A Brief History of Income Inequality

A quick analysis of income inequality prior to the 21st century and why the Industrial Revolution is to blame.

World income inequality is among the most pressing issues of our time. This often begs the question, “where is it headed?” Yet, few of us look to the past in search of answers. Perhaps the question we should be asking, then, is, “how did it originate?”

Nearly two decades ago, François Bourguignon and Christian Morrisson sought to measure world income inequality trends in the 19th and 20th centuries. They were the first to view historical literature through an Economics lens, uniting the best of both the qualitative and quantitative worlds.

Their work was unprecedented; it was the first to take into account income inequality within countries. Up until then, most of the recent literature dealt with the disparity between different countries. This over-simplification fails to capture the big picture. After all, it is unlikely that citizens of a given country all receive the same income. On the contrary; wealth usually concentrates in the hands of few.

The authors trace income inequality from 1820, when the Industrial Revolution was well underway, to 1992, when the Digital Revolution was still in its teens. They take three important variables into account: real GDP per capita, population figures, and income distribution. What did they find?

In short, income distribution across the globe got increasingly worse until 1950, although it took a breather from 1910 until the onset of the Great Depression.

The “good news” is that it increased until the mid-20th century and, since then, the rate of increase decelerated.

Notice that, unfortunately, this does not indicate a reversal in income inequality. It simply means that, despite still happening, the increase slowed down.

Unbalancing forces:

Two occurrences contributed to the gap. The dominant force tugging at one end of the rope was Asia’s slow economic growth relative to the rest of the world. This is, of course, troubling because Asia was (and still is) the most densely populated continent. The second major force tugging at the other end was the fast enrichment of Western Europe and its offshoots (Argentina, Chile, Australia, New Zealand, Canada, and the United States).

During this time period, annual income per person increased about 400 percent in the European countries that birthed the Industrial Revolution. Yet, people in China only saw a 17 percent increase. India had it worse with a mere 10 percent increase.

Rich countries were getting richer and poor countries were utterly deprived of growth.

Balancing forces:

Yes, Western Europe and its offshoots unfairly tipped the scale. Yet, although growth was still systematically higher, by 1950, certain forces started re-balancing the scale. While Africa was still lagging, Asia started growing tremendously, especially thanks to China. The continent’s economic growth added some stability to the unruly widening of the income gap.

Another big equalizing factor was improved income equality within countries. The bloody interwar period was one of great economic unrest in Western Europe. At around the same time, the Russian Revolution took place and, soon, the Iron Curtain befell Eastern Europe. Perhaps expectedly, the most catastrophic century in modern world history brought about the redistribution of world income.

On a macro-level, income was also leveling off among different countries in Western Europe and its offshoots. The gap increased slightly until 1870, as Anglo-Saxon countries grew way faster than the rest of Europe. At the very beginning of the 19th century, an individual’s annual income in the United Kingdom was 40 percent higher than in continental Europe. By 1870, when the American Civil War had just taken place and the Canadian Confederation had been proclaimed, this figure doubled.

Fortunately, by 1920, the gap had widened only slightly. Countries such as the United States and the United Kingdom switched ranks in terms of income distribution. Then, inequality dropped significantly. Sure, the United States’ slight economic advantage was reinforced by the end of World War II, but the post-war years brought economic recovery to Europe and it started playing catch-up with the United States.

The Asian dragons (Japan, Korea, and Taiwan) had an impact, albeit limited, on reducing the income gap across the globe. Prior to the mid-20th century, they barely experienced any growth. Then, things took a turn and they were spewing fire everywhere. Annual income per person increased tenfold, somewhat improving the inequality issue.

And what about Latin America, you may ask? Well, it didn’t have much of an effect on the study, as its growth coincided with the world average.

Interestingly, population growth rates didn’t really affect income distribution either. The reason is simple: the changes weren’t disproportionately big. At the start of the period, Africa and Latin America’s populations grew faster than the other regions. Numerically speaking, this growth spurt is equivalent to Asia losing some of its demographic importance.

Implications:

What does this all mean in terms of poverty? According to the researchers, although income inequality grew,

“the extreme poverty headcount fell from 84 percent of the world population in 1820 to 24 percent in 1992.”

In a nutshell, the rich got rich way faster than the poor, resulting in a heavy concentration of poverty in specific regions. Had the race been closer and countries experienced similar economic growth, poverty would have declined significantly. By 1992, the world would have had about 1 billion fewer people living in extreme poverty (then about a fifth of the world demographic).

Life expectancy is also a strong indicator of economic wellbeing. Unsurprisingly, the measure is another source of inequality around the world. Its progress over time mirrored that of income inequality. While those living in Europe and its offshoots gained 17 years in life expectancy, Latin America only saw a small 7-year surge. People in Asia and Africa saw no change. Yet, unlike world income inequality, things started leveling off after 1930. Average life expectancy increased more than 20 years in several Asian countries, but only 12 to 15 years in European countries. Overall, average life expectancy in the world converged, doubling from 26 to 60 years, but the same cannot be said of income.

To sum it up, we owe a lot to the Industrial Revolution, from progress and urbanization to income inequality. You can’t win it all. From then on, the wealthy players were always frontrunners in the economic race, to the detriment of the poorer countries. Fortunately, some of them were able to catch up, and income inequality isn’t growing as fast as it was then.

So why is this overview relevant, if at all? Because it can help experts avoid falling into the same pitfalls again when drawing up potential solutions to this issue. Thanks to industrialization, everyone is significantly better off than prior to it, some (or many) more than others. Knowing this, how can we help the countries that lagged behind and ultimately shrink the income gap?

See François Bourguignon and Christian Morrisson, “Inequality among World Citizens: 1820–1992,” American Economic Review (September 2002).