On Inequality of Wealth and Income – Causes and Consequences
Disparity in Wealth and Income of American workers/household is a hot public policy/economic/social/political issue.
- Wealth (Stock)
- Income (Flow)
what are the causes and consequences of Inequality on economics and society?
From TRENDS IN INCOME INEQUALITY AND ITS IMPACT ON ECONOMIC GROWTH (OECD)
The disparity in the distribution of household incomes has been rising over the past three decades in a vast majority of OECD countries and such long-term trend was interrupted only temporarily in the first years of the Great Recession. Addressing these trends has moved to the top of the policy agenda in many countries. This is partly due to worries that a persistently unbalanced sharing of the growth dividend will result in social resentment, fuelling populist and protectionist sentiments, and leading to political instability. Recent discussions, particularly in the US, about increased inequality being one possible cause of the 2008 financial crisis also contributed to its relevance for policy making. But another growing reason for the strong interest of policy makers in inequality is concern about whether the cumulatively large and sometimes rapid increase in inequality might have an effect on economic growth and on the pace of exit from the current recession. Is inequality a pre-requisite for growth? Or does a greater dispersion of incomes across individuals rather undermine growth? And which are the short and long-term consequences of redistributive policies on growth?
From Causes and Consequences of Income Inequality: A Global Perspective (IMF)
Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries (EMDCs), with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain. Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Against this background, the objective of this paper is two-fold.
First, we show why policymakers need to focus on the poor and the middle class. Earlier IMF work has shown that income inequality matters for growth and its sustainability. Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.
Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class. While most existing studies have focused on advanced countries and looked at the drivers of the Gini coefficient and the income of the rich, this study explores a more diverse group of countries and pays particular attention to the income shares of the poor and the middle class—the main engines of growth. Our analysis suggests that
Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and EMDCs. Globalization has played a smaller but reinforcing role. Interestingly, we find that rising skill premium is associated with widening income disparities in advanced countries, while financial deepening is associated with rising inequality in EMDCs, suggesting scope for policies that promote financial inclusion.
Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.
There is no one-size-fits-all approach to tackling inequality. The nature of appropriate policies depends on the underlying drivers and country-specific policy and institutional settings. In advanced economies, policies should focus on reforms to increase human capital and skills, coupled with making tax systems more progressive. In EMDCs, ensuring financial deepening is accompanied with greater financial inclusion and creating incentives for lowering informality would be important. More generally, complementarities between growth and income equalityobjectives suggest that policies aimed at raising average living standards can also influence the distribution of income and ensure a more inclusive prosperity.
From World changes in inequality: an overview of facts, causes, consequences and policies (BIS)
Public concern about inequality has grown substantially in recent years. Politicians and journalists descant with increasing frequency on the increase in inequality as a threat to social stability, laying the blame on globalisation and its attendant so-called neo-liberal policies. There is certainly much truth in such views. However, the lack of rigour in the public debate is striking, and one may doubt whether a constructive discussion of inequality, its causes and its economic, social and political consequences can take place without more clarity. Is it really the case that inequality is everywhere increasing more or less continuously, as actually seems to be happening in the United States? What type of inequality are we talking about: earnings, market income, household disposable income per consumption unit, wealth? What matters most: the inequality of opportunity or the inequality of economic outcome, including income? What kind of measure should be used? The recently highly publicised share of the top 5, 1.1% taken from tax data may not evolve in the same way as the familiar Gini coefficient defined on disposable incomes. And, then, what is known about the nature of the unequalising forces that seem to affect our economies and what tools might be available to counteract them?
In an international survey conducted in 2010, people were asked how they thought inequality had changed over the previous 10 years.1 In few countries was the perception of inequality trends in agreement with what could be observed from standard statistical sources about inequality. US citizens felt inequality had remained the same, whereas it was surging by most accounts, Brazilians found it was also increasing despite the fact that, for the first time in over 40 years, inequality was declining, while French and Dutch people thought that inequality had increased although the usual inequality coefficients were remarkably stable.
Good policies must rely on precise diagnostics. It is the purpose of this paper to take stock of what is known at this stage about the evolution of inequality around the world. In so doing, it will be shown that an ever-increasing degree of inequality at all times and everywhere over the last 30 years is far from the reality, and that there is a high degree of specificity across countries. In turn, this suggests that the combination of equalising and unequalising forces may be quite different from one country to another. Some factors may be common and truly global but others may be country-specific, the outcome being quite variable across countries. It also follows that tools to correct inequality, if need be, may have to differ in nature depending on the causes of increased inequality.
Tackling all these issues in depth is beyond the scope of this paper. My aim is only to offer an overview of what is observed and the main ideas being debated in the field of economic inequality. The paper is organised as follows. It starts with a quick “tour d‘horizon“ of the evidence for the evolution of various dimensions of economic inequality. It then tackles the issue of the potential causes, identifying what may be seen as common to most countries and what may be specific. Finally, it touches upon the consequences of excessive inequality and the tools available to counter it, emphasising the rising constraints imposed by globalisation.
