The Pitfalls of Convergence Analysis: Is the Income Gap Really Increasing?
10 Pages Posted: 30 Dec 2003 Last revised: 5 Jul 2010
Date Written: July 5, 2010
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.
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