No Matter Where You Live, the World is More Unequal Than You Realise, according to new research

February 5, 2019 1 By Duncan Green

Update on some interesting research by Franziska Mager and Christopher Hoy. It builds on a December post on the World Bank Development Impact blog, covering more countries  and expanding the discussion to people’s misperceptions about the level of national inequality as well as their misperceptions of their own positions.

New research by the Australian National University conducted in collaboration with Oxfam reaffirms that there is serious concern about inequality among ordinary people according to representative surveys of over 30,000 people across 10 different countries that make up over one-third of the world population. But our most striking finding is that even across a set of very different countries, people’s concerns about inequality is actually based on large misperceptions.

The new findings show people tend to underestimate the extent of inequality in their country and think they are ‘middle class’ regardless of whether they are actually rich or poor. In other words, people are bothered with inequality even though they don’t realise how bad it is – and often poorer people don’t realise they are among the poorest in their society.

What’s more, despite these rosy notions about the scale of inequality and erroneous self-placement, across all countries in the sample – from Mexico to Morocco to the US – poor and rich people alike want inequality to be much lower.

Underestimating the level of inequality

When respondents were asked to select one of six ordinal income distributions to represent their country, ranging from perfectly equal (which does not exist anywhere in the world) to extremely unequal (based on data from South Africa), only 20% of people picked the closest ‘correct’ distribution to what was the case in their country, and 49% picked a too-egalitarian distribution.

Figure 1: Stylised range of income distributions. Options were based on actual distributions of income in some of the countries that were surveyed (except ‘somewhat equal’ and ‘completely equal’).

In other words, in many cases people drastically underestimated to what extent economic resources are concentrated in the hands of the richest. And these misperceptions matter: they often predict what people want done. For example, those who perceived higher levels of inequality were significantly more likely to agree or strongly agree that the gap between rich and poor was too large – irrespective of country.

We all think we are ‘middle class’

What’s more, from the UK to India to Australia, people generally do a very poor job at estimating where their own income places them relative to others in their country. An overwhelming majority actually wrongly think they are in the middle of their national income distribution, when this often isn’t the case. Whether you are relatively poor or relatively rich, you are likely to think your income places you roughly in the middle of incomes in your country (figure 2).

Figure 2: Self-placement in one of 5 income quintiles across 10 countries. This question was asked immediately following the question shown in Figure 1.

Again, this self-perception matters a great deal: people who mistakenly think they are poor have a greater preference for equality compared to people who think they are relatively rich.

Among the ones who are actually relatively poor, those who perceived themselves to be in the bottom half of the income distribution were on average 20 percentage points more likely to prefer lower levels of inequality than poor people who perceived themselves to be in the top half of the income distribution.

Just how much money do our bosses make?

A third common misperception about inequality is that peoples massively underestimate the ratio of the wages of CEOs relative to ordinary workers , yet still, they’d like them to be much lower. This finding once more reaffirms that people are bothered by pay gaps even though they don’t realise how bad they are. For example, in South Africa – the country with the highest known CEO to worker wage ratio, according to Bloomberg, and one of the worst places in the world for income inequality – respondents think this ratio is about 28:1, and would like it to be as low as 9:1. In reality the pay ratio is estimated at over 500:1.

Perceptions matter for policy makers

The research concludes that policy makers who are interested in understanding public support for redistribution should be as concerned — if not more so — about people’s perception of income concentration and wealth differences even when these don’t closely match reality. It bolsters a growing body of evidence that suggests people’s perception of inequality and their perceived position is a better predictor of their preferences for redistribution than what is objectively the case.

As for campaigners, the lesson is that the more they can raise public awareness of the true extent of inequality, the greater the public call for action is likely to be.