Causes of Inequality
- Shareholder Capitalism
- Focus on Cost Minimization
- Focus on ROIC and Economic Value Added (EVA)
- Consolidation – Mergers and Acquisitions
- Free Trade Agreements – NAFTA
- Increased Outsourcing
- Global Commodity Chains
- Global Production Networks
- Global Value Chains
- Lack of Educated Workforce
- Lack of protection for Low income earners
- Compensation for Executives vs Labor
- Unemployment, Underemployment
- Value of High Skilled Technical Workers
- Technological Change
- Skills Obsolescence
Consequences of Inequality
- Impact on Effective Demand
- Slows Economic Growth
- Decreased Economic Mobility
- Health and Social effects
- Living Standards at the Bottom (Poverty)
- Intergenerational Mobility
- Democratic Process and Social Justice
- Reduced Consumption
- Financial Crisis
- Social Cohesion
- Global Imbalances
- Hampers Poverty reduction
- Access to Health services
- Access to Financial Services
- Access to Education
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Edited by Jeremy Gantz
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A Firm-Level Perspective on the Role of Rents in the Rise in Inequality
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Jae Song, David J. Price Fatih Guvenen, Nicholas Bloom
TOWARDS A BROADER VIEW OF COMPETITION POLICY
Joseph E. Stiglitz
University Professor, Columbia University,
Chief Economist at the Roosevelt Institute
ACCOUNTING FOR RISING CORPORATE PROFITS: INTANGIBLES OR REGULATORY RENTS?
Boston University School of Law
Law & Economics Working Paper No. 16-18
November 9, 2016
Inequality: Facts, Explanations, and Policies
Chairman, Council of Economic Advisers
City College of New York New York, NY
October 17, 2016
Domestic Outsourcing, Rent Seeking, and Increasing Inequality
First Published July 21, 2017
Global Concentration and the Rise of China
Caroline Freund and Dario Sidhu
Peterson Institute for International Economics
How Could Wage Inequality within and Across Enterprises Be Reduced?
Columbia Business School Research Paper No. 17-62
Posted: 10 Jun 2017 Last revised: 17 Aug 2017
Date Written: December 15, 2016
The Fall of the Labor Share and the Rise of Superstar Firms
David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, John Van Reenen
NBER Working Paper No. 23396
Issued in May 2017
Inequality: A Hidden Cost of Market Power
Posted: 29 Mar 2017 Last revised: 31 Mar 2017
Date Written: March 6, 2017
Wealth and Income Inequality in the Twenty-First Century
Joseph E. Stiglitz
International Economic Association World Congress
The Globalization of Production and Income Inequality in Rich Democracies
Matthew C Mahutga
INCOME AND WEALTH INEQUALITY: EVIDENCE AND POLICY IMPLICATIONS
Contemporary Economic Policy
Vol. 35, No. 1, January 2017, 7–25
Online Early publication October 14, 2016
Consequences of Rising Income Inequality
BY KEVIN J. LANSING AND AGNIESZKA MARKIEWICZ
October 17, 2016
Economic Research Department of the Federal Reserve Bank of San Francisco.
Top Incomes, Rising Inequality, and Welfare
Kevin J. Lansing
Federal Reserve Bank of San Francisco
Causes and Consequences of Income Inequality: A Global Perspective
Era Dabla-Norris, Kalpana Kochhar, Frantisek Ricka, Nujin Suphaphiphat, and Evridiki Tsounta
(with contributions from Preya Sharma and Veronique Salins)
Piketty, Thomas. 2014.
Capital in the Twenty-First Century.
Cambridge, MA: Harvard University Press.
Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007
Edward N. Wolff
Levy Economics Institute of Bard College
CONSUMPTION AND INCOME INEQUALITY IN THE U.S. SINCE THE 1960S
Bruce D. Meyer James X. Sullivan
NATIONAL BUREAU OF ECONOMIC RESEARCH
Top Income Inequality in the 21st Century: Some Cautionary Notes
Fatih Guvenen Greg Kaplan
April 2, 2017
FIFTY YEARS OF GROWTH IN AMERICAN CONSUMPTION, INCOME, AND WAGES
May 16, 2017
The Inequality PuzzleBY LAWRENCE H. SUMMERS
GLOBAL INEQUALITY DYNAMICS: NEW FINDINGS FROM WID.WORLD
Facundo Alvaredo Lucas Chancel Thomas Piketty Emmanuel Saez Gabriel Zucman
NATIONAL BUREAU OF ECONOMIC RESEARCH
February 2017, Revised April 2017
Power and inequality in the global political economy
Outsourcing governance: states and the politics of a ‘global value chain world’
Frederick W. Mayer & Nicola Phillips
04 Jan 2017
What’s caused the rise in income inequality in the US?
Why are American Workers getting Poorer? China, Trade and Offshoring
Avraham Ebenstein, Ann Harrison, Margaret McMillan
NBER Working Paper No. 21027
Issued in March 2015
The Geography of Trade and Technology Shocks in the United States
David H. Autor, David Dorn, and Gordon H. Hanson
American Economic Review
Economic Consequences of Income Inequality
Joseph E. Stiglitz
Labor’s Declining Share of Income and Rising Inequality
World changes in inequality: an overview of facts, causes, consequences and policies
by François Bourguignon
Monetary and Economic Department
BIS working paper
“Trends in Income Inequality and its Impact on Economic Growth”
OECD Social, Employment and Migration Working Papers, No. 163
Causes of income inequality in the United States
Income inequality in the United States
Redistribution, Inequality, and Growth
Prepared by Jonathan D. Ostry, Andrew Berg, Charalambos G. Tsangarides
Understanding the Economic Impact of the H-1B Program on the U.S.
John Bound† Gaurav Khanna‡ Nicolas Morales§
April 20, 2017