Did Inequality Fall During the Great Depression ?

Inequality

The graph above is taken from Piketty and Saez in their seminal 2003 article in the Quarterly Journal of Economics. It shows that inequality fell during the Great Depression. This is a contention that I have always been very skeptical of for many reasons and which has been – since 2012 – the reason why I view the IRS-data derived measure of inequality through a very skeptical lens (disclaimer: I think that it gives us an idea of inequality but I am not sure how accurate it is).

Here is why.

During the Great Depression, unemployment was never below 15% (see Romer here for a comparison prior to 1930 and this image derived from Timothy Hatton’s work). In some years, it was close to 25%. When such a large share of the population is earning near zero in terms of income, it is hard to imagine that inequality did not increase. Secondly, real wages were up during the Depression. Workers who still had a job were not worse off, they were better off. This means that you had a large share of the population who saw income reductions close to 100% and the remaining share saw actual increases in real wages. This would push up inequality no questions asked. This could be offset by a fall in the incomes from profits of the top income shares, but you would need a pretty big drop (which is what Piketty and Saez argue for).

There is some research that have tried to focus only on the Great Depression. The first was one rarely cited NBER paper by Horst Mendershausen from 1946 who found modest increases in inequality from 1929 to 1933. The data was largely centered on urban data, but this flaw works in favor of my skepticism as farm incomes (i.e. rural incomes) fell more during the depression than average incomes. There is also evidence, more recent, regarding other countries during the Great Depression. For example, Hungary saw an increase in inequality during the era from 1928 to 1941 with most of the increase in the early 1930s. A similar development was observed in Canada as well (slight increase based on the Veall dataset).

Had Piketty and Saez showed an increase in inequality during the Depression, I would have been more willing to accept their series with fewer questions and doubts. However, they do not discuss these points in great details and as such, we should be skeptical.

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6 thoughts on “Did Inequality Fall During the Great Depression ?

  1. Have you had a look at Walter Scheidel’s new book, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century? If so, I would be interested to know what you think of it. I have only just begun reading it, so I have no strong opinion myself. Scheidel states in the “Acknowledgements” that his “perspective and argument” in the book are inspired by Piketty. It seems he read Piketty, was impressed, and intends his book to support Piketty’s claim that economic inequality—indeed, rising inequality—is endemic and inevitable during normal times; i.e., nearly all the time. Scheidel’s own idea is that inequality is substantially reduced only by extreme social violence and mayhem (e.g., total war, communist revolution, the Black Death, etc.). He thinks that from 1914-1945, there was a “great compression” or collapsing of inequality, due mainly to the world wars, I presume, but the great depression would also be part of this.

    I realize this question is pretty tangential to your post, but I figure it doesn’t hurt to ask.

  2. This is a good post on The Depression, I’m actually doing a research paper on it and found some good essays if you don’t mind me sharing them here for you and your readers Vincent. Thanks again and I’ll post there here: The Great Depression Essay

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