Is Inequality Increasing?

• Date: 01 March 2015
• DOI: http://doi.org/10.1111/1467-8462.12088
• Published date: 01 March 2015
• Author: Richard Pomfret

For the Student

Is Inequality Increasing?

Richard Pomfret*

Abstract

In academic economics, inequalityhas received

little attention in recent decades, although

popular concerns about the super-rich have

grown. The World Top Incomes Database

provides evidence of the rise of the super-rich

in many countries since 1980. Thomas Piketty

has publicised the new data, predicting

increases in inequality due to the return to

capital exceeding the rate of economic growth

and advocating policies to counter such

increases by high taxes on the income and

wealth of the super-rich. This article asks why

inequality has been a neglected topic, assesses

empirical contributions and Piketty’s model

and discusses implications for evidence-based

policies.

1. Introduction

Inequality has become a hot policy topic, with

concerns about the ‘top 1 per cent’and activists

in the ‘Occupy’movement, but it is a topic on

which economists have generally been reticent.

Economists’usual modus operandi of generat-

ing theories, which are tested and the results

used to advocate evidence-based policies,

has not worked well in this area. Theories

have proliferated but good data are scarce,

especially for identifying long-term patterns,

and hence policy debates have been dominated

by ideology rather than evidence. In Australia,

the debate has been revived by Andrew

Leigh’sBattlers and Billionaires (Leigh

2013). Internationally, Thomas Piketty’s best-

selling book, Capital in the Twenty-First

Century (Piketty 2014), has provided evidence,

a theory and policy recommendations. This

article draws on these contributions to review

how we might think about long-term trends in

inequality.

2. Def‌ining and Measuring Inequality

The main reason why economists have been

reticent is that it is diff‌icult to measure

inequality and hence to test competing theoret-

ical explanations. Inequality is inherently more

diff‌icult to measure than average output or

income, as in gross domestic product (GDP) per

capita, which requires a measure of total output

and a measure of population. Measuring

inequality requires information about the entire

distribution of income or wealth, or a truly

representative sample. Even if we have the

complete distribution, are we interested in

particular portions—for example, the poor or

* School of Economics, The University of Adelaide, South

Australia 5005 Australia, and Paul H. Nitze School of

Advanced International Studies, The Johns Hopkins

University, Bologna 40126 Italy; email <richard.pomfret@

adelaide.edu.au>. I am grateful to James Dean, Ian

McDonald and reviewers of this journal for helpful

comments on earlier drafts.

The Australian Economic Review, vol. 48, no. 1, pp. 103–11

°

C2015 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by Wiley Publishing Asia Pty Ltd