Inequality: trends, causes, consequences, relevant policies

Author: Philip Arestis

Professional affiliation: University of Cambridge, UK and University of the Basque Country UPV/EHU, Spain

This contribution discusses the importance of tackling income inequality, a very serious occurrence over the last 30 years or so, as we discuss therein. Economic policy initiatives to produce a more equal distribution of income thereby become relevant and urgent. Not only would such policies reduce inequalities but would also help to increase the level of economic activity, as has been demonstrated many times. Relevant economic policies for this purpose are discussed in this contribution. Inequality has emerged as stated above, whereby the members at the very top of the income distribution and in the financial sector in particular, with the latter being one of the main causes of the Global Financial Crisis of 2007/2008, gained at the expense of wage earners. Wealth and gender inequalities are also important in this respect, but they need separate contributions to deal with them satisfactorily. However, we refer to them as necessary.

Authors: Robert Wade and Michele Alacevich

Professional affiliation: London School of Economics (University of London), UK and University of Bologna, Italy

Those few economists who, in the past two decades, have studied income and wealth inequality have tended to concentrate on measurement issues, and on causes of levels and trends. They have said rather little about effects. So the question of: ‘so what?’, or ‘why should we worry about inequality?’ has not been much addressed (outside of moral philosophy), even as inequality of income and wealth has increased fairly steadily in most countries since the 1980s, and in many, income concentration (eg share of top 1 percent) has soared. This paper begins by explaining why economists have tended to say: inequality is not a problem; and then examines effects in terms of: economic growth, financial fragility, social and health indicators, political partisanship, and behaviours manifesting racial and religious tolerance or discrimination, acceptance or antipathy towards immigrants, generosity or the opposite towards the poor (e.g. Trump, Brexit, Europe of 1930s).

Author: Malcolm Sawyer

Professional affiliation: Emeritus Professor of Economics, University of Leeds, UK

Financialisation and rising inequality have often been linked together. In the past decades, the financial sector has expanded rapidly with important structural changes and inequality has risen. The pace and structure of financialisation have differed over time and across countries, and changes in income distribution have proceeded with different time profiles and structures. Financialisation has not been a significant cause of rising inequality, though specific dimensions of inequality have been strongly influenced, notably the rewards within the financial sector. Financial crises follow from rapid credit expansion and rising asset prices, which are unsustainable, bringing crisis. Inequality may contribute to crisis through stimulation of unsustainable credit expansion. Increasing inequality in the situation of stagnant real incomes may well have been a significant factor in the sub-prime crisis in the USA and subsequent global financial crisis. But rising inequality has not been a systematic element in the generation of serious financial crises.

Author: Pasquale Tridico and Riccardo Pariboni

Professional affiliation: University Roma Tre, Italy

The objective of this paper is to identify the causes behind the rise in income inequality in rich countries. The hypothesis is that along with the financialisation of the economy, since 1990, inequality increased because labour flexibility intensified, labour market institutions weakened as trade unions lost power, and public social spending started to retrench and did not compensate for the vulnerabilities created by the globalisation process. In this context wage share deteriorated and functional income distribution worsened with an increase of profits, rents and financial compensation. Using data from 34 OECD countries from 1990, this hypothesis is empirically evaluated. The results suggest that the rise in inequality over the last three decades is caused by an increase in financialisation, a deepening of labour flexibility, the weakening of unions, and the retrenchment of the welfare state. A favourable tax policy towards riches, payments of dividend and corporations, also support this result.

Author: Eckhard Hein

Professional affiliation: Berlin School of Economics and Law and Institute for International Political Economy (IPE) Berlin, Germany

The re-distribution of income from labour to capital, from workers to top-managers, and from low income households to the rich has been a main feature of the finance-dominated capitalism since the early 1980s, which has led to the financial crisis and the Great Recession. The recovery has been sluggish so far, and this has given rise to a renewed discussion about stagnation tendencies in capitalist economies. Whereas in orthodox approaches income distribution only has a restricted role to play, the interaction between income distribution and growth is at the centre of heterodox approaches. In the current paper we will review and compare recent neo-Marxian, post-Classical/Sraffian and post-Keynesian distribution and growth models and try to assess the respective explanations of stagnation tendencies. The focus will be on the interaction between functional income distribution, capital accumulation and growth, but we will also examine the respective roles of personal or household income inequality.

Author: Ahmed Seyf

Professional affiliation: TBC

This chapter examines the impact of tax reforms on inequality. It begins with an examination of the meaning of inequality and its dimensions. While the usual division of 1% and 99% has its own merit, this chapter argues that the situation is more complex, especially among the 99%. The real income of those in the middle of distribution has stagnated too in recent decades. On the other hand, growth rate in most economies is sluggish, primarily due to inadequate investment. This chapter focuses on policies to reduce inequality and proposes two sets of reforms. First, given the regressive nature of indirect taxation, altering the balance between direct and indirect taxation should do. The second set of reforms should try to make our tax system work more efficiently. Two issues would be examined further: one, how to deal with tax havens; and another how to reduce tax avoidance and tax evasions.

Authors: Felipe Serrano and Patricia Peinado

Professional affiliation: University of the Basque Country UPV/EHU, Spain

The study of labour market gender inequalities has been and still is an issue of major relevance. Although gender equality has become a goal in political agendas worldwide, there is empirical evidence showing the persistence of gender differences. The gender employment and unemployment rate gaps, the educational attainment gap and the gender-pay-gap support this persistence. Additionally, during the last decade, the Great Recession has exerted a detrimental impact on labour market outcomes not only in the European Union in general but also in some specific countries in particular. A good example of the formers is the case of Spain, where the rates of unemployment have been outstandingly high. In this contribution we shed light on the evolution of this labour market dimension of gender inequalities during the Great Recession. Special consideration is given to the gender-pay-gap, both in the EU in general and in Spain in particular.

Author: Dimitra Kavarnou and Niko Szumilo

Professional affiliation: Cambridge University and London School of Economics (University of London), UK

This paper discusses the distribution of wealth along with the phenomenal changes in wealth inequality worldwide; focusing, however, on Great Britain over the previous decade. By making use of the Wealth and Assets Survey (WAS), put together in Great Britain in waves from July 2006 to June 2014, we identify the main outcomes of the wealth distribution across time and space, i.e. the government office regions of the country. In our empirical analysis, we use house prices across the regions of Great Britain to identify their effect on the evolution of wealth inequality. Our results confirm that property wealth, and hence house prices, significantly affect inequality across the different groups of the wealth distribution. Moreover, among other findings, wealth is increasingly owned by those who can afford to buy real properties, while those who cannot, they observe their wealth decreasing sharply. Models have been tested for robustness across several specifications.