Deep data matters when assessing global income inequality

Broadly accepted research findings that income inequality began rising within developed countries in the 1980s, but at the same time began falling on a global scale is now in doubt. The rise in income inequality in the United States and other developed economies over this period is an established fact, but it turns out that the increase in incomes for citizens of some developing countries may not have been large enough to reduce global inequality as originally anticipated. This revision to a widely accepted story highlights how important it is to dig into datasets and learn their limitations and flaws when trying to understand changing trends in our economy.

Let’s first look at the new evidence then some of the data sets in need of more research. Jordan Weissmann at Slate points to new research on the topic that finds global inequality has actually stayed constant. Specifically, he cites research by economists Christoph Lakner at the World Bank and Branko Milanovic at the City University of New York, who made adjustments to the household surveys of income they used to study global incomes. These surveys are known to underestimate the incomes of the rich because they aren’t detailed enough, so the two economists made adjustments to account for these flaws. What they conclude is telling. After adjusting for this issue, the incomes of those at the top appear to have been large enough to make global inequality stay constant.

Data issues such as these arise in other areas of economic study. too. For many years, economists were puzzled by statistics on the flow of international investments. Adding together all the investment figures, there are more liabilities than assets. In other words, the entire world appeared to be a net borrower from some extraterrestrial lender. Recent research by economist Gabriel Zucman at the London School of Economics shows this bizarre fact can be explained by assets tucked away in tax havens and not part of any global data set.

Zucman’s finding also reveals that Europe as a whole is not a net debtor but actually a net creditor, and that the United States’ total debt is lower than commonly believed. These are crucial facts needed to understand the global economy, but the widely cited data on the issue miss them.

Within the United States, data issues arise as well. After the rise in income inequality became clear, economists wondered if consumption inequality had risen in a similar fashion. Looking at the official data from the U.S. Bureau of Labor Statistics, consumption inequality appeared not to have increased as much as income inequality. But researchers eventually found flaws in the data such as the tendency of high-income households to underreport consumption. After accounting for this and other issues, research by Orazio Attanasio at University College London, Erik Hurst at the University of Chicago, and Luigi Pistaferri Stanford University finds that consumption inequality has risen the same amount as income inequality.

In the era of Big Data, the presumption is that we can easily track, measure, and understand data about the world around us. But as these studies show, getting a handle on what’s actually going on around us can be a difficult task. That’s why it’s important for researchers and organizations to take the time to dive into the data and improve our understanding of the economic landscape.

August 19, 2014


Economic Inequality

Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch