(Bloomberg) -- The pope has deplored it. European Central Bank President Mario Draghi has said it’s a destabilizing issue in the euro zone. It’s shifted Chinese economic goals and fueled voter anger in the U.S. presidential election. And a 700-page book about it by a French economist became a surprise best seller. It is inequality, a gap between rich and poor that has been widening in many countries for a generation. The term is often used imprecisely as a catch-all description of various related ills including poverty, job stagnation, class division and social disorder. Yet there’s much debate among economists about the impact of inequality itself and its relationship to prosperity.
In every region of the world, inequality in the distribution of wealth increased from 2007 to 2016. During the same period in the U.S., the average income of the poorest fifth of all households rose 12.1 percent to $12,943, while income of the wealthiest 5 percent of households rose 30.6 percent to $375,088. In China, 1 percent of households own more than a third of the nation’s wealth. Using a common measure, the Gini index, which measures income distribution among a population, the CIA World Fact Book ranks Lesotho the least equal nation in family income distribution among 150 nations. The U.S. is No. 40 and Finland is the most equal. Economists have linked rising inequality to greater political instability. Populist parties in Europe have gained greater support as they’ve made the case that immigrants are driving down wages and globalization sends high-paying manufacturing jobs overseas. And income inequality was a driving force behind Donald Trump’s victory in the U.S. presidential election.
After the Great Depression of the 1930s, the share of national wealth held by the richest citizens in many developed nations fell. But since the 1970s, it’s grown. Economists have put forward lots of possible reasons. The export of manufacturing jobs from rich countries to poorer ones was often accompanied by widening inequality at both ends. The increased number of high-tech jobs may pay premiums for highly trained workers, but computers and robots now handle tasks once done by lower-skilled workers, putting many out of work. In efforts to make their labor markets more attractive for investments, many nations pulled back on rules protecting workers, which weakened union membership and bargaining power. The French author of the 2014 bestselling “Capital in the Twenty-First Century,” Thomas Piketty, argued that unchecked capitalism concentrates wealth because the rate of return on capital generally exceeds the growth rate of labor income. The decades in the mid-20th century in which inequality fell were the exception, not the rule, he concluded.
Critics of inequality point to studies finding that more unequal societies suffer from higher unemployment and reduced investment. One study linked households living in high-inequality areas with more financial distress, reflected by increased bankruptcy filings, higher divorce rates and longer commutes. The Great Gatsby Curve suggests that more inequality is linked to less mobility — the ease with which people move up and down the income ladder. Proposals to narrow inequality include increasing the minimum wage, taxing the affluent and raising levies on inheritance and investments. Yet some contend there is scant proof that inequality restricts opportunity. Instead, some researchers say, it acts as an incentive for people to produce and create wealth, innovate and take risks. They point out that inequality isn’t a zero-sum game; when the recession shrank the stock portfolios of wealthy Americans, briefly reducing inequality, the poor did not get richer. Even as the gap between the incomes of the wealthiest and poorest U.S. families grew, poverty rates fell. New York City has the biggest rich-poor gap in the country, but its poverty rate is roughly half of Detroit’s. China’s income gap grew even as hundreds of millions of people were lifted out of poverty. The top 1 percent’s share of income has fallen since 2005 in both Spain and Norway, as one struggled economically and the other prospered.
The Reference Shelf
- OECD data on income distribution and poverty.
- The Great Gatsby Curve: Bloomberg Visual Data chart showing links between higher inequality and lower mobility.
- The World Wealth & Income Database grew out of data gathered for Thomas Piketty’s book, “Capital in the 21st Century.”
- Nick Hanauer, “one of those .01%ers,” wrote in Politico Magazine why “The Pitchforks Are Coming … For Us Plutocrats.”
- Bloomberg View explored income inequality in its series “Getting to Fair.”
- A Bloomberg QuickTake Q&A on how much more CEOs are paid than average workers.
First published Feb.
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