Income inequality is spurring populist movements. But income growth has curbed poverty in many areas, and wealth can hold the key to equality.
A limousine is offered for hire besides a bicycle path in Beijing, China, 29 February 2008 (EPA/Adrian Bradshaw)
Has income inequality risen or declined in the past 20 years?
This is an important question. Populist movements in a number of countries including the United Sates have capitalized on a widespread sense that the gap between those earning the most and those earning the least has grown considerably in the past two decades, especially since the Great Recession of 2008.
The answer to the question depends on your vantage point.
From a global perspective, income equality — and with it, poverty — has declined. Consider these graphs:
What are these graphs showing us? That large numbers of people, mainly in Asia but also in Latin America, have started earning more money, and that the distribution of global income has become more equal, especially since 1975.
Economic development means that the percentage of people in absolute poverty — defined as those living on less than $1.90 per day, without enough to meet basic needs — has dropped sharply.
Gaping inequality may weigh on future economic growth.
Still, all is not well, as the graphs mask some crucial imbalances. Even globally, those at the top of the earning scale have seen their share of income increase. And the number of people living in poverty in some parts of the world, mainly Africa, has risen.
Income inequality has risen in many countries — for example, in China, Russia, the United Kingdom and the United States.
Still, the key point for economists is not that income inequality injures our sense of justice. It’s that it impedes social mobility and dampens future economic growth because people with greater financial means generally enjoy better living conditions and have access to more educational opportunities.
A study published last year by the U.S. National Bureau of Economic Research concluded that children whose parents are among the top one percent income earners are 77 times more likely to attend an elite, Ivy League college than those whose parents are in the bottom 20 percent.
Because those attending college tend to be paid more than those who do not go to college, the advantage in terms of admission perpetuates income inequality and impedes social mobility.
What is more, gaping inequality may weigh on future economic growth.
In many ways, a bigger issue is the uneven distribution of wealth.
In the past, a bit of income inequality was thought to promote growth by motivating those with relatively low incomes. But recent studies have shown that those in the bottom 50 percent of the income scale tend to be less educated and under-employed, presenting a missed opportunity and a drag on the economy.
A 2005 study found that inequalities at the bottom and the upper ends of the income distribution curve have different impacts: inequality at the bottom end tends to delay growth, while at the top end it spurs growth.
Accordingly, redistribution policies such as progressive taxation and social welfare programs can stimulate growth by boosting incomes at the bottom end of the scale. But, of course, fiscal intervention and re-distributive polices are not very popular in Western democracies nowadays.
While income inequality is important from an economist’s point of view, in many ways a bigger issue is the uneven distribution of wealth. That is because wealth — an individual’s stock of assets — more than an income stream determines consumption and social mobility.
But it is not always easy to measure wealth. Most wealth is concentrated in real estate, which can be difficult to evaluate and the value of which can fluctuate wildly. And it is not always easy to gain access to information on real estate.
As it turns out, inequality in the distribution of wealth can be the result of access to higher than average yields on assets, and some investors obtain higher returns because they have access to better information and more efficient investment tools, according to a study to be published next year in the American Economic Review.
“Looking across different countries, more unequal than income distribution is often wealth distribution,” said Alberto Bisin, an economist at New York University and one of the authors of the study.
“Even in a country such as Sweden, where a large set of active redistribution policies warrant a more equal distribution of income, wealth is very skewed toward the wealthier.”
According to Bisin, investors in the top one percent of wealth distribution in the United States receive about one percent more per year in average returns on assets. Compounded over years, this gap can make an enormous difference.
Such ingrained advantages for the wealthy would seem to argue in favor of the progressive taxation of wealth.
THREE QUESTIONS TO CONSIDER:
- How much income inequality is there in your country?
- Can you imagine a scenario in which income inequality could be a good thing?
- If you wanted to reduce income inequality, how would you do so?
A correspondent and editor in Europe and the United States for more than two decades, Tiziana Barghini has reported on Popes, mobsters and political crises. She led Reuters coverage of the euro crisis in southern Europe before moving to New York where she tackled the U.S. political economy including Detroit’s bankruptcy and the U.S. public pension system.