4.2 Global Inequality Trends and Causes
4 min read•july 25, 2024
Global inequality has risen sharply since the 1980s, with income and wealth becoming increasingly concentrated among the top earners. This trend is driven by factors like , , and policy shifts, leading to widening gaps between rich and poor.
The impacts of rising inequality are far-reaching, affecting economic growth, social mobility, and political stability. High inequality can reduce aggregate demand, erode democratic institutions, and increase social tensions, highlighting the need for policies to address these disparities.
Global Inequality Trends
Global trends in income inequality
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- trends
- changes over time measure income distribution widened in many countries since 1980s (US Gini rose from 0.35 to 0.41)
- Top 1% income share across countries grew significantly doubled in US from 10% to 20% since 1980
- Bottom 50% income share changes declined in many nations bottom half of US earners' share fell from 20% to 12%
- patterns
- Global wealth distribution highly concentrated top 1% own 45% of global wealth
- Ultra-high net worth individuals ($30+ million) grew 46% in past decade to 521,653 people globally
- Wealth-to-income ratios increased substantially France ratio rose from 300% to 600% since 1970
- Regional differences in inequality
- Developed vs developing countries developed nations often have lower inequality (Denmark Gini 0.28) than developing (South Africa Gini 0.63)
- Emerging economies' inequality shifts rapid growth led to rising inequality in China Gini rose from 0.3 to 0.5 since 1980s
- Historical context of inequality trends
- hypothesized inequality rises then falls with economic development not consistently observed
- Great compression and divergence periods US saw compression 1940s-1970s then divergence since 1980s
Key drivers of rising inequality
- Technological change
- increased demand and wages for high-skilled workers
- and job displacement eliminated many middle-skill jobs (manufacturing, clerical)
- Globalization effects
- Offshoring and outsourcing moved production to lower-wage countries reduced manufacturing jobs in developed nations
- put downward pressure on wages for less-skilled workers in developed countries
- Policy and institutional factors
- lowered top marginal tax rates in many countries US cut from 70% to 37% since 1980
- weakened worker protections and bargaining power
- Declining reduced from 35% to 10% of US private sector workers since 1950s
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- Returns to education college graduates earn 80% more than high school graduates on average
- Access to quality education varies greatly by income and location
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- Returns on capital vs labor capital share of income rose while labor share fell in many nations
- Intergenerational wealth transfer reinforces and amplifies existing wealth disparities
Globalization and Inequality Impacts
Globalization vs inequality relationship
- impacts
- Winners and losers from free trade import-competing industries and workers often negatively impacted
- Sectoral shifts in employment manufacturing declined while services grew in many developed economies
- (FDI) effects
- Technology transfer can increase productivity and wages in recipient countries
- in host countries FDI often pays higher wages than local firms creating within-country inequality
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- Capital mobility and tax competition led to declining corporate tax rates globally
- Global financial crises and inequality 2008 crisis disproportionately impacted lower-income groups
- Migration and inequality
- high-skilled workers leave developing countries for better opportunities
- and home country inequality migrant remittances can reduce poverty but also increase inequality
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- Uneven distribution of value added higher-value activities often concentrated in developed countries
- Power dynamics in supply chains large multinational corporations often capture most of the value
Consequences of high inequality
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- Reduced aggregate demand lower-income groups have higher propensity to consume
- Inefficient resource allocation underinvestment in human capital and public goods
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- Intergenerational mobility decline children's outcomes more tied to parental income
- Opportunity hoarding wealthy families secure advantages for their children (elite education, networks)
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- Erosion of democratic institutions wealthy exert disproportionate influence on policy
- Policy capture by elites policies often favor the interests of economic elites
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- Trust in institutions declines as inequality rises
- Social unrest and conflict high inequality associated with increased social tensions and instability
- Health and well-being
- life expectancy gap between rich and poor widening in many countries
- Stress and mental health issues higher rates of depression and anxiety in more unequal societies
- Education outcomes
- wealthy students more likely to complete higher education
- Perpetuation of inequality cycles unequal education reinforces income and wealth disparities
Key Terms to Review (27)
Automation: Automation refers to the use of technology to perform tasks with minimal human intervention. This process can enhance efficiency and productivity across various sectors, including manufacturing, services, and agriculture. As automation technologies evolve, they raise significant implications for job markets and income distribution, potentially widening the gap between those who benefit from these advancements and those who do not.
