You can’t avoid inequality these days. Lately, it’s made the covers of The Atlantic and The Economist, and rarely a week seems to go by without some new report examining its impact. Even those on the sunny side of the rich-poor gap seem concerned: The “Davos Crowd” recently cited “economic disparity” as one of the two biggest risks facing the global economy.
There isn’t much debate over whether or not income inequality is rising within countries. Almost everyone accepts it is. As these numbers show, it’s grown in all but a handful of OECD countries since the 1980s, although – as the OECD’s Growing Unequal? report points out – probably by not as much as most people think.
But inequality hasn’t just risen in the developed OECD area. While emerging economies like India and China are enjoying huge reductions in absolute poverty they are also seeing a widening gap between rich and poor. Even China’s media uses words like “unreasonable” to describe these disparities. Rising inequality is also being linked to the turmoil in North Africa and the Middle East. Mario Pezzini, director of OECD’s Development Centre, noted recently that the uprisings in Egypt and Tunisia “are some of the manifestations that inequality matters in economic and political terms.”
There also isn’t much debate over the factors fuelling inequality. One is globalisation, which “expands the market for ultra-talented individuals but competes away the income of ordinary employees”, says economist Ken Rogoff. Another is the shift to the so-called knowledge economy – “people who know how to exploit the internet gain,” says Growing Unequal?, “and those who don’t, lose.”
The workers who “lose” are often perceived as being fairly far down the corporate chain – the receptionist who’s replaced by an automatic answering machine, for example. But that’s no longer the case, says Paul Krugman: These days, he says, even well-educated white-collar workers are being replaced by technology. Example? Lawyers: Specialised software can now perform pre-trial document searches that until recently were carried out by “a platoon of lawyers and paralegals who worked for months at high hourly rates”. Krugman argues that what we’re seeing is not just a widening gap between rich and poor, but a hollowing out of the middle class: “Both high-wage and low-wage employment have grown rapidly, but medium-wage jobs – the kinds of jobs we count on to support a strong middle class – have lagged behind.”
If that characterisation is accurate, the identity of the “winners” seems clear: Chrystia Freeland refers to them as “a new super-elite … hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition”.
What about everyone else? Is this winner-takes-(almost)-all society benefiting the non-jet-setters? There’s increasing interest in investigating that question. For example, one of the most-discussed books of recent years was The Spirit Level, which described unequal societies as “dysfunctional”; critics, however, said the book’s analysis was “heavily flawed”.
The rise is inequality is being examined by others, too. A recent paper from economists at the IMF states that rising inequality helped cause the financial crisis of 2008, mainly because it weakened the “bargaining power” of those at the bottom of the economic pile. Other economists have examined the impact of the “trickle down” effect – the extent to which rising wealth at the top supposedly filters down to the less well off. A paper co-written by OECD colleague Dan Andrews (who carried out the research in a private capacity) concludes that the trickle-down benefits for lower earners have been fairly weak, and that any benefits have taken a long time to materialise.
Still, love it or loathe it, inequality will never vanish entirely, and many believe we would all suffer if it did: The prospect of getting a bit richer is an incentive for entrepreneurs and risk-takers and – as Gary Becker argues – for people to invest in education and skills (their human capital).
So, the question for societies is more likely to be this: How much inequality are we prepared to live with? Of course, if we decide we’d like a bit less, that raises a second question. As The Economist recently framed it, do we achieve it by pushing up people at the bottom and the middle of the income distribution or by pulling down those at the top?
Growing Unequal? – Income distribution and poverty in OECD countries