Permanent income inequality: Australia, Britain, Germany, and the United States compared

• Andrew Leigh
• Centre for Economics Policy Research

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Image: mtsofan / flickr

15 January 2010A common critique of most measures of income inequality, which are based on a single year's income, is that they fail to take account of income mobility. If income fluctuations are large, and individuals can smooth consumption, then high inequality and high mobility may be no worse than low inequality and low mobility.

To test this, the author uses panel data from four countries – Australia, Britain, Germany and the United States – and estimates measures of permanent income inequality that are based on income averaged over multiple years. He finds that:

(1) using pre-government income, annual inequality and permanent inequality have grown in Germany and the US, while post-government income inequality has grown in the US;

(2) comparing levels of annual post-government income inequality across countries, the ranking was the US, Australia, Britain, Germany;

(3) comparing levels of permanent income inequality across countries, the ranking of triennial post-government inequality in the most recent year was the US, Australia, Germany, Britain;

(4) in the most recent year, the most mobile country was Australia, while the least mobile was Germany.

However, as a comparison of points (2) and (3) demonstrates, mobility had little effect on the overall rankings. 

Image: 'Monopoly justice', mtsofan / flickr