The past two decades have seen both an increase and a decline in income inequality. Within countries, income inequality has increased in a near universal manner. This is particularly the case when considering the true real income levels experienced across a society, as income inequality has generally been allied with inflation inequality (it is more expensive to be poor, basically).
Some of those forces that have created national income inequality have also, however, reduced international income inequality. The increase in per capita income in several key emerging markets (most popularly associated with the gains in China) has reduced international income inequalities between countries.
Paul Donovan, UBS: The Rise Of The Rich?
So what has happened to the well-off in global society? A quick comparison of the development of incomes in higher income countries and key emerging markets bears out this story.
The upper echelon
Taking the top quartile of the US population as having disposable income levels that can be described as “well-off”, the income threshold for such households’ disposable income is circa $100,000. The Euromonitor group conveniently provide data on how many households exceed this threshold amongst high income countries as of 2010 (national currencies are converted using purchasing power parity exchange rates, which always causes economists a twinge of discomfort, but it does allow for stability in the results).
So what marked “well-off” in the past? This is a highly subjective analysis, and of course one could back out the real number using inflation rates (or better still, income quartile-specific inflation rates). Affluence is often a matter of social aspiration, however, and the concept is perhaps best categorised by using the similar relative measure of affluence. If we take the benchmark as being the top quartile of the US population, that suggests that in 1990 a threshold of $55,000 disposable income in 1990 as being the hallmark of the “well-off”. Euromonitor also conveniently supply data on this population. Comparing 1990 with 2010, the number of households inhabiting the “well-off” category of high income countries increased by 18.6%, to number nearly 77 million.
The fast track
So what of the emerging markets, which seem to generate such excitement amongst popular opinion? Here the published Euromonitor dataset becomes less helpful. We have data on those households with disposable incomes over $10,000 in countries like Brazil and China, but we do not have any more granularity than that (largely because the “well-off” on our definition are such a tiny proportion of the population of these countries).
To put things into context the top 10% of China’s population in 2010 had a disposable income in current prices (per household, not per person) of around $55,000 on average. That is a fraction higher than the average of the fifth decile of US income distribution (i.e. the population of the poorest 40-50% of American society).
The top decile in Brazil come closest to the income level we use to demark being “well-off” with over $90,000 income. India is lower than China, and Russia lies just below $80,000.
What does this mean about the growth of the “well-off” in these societies? Each country has a slightly different story. In the case of Brazil, the level of income for the top decile has been remarkably stable over time. A comparison of those earning over $55,000 in 1990 with those earning over $100,000 in 2010 is unlikely to show much increase. Indeed, there is the possibility of a decline. For China, the number of “well-off” citizens in 1990 can be assumed to be close to zero. The defining $55,000 household income was significantly above the top decile’s income level at that point. Drawing on historic parallels, we would suggest that around 1% of the population probably qualify for “well off” status in 2010.
India is more problematic. The top decile is some considerable way from the $100,000 threshold. To have 1% of the population classified as globally “well-off” would err towards the generous. However, India is an unequal society, so perhaps we should accept 1% as being an upper limit of a 0.5% to 1% range. Russia probably has the largest increase in well off citizens – in part because of the choice of start date (1990 was not a terribly good year for Russia in economic terms).
How have the “well off” risen?
Using our approximation, the four emerging markets are likely to have increased the number of “well-off” households by something like 6.7 million over the past two decades. Adding this to the numbers of high income economies, that point estimate would give a 29% increase in the number of “well off” households in these economies.
This sounds like a new age of affluence. But before we get carried away by the rise of what might be termed the upper middle class, there is a point to reflect on. The number of well off households having increasing 29% from 1990 to 2010 needs to be compared against a rise in the global population of 30% over the same period. In other words, the number of “well-off” households has risen broadly in line with demographics.
This then begs the question – why has income inequality increased, if the number of "well-off" households is rising proportionate to the increase in overall population? The answer to that is that it is not enough to be “well-off” any more. The growth in income inequality within countries owes much to the rise in incomes of the very highest income groups – the top 1%, even the top 0.1% of the population. In relative terms, the “well-off” are not as “well-off” as they used to be.