with an explicit goal to limit the power of the elite. The policies implemented by himself and his followers, including his daughter Indira Gandhi, up to the late 1970s, included nationalizations, strong market regulation and high tax progressivity. Nationalizations involved the railways and air transport in the early-1950s, oil in the mid-1970s and banking throughout the entire period, to cite but a few. Along with the transfer of private to public wealth and their implicit reduction in capital incomes, nationalizations brought government pay-scale setting with them that compressed wage distributions. In the private sector, incomes were constrained by extremely high tax rates: between 1965 and 1973, top marginal income tax rates rose from 27% to almost 98%. These changes may have discouraged rent-seeking behavior at the top of the distribution, which can be seen as an efficient strategy in the presence of excessive bargaining power and rent-seeking activity. The impact on income inequality was substantial, as the top 1% income share decreased from 21% before the second World War to approximately 10–12% in the 1950s and 1960s and fell further to 6% in the early 1980s.

Revisiting “Shining India’s” income growth rates

How do these vast institutional and policy changes translate in terms of income growth rates for different groups of the population? As Figure 2.9.3 illustrates, the average growth of real incomes has varied notably between the different groups in the income distribution since the 1950s. The annual real incomes of the bottom 50% grew at a faster rate than the countrywide average during the 1960s and 1970s when socialist central planning dominated the Indian economy, and at a notably higher pace than the growth experienced by those in the top 10% and top 1% of earners. However, this dynamic changed dramatically during the 1980s and has remained as such ever since. The 1980s saw a much higher average income growth rates than in the previous decades, but growth was only marginally higher for the bottom 90% of the population. High growth was in fact concentrated among the top 10%. This situation was prolonged throughout the 1980–2000s. During the 2000s, the annual real income growth of the top 1% was close to 8.5%, followed by the top 10% at around 7 % and the bottom 50% at less than 2.5 %. India’s countrywide average was 4.5 % over the decade.

Table 2.9.2 shows the growth rate and the percentage of growth captured by different income groups in India between 1951–1980. During this period, the higher the group in the distribution of income, the lower the growth rate they experienced. Real per-adult incomes of the bottom 50% and middle 40% groups grew substantially faster than average income, increasing by 87% and 74% respectively, compared to the 65% growth of average income per adult. Furthermore, the top 0.1%, top 0.01% and top 0.001% income groups experienced a significant reduction in their real incomes, falling -26%, -42% and -45% respectively over the 30-year period. The bottom 50% group captured 28% of total growth between 1951 and 1980, while the middle 40% captured almost half of total growth.

It is particularly interesting to compare the pre-1980 with the post-1980 growth rates. From 1980 to 2014, the bottom 50% and middle 40% grew at 89% and 93%, respectively. Whereas average income growth is substantially higher after 1980, there is very little difference in growth rates for the bottom 50% and middle 40%. Since 1980, it is also striking that the top 0.1% earners captured more of the total growth than the bottom 50% (12% versus 11% of total growth). The top 0.1% of earners represented less than 800 000 individuals in 2014, this is equivalent to a population smaller to Delhi’s IT suburb, Gurgaon. It is a sharp contrast with the 389 million individuals that made up the bottom half of the adult population in 2014. At the opposite end of the distribution, the top 1% of Indian earners captured as much growth as the bottom 84%.

Table 2.9.3 illustrates the income levels and income thresholds for different groups and their corresponding adult population in 2014. The bottom 50% earned significantly less than the average income per adult, receiving less than one-third of the nationwide mean income before tax, while the average income of the middle 40% was around four-fifths the national average. Those in the top 10% earned five times the national average, and when one examines further up the income distribution, the same exponential trend as seen in the growth statistics is evident. The top 1% of earners, for example, received around €134 600 (₹ 3.12 million) per year on average, while the top 0.1% receive approximately €533 700 (₹ 12.4 million), 22 and 86 times the average income for Indian adults, respectively. For the top 0.001%, this ratio is 1871. (Figure 2.9.4)