Brain Drain Phenomenon: The brain drain phenomenon refers to the emigration of highly skilled and educated individuals from their home country to another, often in search of better economic opportunities or living conditions. This movement can lead to significant negative impacts on the home country's economy and development, as it loses valuable human capital that could contribute to growth and innovation.
Capital Accumulation: Capital accumulation refers to the process of increasing the stock of capital assets, such as machinery, buildings, and technologies, which are used to produce goods and services. This process is essential for economic growth, as it enables societies to invest in production capabilities and improve living standards. Understanding capital accumulation helps to explain how wealth is created and distributed, particularly in relation to dependency dynamics and the widening gap in global inequality.
Economic growth impacts: Economic growth impacts refer to the effects that increases in a country's economic output have on various social, environmental, and economic factors. This includes changes in living standards, income distribution, and resource consumption, as well as the overall health of the economy and society. Understanding these impacts helps to assess how growth can either alleviate or exacerbate issues related to inequality and sustainability.
Education and skills gap: The education and skills gap refers to the disparity between the skills that individuals possess and those that are needed by employers in the labor market. This gap can lead to high unemployment rates, underemployment, and economic inequality, as individuals struggle to find jobs that match their qualifications. Addressing this gap is crucial for fostering economic growth and reducing global inequality.
Educational attainment gaps: Educational attainment gaps refer to the differences in the highest level of education achieved among different groups of people, often linked to factors such as socio-economic status, race, or geographic location. These gaps highlight systemic inequalities within societies, affecting individuals' opportunities and potential for economic mobility. The existence of these gaps reveals how certain populations may be marginalized in access to quality education, resulting in long-term implications for income, health, and overall well-being.
Financial Globalization: Financial globalization refers to the increasing interconnectedness and integration of national financial markets and institutions through the cross-border flow of capital, investments, and financial services. This phenomenon has facilitated the rapid movement of funds across countries, allowing for greater investment opportunities and economic growth, but it has also contributed to rising global inequality and economic disparities.
Foreign direct investment: Foreign direct investment (FDI) refers to the investment made by a company or individual in one country in business interests in another country, typically by establishing business operations or acquiring assets. This type of investment is crucial for promoting economic growth and development, as it often involves the transfer of capital, technology, and expertise across borders, directly impacting sustainability and international development efforts.
Gini Coefficient: The Gini Coefficient is a statistical measure used to represent income inequality within a nation or a group, ranging from 0 to 1, where 0 indicates perfect equality and 1 signifies maximum inequality. This metric highlights the distribution of wealth and income, making it essential for understanding economic disparities and guiding policies aimed at achieving equitable growth.
Global labor market competition: Global labor market competition refers to the dynamics of labor supply and demand on a worldwide scale, where workers from different countries vie for job opportunities while companies seek to hire the most cost-effective labor. This competition has significant implications for wages, working conditions, and job security across nations, often leading to inequalities in income and employment. It creates a landscape where skilled and unskilled workers alike must navigate the complexities of a globalized economy that increasingly emphasizes efficiency and profitability.
Global Value Chains: Global value chains (GVCs) refer to the interconnected processes and activities involved in the production of goods and services that span multiple countries. These chains highlight how different stages of production, from raw materials to final products, are distributed across various geographical locations, allowing companies to optimize costs and efficiency. The concept is crucial for understanding patterns of global trade, economic integration, and the factors contributing to global inequality, as it reflects how economic benefits and resources are unevenly distributed across nations and communities.
Globalization: Globalization refers to the interconnectedness and interdependence of countries through trade, investment, technology, and cultural exchange. It influences various aspects of life, including economic development, social relations, and environmental sustainability, shaping how nations collaborate and compete on a global scale.
Health Inequalities: Health inequalities refer to the systematic differences in health status or in the distribution of health resources between different population groups. These disparities are often linked to social, economic, and environmental factors, leading to unequal access to healthcare, differing health outcomes, and significant variations in life expectancy. Addressing these inequalities is crucial for achieving equity in health and ensuring that all individuals have the opportunity to lead healthy lives.
Income Inequality: Income inequality refers to the unequal distribution of income within a population, often illustrated by the gap between the wealthiest individuals and the rest. This disparity can hinder economic growth, exacerbate poverty, and limit access to opportunities for lower-income groups. Addressing income inequality is crucial for fostering inclusive growth and ensuring that economic benefits are more widely shared.
