Inequality dynamics in turbulent times

by María Gómez León (Instituto Figuerola/Universidad Carlos III, Madrid) and Herman J. de Jong (University of Groningen)

 

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The Home Front in Britain during the Second World War. Available here

Recent influential studies on the historical evolution of inequality and its causes (Milanovic 2016; Piketty 2014) have attracted new interest in the topic. While attributed to different factors, there is a wide consensus on the slowdown of inequality in western Europe during the twentieth century up to the 1980s—a phenomenon commonly referred to as the ‘great levelling’ or ‘egalitarian revolution’. Yet, we do not know how differently this deceleration evolved across countries. Turbulent episodes during the first half of the twentieth century—including two World Wars, the Great Depression and the upsurge of radical parties—suggest that, at least in the short run, inequality may have followed very different patterns across European nations. However, we have little empirical evidence, due to the lack of data on income distribution before 1950, especially for the interwar years.

In a forthcoming article we provide new annual data on income inequality for two leading European countries, Germany and Britain, for the first half of the twentieth century. Using dynamic social tables, we obtain comparable annual estimates (measured as Gini coefficients) covering the full range of income distribution. Evidence from Germany and Britain (Figure 1) yields two main results. First, the drop in inequality was neither steady nor similar across these countries, supporting the notion of inequality cycles (Milanovic 2016; Prados de la Escosura 2008). Second, inequality trends in Germany and Britain tended to follow opposite patterns.

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Figure 1. Inequality trends in Britain and Germany.  For data and sources see Gómez León and de Jong (Forthcoming)

What drove inequality changes in these two countries? How did inequality develop for specific groups of the population?  On the first question, we find that in Germany before 1933 and from 1939 onwards, variations in the relationship between owners and workers as well as variations within the group of workers (across work status and gender) drove changes in income distribution. During the Nazi period, only differences between owners and workers help to explain changes in inequality, as the abolition of trade unions and the setting of maximum wages precluded the dispersion of labour earnings. On the other hand, the dispersion of earnings among British workers appears to have been the main driver of changes in inequality before the Great War and after 1939, when the reduction of skill premiums and gender payment inequalities offset the relative increase in incomes. However, from the First World War to the outbreak of the Second World War, differences between proprietors and workers, as well as changes in labour earnings dispersion, drove inequality changes.

On the second question, we observe that in both countries the winners of the economic expansion experienced between 1900 and 1950 were the upper-low and lower-middle classes (i.e. the salaried and wage-earners in both manufacturing and war-related heavy industries). However, the gains linked to industrial expansion during the First World War and the Second World War were concentrated among the upper classes in Germany, while in Britain the benefits were more evenly distributed among the working classes. The reverse occurred during the interwar period.

In line with Lindert and Williamson (2016) and Piketty (2014), our paper points primarily towards political and institutional factors as the crucial drivers of inequality trends during the first half of the twentieth century. The usefulness of dynamic social tables for exploring national income distributions in the past invites future research on other European countries as well as on other potential factors (e.g. migration, technological change) affecting short-term inequality dynamics during the period.

 

To contact the lead author: e-mail: mgomez3@clio.uc3m.es ; Twitter: @Maria0zmg

 

References:

Gómez León, M. and de Jong, J. H., ‘Inequality in turbulent times: Income distribution in Germany and Britain 1900–1950’, Economic History Review, (Forthcoming)

Lindert, P. H. and Williamson, J. G., Unequal gains: American growth and inequality since 1700 (Princeton, NJ, 2016).

Milanovic, B., Global inequality: A new approach for the age of globalization (Cambridge, Mass., 2016).

Piketty, T., Capital in the twenty-first century (Cambridge, Mass., 2014).
Prados de la Escosura, L., ‘Inequality, poverty and the Kuznets curve in Spain, 1850–2000’, European Review of Economic History, 12 (2008), pp. 287–324.