Brazil’s inequality is higher than previously estimated and relatively stable over the past two decades

Brazil has consistently been ranked among the most unequal countries in the world since data became widely available in the 1980s. However, from the mid-1990s, household surveys began to show that inequality was falling, due to a combination of strong labor market performance, declines in the skill wage premium due to educational expansion, systematic increases in the minimum wage (indexed to social benefits), and the growing coverage of social assistance programs.⁵⁰ This household data provided evidence that government policies had been effective in reducing inequality. Indeed, this apparent decline in Brazilian income inequality drew significant attention worldwide, as examples of large economies that could reduce inequality while growing solidly are relatively rare.⁵¹

However, as described earlier in this report, household surveys only tell part of the story. Recent releases of income tax data by the Federal tax office have painted a different picture, showing that inequality in Brazil was higher than previously thought.⁵² Marc Morgan has generated a series of distributional national accounts for Brazil, which combine annual and household survey data with detailed information on income tax declarations and national accounts. By ensuring the consistency of the surveys and tax declarations with macroeconomic totals, he is able to provide the most representative income inequality statistics to date that show a sharp upward revision of the official estimates of inequality in Brazil. The novel data also suggests that, if contrary to other emerging countries such as Russia, India or China, pre-tax inequality has remained relatively stable in Brazil since the turn of the new century, it has not declined as much as many commentators have argued.

Total income inequality has remained at very high levels in Brazil despite the fall in labor income inequality

The findings highlight the large extent of income concentration in Brazil. The richest 10% of Brazilian adults—around 14 million people—received over half (55%) of all national income in 2015, while the bottom half of the population, a group five times larger, earned between four and five times less, at just 12%. The middle 40% of the distribution receives just less than one third of total income (32%), a figure which is low by international standards. This clearly reveals that inequality in Brazil is principally affected by the extreme concentration at the top of the distribution. This concentration becomes less extreme when we look at the labour income distribution. The top 10% highest earners received 44% of all national labour income in 2015, with the middle 40% taking home almost 40% and the bottom 50% in this distribution receiving about 15%. (Figure 2.11.1)

Since 2000, total income inequality has remained relatively stable. Small gains were made by the bottom 50%, who increased their share of national income from 11% to 12% from 2001 to 2015, while the top 10% income share evolved from 54% to just over 55% over the period. Both of these gains were at the expense of a continuous squeeze on the middle 40%, whose share of national income fell from 34% to just above 32%. The stability in the total income inequality should not mask the registered decline in the inequality of labour incomes. The bottom 50% of earners made greater gains in this distribution, increasing their share from 12% to 15% from 2001 to 2015, while the top 10% labor income share fell from 47% to 44%. The middle 40% share increased from 37% to almost 40%, which confirms the overall compression in the labour income distribution and conveys the importance of capital income in the total income distribution. This is even more apparent the higher up in the hierarchy the comparison is made. For instance, while the top 1% of labour earners received 14% of national labour income in 2015, the same group in the national total income distribution received double this share (28%).

These extreme levels of inequality manifested themselves in large differences between the average incomes of the aforementioned groups, as represented by Table 2.11.1. In 2015, the average income of an adult living in Brazil was around €13 900 (R$37 100), but for those amongst the bottom 50% of earners, the average income was less than €3 400 (R$9 200, around a quarter of the national average). Moving up the income distribution, the average annual income of adults in the middle 40% was approximately €11 300 (R$30 500), meaning that a significant percentage of 90% of Brazil’s adult population earned less than the national average, which highlights the extent of income skewness in Brazil and the lack of a broad “middle class.” Consequently, the average income of the top 10% was over five times greater than the national average at €76 900 (R$207 600). The magnitudes increase substantially as one moves towards the upper echelons of the income distribution, with the average income of the richest 1% being around €387 000 (R$10 449 000).

