Reports from the Economic Front

a blog by Marty Hart-Landsberg

Inequality: Bad For (most) People, Good For Profits

The IMF recently published a report titled Causes and Consequences of Income Inequality: A Global Perspective.  Among its nuggets: an unequal income distribution hurts growth and is self-reinforcing; capitalist globalization and labor repression are among its most important drivers.

The authors find a significant growth in inequality, especially in the advanced capitalist countries.  As they note in their executive summary:

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.

They offer the following snapshot which illustrates both changes in, and levels of, inequality as measured by the net gini index:

Gini Index

The gini index or coefficient, perhaps the most commonly used measure of inequality, ranges from 0 to 1 (or 100 as in this figure), with higher values denoting greater inequality.  The above figure is color coded to highlight changes in the gini coefficient over the period 1990-2012.  The numbers shown represent the actual value of the gini coefficient in 2012.

As we can see, Russia and China have experienced tremendous increases in inequality, as their red color indicates.  In China’s case, that increase has left the country with one of the world’s most unequal income distributions as shown by its high gini coefficient.  Brazil also suffers from great inequality, but its degree of inequality has lessened over the period as shown by its green color.

The authors argue that while past IMF work has shown that income inequality matters for growth, their work shows that “the income distribution itself matters for growth as well. In particular, our findings suggest that raising the income share of the poor and ensuring that there is no hollowing-out of the middle class is good for growth through a number of interrelated economic, social, and political channels.

More specifically, they found that:

A higher net Gini coefficient (a measure of inequality that nets out taxes and transfers) is associated with lower output growth over the medium term, consistent with previous findings. More importantly, we find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth. This positive relationship between disposable income shares and higher growth continues to hold for the second and third quintiles (the middle class). This result survives a variety of robustness checks, and is in line with recent findings for a smaller sample of advanced economies.

They also found, as the figure below shows, that greater income inequality is associated with a fall in social mobility, at least for the leading advanced capitalist countries.  This means that inequality becomes self-generating.

social mobility

In investigating the causes of the growth in inequality, the authors offer the following two figures, both of which shed light on the ways in which contemporary capitalist dynamics, in particular globalization and labor repression, have worked to promote this outcome.

The figure below illustrates the growing disconnect between real average wages and productivity.  In country after country we see how corporations have been able to push up productivity without increasing wages.  This disconnect is especially striking in the post-2008 period.

disconnect wages and productivity

And as we can see from the following figure, the degree of unionization has also fallen significantly in every highlighted region, with the greatest declines taking place in Europe and East Asia and the Pacific.

Unions

Both developments are likely the result of national policies encouraged by capitalist globalization dynamics which allow corporations to use their growing international mobility to pit workers and even nations against each other.

Of little surprise, the highlighted increase in income inequality, which as the IMF notes is harmful to growth, is strikingly beneficial for those at the top.  As the following two figures reveal, profits have soared and so have the income shares of the top 1% in the selected countries.

Profits

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