Monitoring Inequality Via The Income Share Of Society”s Richest People

Changes in the income share of the very richest people in society are a good indicator of changes in overall inequality, according to new research by Australian National University economist Andrew Leigh, published in the November 2007 issue of The Economic Journal. Dr Leigh comments: ”Top incomes might be used to study possible drivers of inequality, such as immigration, demographics and technological change. They might also be used to help us learn more about the effects of inequality, such as trust, happiness, crime or political polarisation.”

His research combines data on top income shares for 13 developed nations: Australia, Canada, France, Germany, Ireland, Japan, the Netherlands, New Zealand, Spain, Switzerland, Sweden, the UK and the United States:

”Using taxation statistics, researchers in these countries have painstakingly estimated measures of the income share of the rich, such as the share of income held by the top 10% or the top 1%.”

”These figures provide a window into inequality across the twentieth century, allowing us to see how the distribution of income has changed in periods before national income surveys became common.”

Over the first part of the twentieth century, top income shares show a strikingly similar pattern – falling substantially during the two World Wars, and remaining low in the 1950s and 1960s. But since the late 1970s, top income shares in Anglo-Saxon countries have risen substantially, while those in continental Europe and Japan have not changed significantly.

Comparing top income shares with conventional measures of inequality, such as the
Gini coefficient, the study finds that the two are highly correlated. Dr Leigh suggests
that this may reflect the fact that many of the drivers of inequality have the same
impact on the top and bottom of the distribution.

Dr Leigh concludes: ”The close correspondence between top incomes and other inequality measures suggests that top income shares may provide a window into the income distribution during periods when other inequality measures are unavailable.”

‘How Closely Do Top Income Shares Track Other Measures of Inequality?” by Andrew Leigh is published in the November 2007 issue of The Economic Journal.

Andrew Leigh

Australian National University