Increasing Income Inequality: Side-Effect of Fight against Crises?

Rich and Poor Serving Inequality by epSos de
Rich and Poor Serving Inequality

We have recently written about increasing income inequality in Canada. This trend isn’t unique for Canada, as 71 per cent of the world’s population live in countries where income inequality has been increasing — including large-population countries like China, India, Russia, and the United States. What is the reason and what can we expect in the future?

Rich Get Richer

According to the Conference Board of Canada, income inequality rose in Canada as the rich group gained a higher share on total national income and the middle-income and poorest groups lost their share. In a study for the Canadian Centre for Policy Alternatives, researcher Armine Yalnizyan pointed out that the rising wealth of the rich group is not due to the assets they own, but “is due mostly to the lavish sums they are paid for the work they do.” This is common in technologically advanced societies, where skill has higher value than it does in less technologically advanced societies. However, Yalnizyan notes that falling top marginal tax rates are another reason for increased wealth. This confirms arguments that the rich get richer thanks to stagnating minimum wage rates, deregulation, and national policies that favour the wealthy.

Searching for Reasons

Inequality in the streets by Toban Black
Inequality in the streets by Toban Black

Agnello and Sousa from Universidade de Minho investigated the impact of fiscal consolidation on income inequality. They tried to find a connection of increasing inequality with countries’ policy that was implemented after crises boomed and governments were forced to reduce their budget via fiscal adjustments.

They showed that when fiscal consolidation is undertaken, it has small or no impact on inequality, but in the absence of crises episodes, it leads to a more unequal distribution of income. In the aftermath of the banking crisis, fiscal austerity has a strong impact on income inequality. Moreover, their findings suggest that when fiscal austerity is driven by spending rather than by revenue, inequality rises more. Trade can also drive a country’s unequal income distribution.

Margaret Blair’s work indirectly supports their findings. She claimed that, as asset bubbles typically lead to higher returns, the banking system has the potential to generate highly leveraged systems and increase income inequality as a growing share of society’s resources is captured by finance.

Inequality About to Increase

There is no reason to expect a decrease. The second wave of the financial crisis will force governments to accept new fiscal consolidation programs. Their priority will remain financial sustainability — not income equality. So while the country’s policy fights against crisis, the problem with inequality deepens. If the situation gets serious, it will bring more social tensions, and after, crisis governments will have to fight again — against angry citizens.

Zhu Min, a special adviser at the International Monetary Fund, said: “the increase in inequality is the most serious challenge for the world… I don’t think the world is paying enough attention.”

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