The Unassuming Economist

Discussions about welfare and development often revolve around the usage of income thresholds to analyze changes in living standards and the well-being of individuals. While many studies emphasize the growing gap between those falling under the upper and lower tails of the income distribution table, it is the middle that is often dismissed in such development stories, and perhaps wrongfully so.

In a recent column for the Brookings Institution (2021), economists Kimberly Blair Bloch and Luis F. Lopez-Calva bring this issue into the spotlight and discuss considering median, rather than the mean income, as an insightful estimate of the “middle”. Their findings highlight three major points- (a) the mean and median incomes have risen steadily over the years in all countries (2002-2019); (b) median income has grown more rapidly than mean income in all countries; (c) and, the ratio of mean to median income has fallen in all countries.

Thus, they observe that income distributions in all countries are gradually tending towards a more normal distribution than a positively skewed one, which has the very important policy implication that the “middle” class can simply not be ignored by policymakers any longer.

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Excerpts from a column by Professors Martin Ravallion (Georgetown University) and Shaohua Chen (Xiamen University) for Vox EU CEPR.

Ravallion and Chen’s newest paper (2021) highlights some theoretical arguments about potential trade-offs between reducing income polarisation and other valued goals, including poverty reduction, discussions on which are contained in their column for Vox EU CEPR.

“China’s well-documented success in reducing absolute poverty came, of course, with a rising share of its population living above official poverty lines (Chen and Ravallion 2021). Many of those who escaped absolute poverty joined China’s middle-class. Naturally, what this means depends on the setting. The prevailing definition of a middle-income group can be expected to change over time with rising living standards; what was considered a middle income in the China of the 1980s is clearly not the same today. “Fleshing out the olive” can be interpreted as reducing the spread of incomes relative to the current median, which may provide a more relevant reference point than a fixed absolute level of real income. 

This perspective suggests that the concept of polarisation as found in economics is relevant to monitoring China’s performance in “fleshing out the olive” and identifying potential trade-offs against other goals. And there is a measure available in the literature, namely the Foster-Wolfson (FW) polarisation index (Foster and Wolfson 2010). The greater the spread of incomes relative to the median (in either direction), the higher the FW index. What trade-offs might be found between this concept of polarisation and other goals for the distribution of income? And what does the time-series evidence suggest?”

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