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Inequality in the Long Run Survey Data That Became Available in the 1960S and 1970S in Many Countries

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Inequality in the Long Run Survey Data That Became Available in the 1960S and 1970S in Many Countries larger volumes of data to be collected and pro- REVIEW cessed than were accessible to previous gener- ations of scholars. The second reason for this time gap in using tax data is that most modern research on inequality has focused on micro- Inequality in the long run survey data that became available in the 1960s and 1970s in many countries. Survey data, how- 1 2 Thomas Piketty * and Emmanuel Saez ever, cannot measure top percentile incomes accurately because of the small sample size and This Review presents basic facts regarding the long-run evolution of income and wealth top coding. The top percentile plays a very large inequality in Europe and the United States. Income and wealth inequality was very high a role in the evolution of inequality that we will century ago, particularly in Europe, but dropped dramatically in the first half of the 20th discuss. Survey data also have a much shorter century. Income inequality has surged back in the United States since the 1970s so that time span—typically a few decades—than tax the United States is much more unequal than Europe today. We discuss possible data that often cover a century or more. interpretations and lessons for the future. Kuznets-type methods to construct top in- come shares were first extended and updated to he distribution of income and wealth is a for the top decile and percentile of the U.S. the cases of France (8, 9), the United Kingdom widely discussed and controversial topic. population. By dividing by national income, (10), and the United States (11). By combining Do the dynamics of private capital ac- Kuznets obtained series of U.S. top income shares the efforts of an international team of over 30 T cumulation inevitably lead to the con- for 1913 to 1948. scholars, similar series covering most of the centration of income and wealth in ever In the 1960s and 1970s, similar methods 20th century were constructed for more than fewer hands, as Karl Marx believed in the 19th using inheritance tax records were developed to 25 countries (12–15). The resulting “World Top century? Or do the balancing forces of growth, construct top wealth shares (2, 3). Inheritance Incomes Database” (WTID) is the most ex- competition, and technological progress lead declarations and probate records dating back tensive data set available on the historical in later stages of development to reduced in- to the 18th and 19th centuries were also ex- evolution of income inequality. The series is equality and greater harmony among the classes, ploited by a growing number of scholars in constantly being extended and updated and is as Simon Kuznets thought in the available online (http://topincomes. 20th century? What do we know parisschoolofeconomics.eu/) as about how income and wealth a research resource for further have evolved since the 18th cen- Income inequality in Europe and the United States, analysis. tury, and what lessons can we de- 1900–2010 Historical top wealth shares se- rive from that knowledge for the ries have also been constructed with Share of top income decile in total pretax income century now under way? For a long similar methods, albeit for a smaller time, social science research on the number of countries so far, but with distribution of income and wealth Top 10% income Top 10% income alongertimeframe(16–21). Draw- 50 percent was based on a relatively limited share: Europe share: U.S. ing on previous attempts to collect set of firmly established facts to- historical national balance sheets gether with a wide variety of pure- 45 (22), long-run series on the evolu- ly theoretical speculations. In this tion of aggregate wealth-income Review, we take stock of recent ratios in the eighthlargestdevel- progress that has been made in 40 oped economies were established, this area. We present a number some of them going back to the of basic facts regarding the long- 18th century (23). 35 run evolution of income and wealth This Review draws extensively inequality in advanced countries. on this body of historical research We then discuss possible inter- 30 on income and wealth, as well as pretations and lessons for the on a recently published interpre- future. tive synthesis (24). We start by 25 presenting three basic facts that Data and Methods 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 emerge from this research pro- Modern data collection on the dis- gram (Figs. 1 to 3), and then turn tribution of income begins in the to interpretations. 