The median versus inequality-adjusted GDP as core indicator of ‘ordinary’ household living standards in rich countries

Social Macroeconomics working paper
Brian Nolan
Abstract

This paper first highlights the extent to which GDP per head will be unreliable as an indicator of household income change over time around the middle for rich countries, in the short or long run, and will mislead as to the relative performance of countries in achieving broadly based improvements in prosperity. It then demonstrates that ‘inequality-adjusting’ GDP will not suffice to bridge the gap.

The divergence between the trajectory of median household income and GDP/GNI per capita is due to a variety of factors that themselves vary in significance across countries and over time, with the distribution of the gains from growth being only one. Median income thus needs to be accorded a central role alongside GDP per capita in both official monitoring of living standards and research on inclusive growth.

Growth in median incomes will not be a reliable measure of what is happening to the incomes of the poor, though, so low incomes and poverty certainly need to be separately monitored and 2 analysed: one cannot assume that growth that transmits to the middle is also going towards the bottom.