Kuznets Curve Theory: The Kuznets Curve Theory is an economic hypothesis that suggests there is a relationship between economic development and income inequality, typically represented as an inverted U-shape. Initially, as a country's economy grows and industrializes, income inequality tends to increase; however, after reaching a certain level of economic development, it begins to decrease. This theory provides insight into the dynamics of global inequality trends and the causes behind them.
Labor Market Deregulation: Labor market deregulation refers to the reduction or elimination of government regulations governing employment practices, wages, and working conditions. This shift often aims to increase labor market flexibility, enabling employers to hire and fire more easily, adjust wages based on market demands, and reduce costs associated with labor. While proponents argue that it can lead to increased competitiveness and job creation, critics contend that it can exacerbate inequality and undermine workers' rights.
Political Consequences: Political consequences refer to the outcomes or effects that arise from political actions, policies, or events, which can significantly influence governance, social stability, and public opinion. These consequences often manifest in shifts in power dynamics, changes in policy direction, and alterations in the relationship between the government and its citizens. Understanding political consequences is essential for analyzing the impact of global inequality trends and the causes that contribute to such disparities.
Remittances: Remittances are the transfer of money by migrant workers to their home countries, often providing essential financial support to their families and communities. These funds are a crucial source of income for many households, helping to alleviate poverty and improve living standards, while also playing a significant role in the economic development of recipient countries. Remittances can contribute to global inequality trends by creating dependencies on external income and affecting local economies.
Skill-biased technological progress: Skill-biased technological progress refers to the phenomenon where advancements in technology disproportionately benefit skilled workers over unskilled workers, leading to increased income inequality. As new technologies emerge, they often require higher levels of education and specialized skills, which enables skilled workers to command higher wages while leaving unskilled workers at a disadvantage. This dynamic plays a crucial role in shaping labor markets and influencing global inequality trends.
Social cohesion: Social cohesion refers to the strength of relationships and the sense of solidarity among members of a community or society. It encompasses the bonds that unite people, fostering trust, belonging, and collective identity. Social cohesion plays a crucial role in addressing inequality, promoting community resilience, and enhancing overall quality of life.
Social Mobility Effects: Social mobility effects refer to the changes in an individual's or a group's social status, which can be influenced by various factors such as education, income, and family background. These effects are significant as they highlight the disparities in opportunities for upward or downward movement within the social hierarchy, particularly in relation to global inequality trends and their underlying causes.
Tax policy changes: Tax policy changes refer to modifications in the laws and regulations governing taxation, which can impact how individuals and businesses are taxed, as well as how government revenue is generated. These changes can influence economic behavior, redistribute wealth, and affect overall economic growth, thereby playing a crucial role in addressing global inequality trends and their underlying causes.
Technological change: Technological change refers to the process through which new technologies are developed and implemented, resulting in advancements in production methods, services, and communication. This ongoing transformation impacts economic growth, productivity, and social structures, often exacerbating or alleviating issues related to global inequality.
Trade liberalization: Trade liberalization refers to the process of reducing government restrictions on international trade, including tariffs, quotas, and regulations. This approach encourages an open market where goods and services can move more freely between countries, fostering economic growth and development. The impact of trade liberalization can be complex, as it has the potential to reduce global inequality by increasing access to markets but may also exacerbate disparities if certain economies cannot compete effectively.
Union Power: Union power refers to the collective strength and influence that labor unions possess in advocating for workers' rights, negotiating wages, and improving working conditions. This power is rooted in the ability of unions to organize workers, leverage collective bargaining, and engage in political advocacy, which can significantly affect economic inequality and labor relations on a global scale.
Wage Differentials: Wage differentials refer to the variations in wages between different workers, jobs, or industries, often influenced by factors such as education, experience, geographic location, and market demand. Understanding wage differentials is essential for analyzing global inequality trends and causes, as they highlight disparities in income distribution across various sectors and regions, revealing underlying social and economic inequities.
Wealth Inequality: Wealth inequality refers to the unequal distribution of assets among individuals or groups within a society. This disparity can be observed in various forms, such as differences in income, property ownership, investments, and access to resources. Wealth inequality is often connected to broader social and economic issues, including poverty, education disparities, and systemic discrimination, influencing global trends and causes related to inequality.