Welfare Inequality versus Income Inequality

Abstract

Recent research has documented a rise in income and wealth inequality to levels not observed since the Gilded Age. This paper argues that focusing on income inequality trends masks gains in relative welfare over time. For a given a distribution of income, welfare differences among different social classes converge if the relative price of manufactured goods declines over time. Using a simplified version of Matsuyama (2002)’s Flying Geese model this paper shows that, if initial productivity levels are low, the distribution of income may need to be very unequal to obtain welfare convergence.

Keywords: Welfare inequality, Welfare convergence, Income inequality

JEL Classification: D63, I31