The rich are getting richer in all countries and economies around the world. This fact is the fundamental cause of growing wealth and income inequality.

Causes and Consequences of Income Inequality : A Global Perspective (A Review by Edward Phillips)

Author/Editor: Era Dabla-Norris ; Kalpana Kochhar ; Nujin Suphaphiphat ; Frantisek Ricka ; Evridiki Tsounta


Publication Date: June 15, 2015
PDF Copy: http://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf

Summary. This new International Monetary Fund (IMF) study looks at 159 advanced, emerging, and developing economies around the world for the period 1980–2012, and it finds that the more income concentrates at the top, the more the overall economy sputters — and the lower the pretax incomes of low- and middle-income class households. In short, the report concludes that when the rich get richer, economic growth is stymied, and benefits do not trickle down. To tackle inequality, the authors argue that financial inclusion is imperative in emerging and developing countries while in advanced economies, policies should focus on raising human capital and skills and making tax systems more progressive.

What is significant about this study is that it covers more than 80 percent of the world’s countries, thus it is perhaps the most complete and up-to-date study of its kind to be found anywhere. It confirms most of what we knew about inequality, but it extends the breadth of our knowledge, it deepens our knowledge with substantially more detail, while it draws from an extensive data base while utilizing more accurate and comprehensive analytical techniques for establishing cause/effect relationships.

Important Findings. There are three primary factors that can reduce income inequality across all economies. They are: 1) better educational opportunities; 2) better health care; and 3) a deepening of financial assets among the poor. It also showed a widening gap between productivity gains and wages across nearly all countries during the past 32 years.

Limitations. Although this study examined a wide variety of factors and related them to other recent studies, it did not examine issues such as fraud, waste, or greed; the impact of monetary or fiscal policies; or the consequences of inheritance laws or specific legal decisions on wealth accumulation and distribution. It would have been very difficult, if not impossible, to examine any of these factors. Mergers, acquisitions, buyouts, bankruptcies, selloffs and similar activities were not examined.

In general most of the factors suggested by common sense show up in the results, but they do not impact different economies to the same degree. Technology, for example, is good for all economies. It is the one palliative that lifts all participants. It comes with the requirement that workers’ skill levels must also rise to stay abreast of them. Economic growth reduces inequality. A progressive tax policy (higher rates on higher incomes, not lower rates) is universally helpful for reducing inequality. Nearly all government spending is helpful, but it should be targeted to specific needs. Globalization is helpful to emerging economies and tends to exacerbate inequality in advanced economies. Minimum wages that keep up with other wages reduces inequality, and so does worker participation via unions. More, not less, work place regulation reduces inequality. Wealth inequality is approximately double income inequality everywhere.

It is a fair summation to say that most progressive thinking about the causes of inequality is supported by this study, while most conservative thinking is refuted. But since upper management is the domain of conservative thinking, this study and others like it are likely to be rejected, and growing inequality is likely to get worse around the world until a major disaster of unfathomable proportions occurs.