Does Inequality matter?

Most of us will be concerned about inequality. We will read sensationalist reports about how X percent of the population owns Y percent of the wealth and, depending on politics, think this is either grossly unfair or a regrettable necessary to provide an incentive to achieve.

For some time I have been convinced that inequality needs to be dealt with more coherently than this. We need to be able to put it in perspective and have the means to hold the government to account.

To do this we need a measure of inequality. The favourite measure for economists seems to be the Gini Index. The derivation which is rather mathematical, but the result is a scale of 0 to 100 where 0 represents absolute equality, where everyone has exactly the same, and 100 is complete inequality where one person has everything and the rest nothing at all.

The realistic range seems to be from 25 for the most equal counties, such as Denmark and Japan, to 75 for certain African countries. The figure for the UK is 36

Figure 1 shows the Ginis for all nearly all countries, compiled by the UN. These figures can be found in Wikipeadia. In this figure the counties are sorted in order of "Human Development Index", which is a measure used by the UN based on a combination of national income, health and education. This is used to define the terms "developed, developing and underdeveloped".

Clearly inequality is just one of many factors that determines the sort of regime in any particular country, others are recent history, relative poverty, corruption and geography.

The most meaningful comparisons for this country will be with other developed countries with a recent history of democratic government. In the figures I have shown developed countries with the solid round dots except for the ex-soviet union states, which are shown with crosses and the UK, shown as a hollow diamond, and the USA, shown as a hollow square.

Infant mortality is usually regarded as a good indicator of health provision. Figure 2 shows this plotted against Gini.

Another figure compiled by the UN is the "Global Competitiveness" which is based on a combination of economic factors. Figure 3 shows this plotted against Gini.

In both figures the solid dots on the right hand side, with Ginis greater than 40 are mostly in South America. The two dots with Ginis above 40 but good figures for both Global Competitiveness and infant mortality are Hong Kong and Singapore. Switzerland also comes out well.

The conclusion from these graphs is that what is probably bad for you is:

• to have been part of the Soviet Union
• to have been in a dictatorship recently
• inequality.

Unless you are a city state with a strong banking sector.

More definitely, for Ginis above 25:

There is no evidence that inequality imparts any benefit.

Figure 4 show the implications of reducing inequality. (For the mathematically inclined, I generated some hypothetical power law distributions with specific Ginis. It appears that real income distributions approximate sufficiently well to a power law to illustrate general trends for the purposes of this discussion.)

What would a reduction in inequality actually mean to any particular person? Let us make the, maybe unrealistic, assumption that incomes of individuals stay in the same order. The graphs then show the percentage change at any income level.

All four graphs show the same data plotted on different horizontal scales. I have shown the effect of reducing the Gini from todays value of 36 to three different target values: 34, 30 and 25, the lowest current value.

The first plot shows that over 80% of the population will see a modest increase in income. The top right plot shows change against income, which shows that reductions only occur above an income of £35,000

The lower two plots have a logarithmic scale in order to see what happens to very high incomes. We see that a modest reduction of Gini to 34 would see a 20 to 30% reduction in income for the richest 100, those earning over 10 million pounds a year. The poorest half of the population would see an increase in 3 to 4%.

I suggest that the type of society we live in is adversely affected by excessive inequality;

• Democracy becomes less representative as political power becomes the preserve of the rich
• There is a greater incidence of stress resulting in poorer health,
• Provision of health and education and housing for all become more difficult.
• Financial, intellectual and ethical standards are compromised by the increasing imperative of the very rich to retain their wealth.

Inequality in the UK and has been increasing steadily, in 1980 the Gini was around 25 and is now 36.

I would like to see a commitment to a gradual reduction of inequality starting with a target of a Gini of 34 in the life of a government.

John Greenwood

26/10/07