The pitfalls of convergence analysis: is the income gap really widening?

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. This is believed 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 inferences are being made 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. The β-convergence method and two different measures of per capita income are used and it is shown that there is indeed evidence of income divergence between countries. However, crucially, convincing evidence is found of income convergence if the regressions are weighted by population. Thus, it is found that poor peoples' incomes are growing faster than rich peoples' incomes, suggesting that global income inequality is in fact improving.