Gary Becker on Income Inequality
GDP per capita is often used to measure quality of life across countries, but quantity of life (measured by life expectancy) is also important. Used alone, simple measures of GDP lead to an incomplete cross-country view of income inequality.
Gary Becker, the late
University of Chicago economist and Nobel Laureate, in a 2005 American Economic Review article, “The Quantity and Quality of Life and the Evolution of World Inequality,” calculated a “full” income measure. He and his coauthors, University of Chicago’s Tomas Philipson and University of Maryland’s Rodrigo Soares, examined 96 countries, comprising 82 percent of the world’s population, between 1960 and 2000.
They found that the poorest 50 percent of countries in their sample had a life expectancy of 41 years in 1960 and 64 years in 2000, an increase of 56 percent. This contributed to an annual growth rate of 4.1 percent in full income. The richest 50 percent of countries saw an increase of 14 percent over that same time period, for a yearly full income growth rate of 2.6 percent.
Taking the world average, the increase in life expectancy also added the equivalent of $56,000 today to the present value of lifetime per capita income.
Using Becker’s findings, incomes in low-income countries have grown much faster than high-income countries over the past half century. This differs drastically from the prevailing view that cross-country income inequality has not decreased, or at least not drastically decreased, since the end of World War II.
Low-income countries have benefited from new treatments for diseases and greater understanding of the human body, even more so than the high-income countries that have done the most to further medical progress.
Life expectancy is directly tied to a country’s level of economic freedom. According to the Economic Freedom of the World: 2013 Annual Report, a yearly Cato Institute and Frasier Institute publication authored by James Gwartney, Robert Lawson, and Joshua Hall, life expectancy is 79 years in the top quarter of countries based on economic freedom. It is only 60 years in the bottom quarter of countries. Per capita income is also eight times greater in countries in the top quarter as compared to the bottom.
Countries such as Chile, Hong Kong, Malta, Mauritius, and Singapore saw some of the largest per capita economic gains from increased life expectancy. It should come as no surprise that these countries all instituted reforms that respected economic freedom in the second half of the 20th century.
For example, Chile did not rank in the top 50 economically-free countries until the mid-1980s. Now, thanks to strong protection of property rights and clear rule of law, the country is ranked 11th overall. However, the current president, Michelle Bachelet, is working to undo the very system that caused so much prosperity. Since 1970, life expectancy in Chile has increased 28 percent. The world average increased 11 percent over that same time.
These statistics also show the benefits of globalization. The world has increasingly opened itself up to trade between countries by lowering import tariffs and negotiating free trade agreements. The humanitarian effects of open borders, in terms of both trade and immigration, should not be overlooked in policy discussions.
Material well-being is only one aspect of increased standards of living. While calculating happiness is difficult and imprecise, adding measures such as life expectancy to GDP calculations is one of Becker’s most innovative and novel insights.
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