As growth slows in mature economies across the developed world, economic inequality has reached new heights. Defined in terms of the shares of disposable income of households across the economic spectrum, adjusted for varying needs, inequality today in the United States is significantly higher than it was a generation ago. The same is true in the United Kingdom, and even less laissez-faire countries, such as Germany and Sweden, have seen inequality increase dramatically.
The main reason for the rise in inequality is the explosion in gains accruing to those at the very top of the income distribution. But the circumstances of those at the bottom have contributed, too. According to government calculations, the poverty rate in the United States in 2014 stood some four percentage points higher than it did 40 years earlier. In Germany, poverty, as measured by the EU standard, has risen by nearly half since 2000. Europe as a whole has made little progress in aiding the poor in recent years, despite the EU’s pledge to lift 20 million Europeans out of poverty or social exclusion by 2020.
Global leaders have taken note, and they are worried. U.S. President Barack Obama called rising income inequality “the defining challenge of our time,” and Christine Lagarde, the head of the International Monetary Fund, warned of “the dark shadow it casts across the global economy.” But what officials have not said, by and large, is what they would do about it. Many seem to have resigned themselves to an ever-less-equal world.
The good news is that present levels of inequality are not inevitable. If governments are serious about tackling inequality—and that is a big if—then there are concrete steps they can take. Some of these actions might be controversial and difficult, and they would create losers as well as winners. But they are the best practical way to make a dent in a frustratingly persistent problem.
AN INCOME FOR EVERYONE
The standard explanation of rising inequality centers on supply and demand. Forty technological change, which increases the demand for them. Since demand has grown faster than supply, the premium paid to skilled workers has increased, widening the wage differential between them and their unskilled counterparts. Later, globalization entered the picture, causing jobs for low-educated workers in many places to disappear. The policy prescription that flows from this explanation is for societies to invest more in education and training. Such calls are justified, but there is more to the story.
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