Table 2.11.2 presents refined shares at the top of the income distribution for 2015, to show more precisely how national income is shared across the adult population and also compares how inequality estimates differ between the DINA series and survey data. Using only the survey data, the top 1% (about 1.4 million adults) received 12% of national income in 2015. However, when income from fiscal data and undistributed income from national accounts are included, the share of this top 1% increases dramatically, to 28%. The large share of national income captured by the top 1% therefore seems to be gradually reducing the share of the middle 40% over time.

Higher up the distribution, the trend is similar, with the elites capturing a disproportionate share of Brazilian income. Figure 2.11.2 compares the income share of the bottom 50% (70 million adults), with that of the top 0.1% (140 000 adults) over the fifteen-year time period. Having started at similar levels of national income in 2001—around 11% each—the two groups quickly experienced diverging fortunes, with the top 0.1% share growing to just under 15% of national income by 2004 and the share of the bottom 50% remaining virtually unchanged. By 2015 the gap between the groups’ respective shares had grown to 4 percentage points, such that the collective incomes of the top 0.1% were significantly larger than those of the bottom 50% despite the top 0.1% being 500 times smaller in population size.

Morgan in the same work also compares the raw estimates from the surveys with his benchmark national income series (combining national accounts, surveys and fiscal data). There are clear, large discrepancies in the level and change in inequality that grow increasing larger the higher up the distribution one looks. These discrepancies thus highlight why relying exclusively on surveys and ignoring undistributed income in national accounts flowing to corporations can distort understanding of how income inequality has developed in Brazil. For example, household surveys indicate that income inequality fell between 2001 and 2015, with the top 10% share of national income falling from 47% to just above 40% and the bottom 50% share rising from just over 12% to 16%. These are in stark contrast with the trends and levels presented above, with a top 10% share oscillating around 55% (Figure 2.11.3). The general trend is therefore one of an increase in the concentration of national income shares at the top of the income distribution, small increases at the bottom and an ever-smaller share for the middle.

Brazilian income inequality rises as the richest experience higher growth in incomes

Distributional National Accounts also enable us to examine how growth at the macroeconomic level in Brazil has affected the income shares of the country’s population. Between 2001 and 2015, cumulative real growth of national income in Brazil totaled 56%. (See Table 2.11.3.) The question that arises from this evolution is how the income growth of different groups of the income distribution compares to this number. The real growth of incomes in the bottom 50% was strong, increasing approximately by 72% over the fifteen-year period. This was comparatively higher than the growth in incomes of the middle 40% (44%) and the top 10% (60%). Among the top percentiles, growth was equally strong. The income of the top 1% grew by 69%, while the incomes of the top 0.1% grew at almost 65%, both higher than the cumulative growth of total national income.

Despite the growth of incomes in the bottom half of the income distribution, the top of the distribution captured a disproportionately large part of the total income growth between 2001 and 2015. For example, the top 10% captured 58% of total growth, while the top 1% captured 32%. Even with the strongest growth performance over the period of three major income groupings, the low incomes of the bottom 50% meant that the fraction of total growth they were able to capture was relatively small, at 16%. Subsequently, the change in the bottom 50% share of total national income was also small. The figures relating to the middle 40% help to reinforce the importance of the size of incomes in analyzing how group shares in national income have changed: despite their total cumulative growth rate being smaller than the bottom 50%, the fraction of total growth captured by the middle 40% was higher than that of the poorest half of the population, at 26%.

Table 2.11.3 also subdivides the incidence of growth by two roughly equal time periods, relating to that before the global financial crisis, and that during and after it. During the first period (2001–2007), all groups experienced strong increases in their incomes as the economy grew solidly, with only the middle 40% growing at a slower pace than the national income. Nevertheless, the overwhelming gains went to the top decile, with the top 10% capturing over half of total growth. Growth in the years between 2007 and 2015 was slightly weaker, with incomes expanding by 23% as compared to 27% in the previous period, but growth was equally concentrated in the top decile after the financial crisis and the beginning of the domestic recession.