1950swiththeworkofKuznets(1). Fig. 1. Income inequality in Europe and the United States, 1900 to 2010. Shortly after having established The share of total income accruing to top decile income holders was higher in Three Facts About Inequality the first national income time series Europe than in the United States from 1900 to 1910; it was substantially in the Long Run for the United States, Kuznets set higher in the United States than in Europe from 2000 to 2010. The series We find large changes in the lev- himself to construct time series of report decennial averages (1900 = 1900 to 1909, etc.) constructed using els of inequality, both over time income distribution. He used tab- income tax returns and national accounts. See (24), chapter 9, Fig. 9.8. Series andacrosscountries.Thisre- ulated income data coming from available online at piketty.pse.ens.fr/capital21c. flects the fact that economic trends income tax returns—available since are not acts of God, and that the creation of the U.S. federal income tax in France, the United States, and the United King- country-specific institutions and historical cir- 1913—and statistical interpolation techniques based dom (4–7). cumstances can lead to very different inequality upon Pareto laws (power laws) to estimate incomes Such data collection efforts on income and outcomes. wealth dynamics have started to become more 1 Department of Economics, Paris School of Economics, Paris, systematic and broader in scope and time only Income Inequality France. 2Department of Economics, University of California at Berkeley, Berkeley, CA, USA. since the 2000s. This is due first to the advent First, we find that whereas income inequality *Corresponding author. E-mail: [email protected] of information technologies, which allow much waslargerinEuropethanintheUnitedStatesa 838 23 MAY 2014 • VOL 344 ISSUE 6186 sciencemag.org SCIENCE century ago, it is currently much larger in the by the top 10% of wealth holders was notably was about 70 to 80% in from 1870 to 1910, fell to United States. This is true for every inequality larger in Europe than in the United States one 60 to 70% from 1950 to 1980, and has been metric. The simplest and most powerful measure, century ago, while the opposite is true today rising above 70% in recent decades. Naturally, on which we focus in this article, is the share of (Fig. 2). this means that wealth concentration has been total income going to the top decile (Fig. 1). There are important differences between in- high throughout U.S. history. But this also implies On the eve of World War I (WWI), in the come and wealth inequality dynamics, how- that there has always been a large fraction of U.S. early 1910s, the top decile income share was ever. First, we stress that wealth concentration aggregate wealth—about 20 to 30% —that did not between 45 and 50% of total income in most is always much higher than income concen- belong to the top 10%. As the bottom 50% wealth European countries. This applies in particular tration. The top decile wealth share typically share has always been negligible, this remaining to the United Kingdom, France, Germany, and falls in the 60 to 90% range, whereas the top 20 to 30% fraction corresponds to the share Sweden, which are the four countries that we decile income share is in the 30 to 50% range. owned by the “middle 40%” (i.e., the intermediate use to compute the European average series Even more striking, the bottom 50% wealth group between the bottom 50% and the top 10%), reported in this article. At the same time, the share is always less than 5%, whereas the bot- a social group that one might want to call the top decile income share was slightly above 40% tom 50% income share generally falls in the 20 “wealth middle class.” The important point is in the United States. to 30% range. The bottom half of the popula- that, to a large extent, there has always been a One century later, in the early 2010s, the in- tion hardly owns any wealth, but it does earn wealth middle class in the United States. equality ordering between Europe and the United appreciable income: On average, members of In contrast, wealth concentration was so ex- States is reversed. In Europe, the top decile in- thebottomhalfofthepopulation(wealth-wise) treme in pre-WWI Europe that there was ba- come share fell sharply, from 45 to 50% to about own less than one-tenth of the average wealth, sically no wealth middle class. That is, the top 30%, between 1914 and the 1950s–1960s. It has while members of the bottom half of the pop- decile wealth share was close to 90% (or even been rising somewhat since the 1970s–1980s, and ulation (income-wise) earn about half the aver- somewhat higher than 90%, as in the UK), so it is now close to 35% (somewhat less in con- age income. thatthemiddle40%wealthholderswerealmost tinental Europe and somewhat more in the United In sum, the concentration of capital ownership as poor as the bottom 50% wealth holders (the Kingdom, which has experienced an evolution is always extreme, so that the very notion of wealth share of both groups was close to or less closer to that of the United States).
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