Revisiting Inequality: Long-Run Patterns and Convergence Clubs in OECD Countries

This study examines long-run patterns of income inequality across 21 OECD countries from 1870 to 2021, focusing on both top income shares and overall inequality (Gini coefficients). Building on a rich literature that documents a pronounced decline in inequality during the first three quarters of the twentieth century followed by post-1970 divergence, we apply the nonlinear, time-varying factor model of Phillips and Sul (2007) to identify endogenous convergence clubs. Our analysis reveals two key findings. First, while Gini coefficients exhibit strong convergence over the full sample period, top income shares diverge sharply after the 1970s, challenging the assumption that aggregate convergence implies similar distributional dynamics. Second, we uncover three distinct post-1970 convergence clubs, high, intermediate, and low inequality, alongside one clear outlier, the United States. These patterns defy conventional regional typologies, with Nordic countries clustering in the intermediate club and Anglo-Saxon versus Continental distinctions proving fragile. To explain these dynamics, we integrate an ordered probit analysis linking club membership to wage-bargaining institutions, union density, government involvement in wage setting, financial structures, and educational expansion. Our findings underscore the centrality of top incomes and institutional frameworks in shaping inequality trajectories, offering new insights into the structural determinants of long-run divergence. JEL: D63, D31, C33 .