The Pitfalls of Convergence Analysis: Is the Income Gap Really Increasing?

10 Pages Posted: 30 Dec 2003 Last revised: 5 Jul 2010

See all articles by Eric Neumayer

Eric Neumayer

London School of Economics and Political Science (LSE)

Matthew A. Cole

University of Birmingham - Department of Economics

Date Written: July 5, 2010

Abstract

A number of studies have tested whether, globally, per capita incomes are converging over time. To date, the majority of studies find no evidence of absolute convergence, but many find evidence of conditional convergence, i.e. convergence having controlled for differences in technological and behavioural parameters. The lack of evidence of absolute convergence has led to claims that global income inequality is deteriorating. We believe this to be untrue. Most convergence studies are aimed at proving or disproving the neoclassical growth model and hence take the 'country' as the unit of measurement. However, if one is making inferences about world income distribution the focus should be on 'people' rather than 'countries' to prevent China and Luxembourg, for example, receiving equal weighting in the analysis. We use the beta-convergence method and two different measures of per capita income and show that there is indeed evidence of income divergence between countries. However, crucially, we also find convincing evidence of income convergence if we weight our regressions by population. Thus, we find that poor peoples' incomes are growing faster than rich peoples' incomes, suggesting that global income inequality is in fact improving.

Suggested Citation

Neumayer, Eric and Cole, Matthew A., The Pitfalls of Convergence Analysis: Is the Income Gap Really Increasing? (July 5, 2010). Applied Economics Letters, Vol. 10, No. 6, pp. 355-357, 2003. Available at SSRN: https://ssrn.com/abstract=482025

Eric Neumayer (Contact Author)

London School of Economics and Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 207 955 7598 (Phone)
+44 207 955 7412 (Fax)

HOME PAGE: http://personal.lse.ac.uk/neumayer

Matthew A. Cole

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

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