The report published recently by the Paris School of Economics measures income and wealth inequality around the world and reveals the high share of total income accounted for by the top earners, reflecting a very worrying situation. The report notes that the top 1% of earners worldwide captured 27% of total income growth since 1980 (net of inflation), while the bottom 50% captured only 12% of income growth over the same period. The world’s reference points have definitely changed over this period. Individual country income-inequality trajectories are sometimes even more stark, but inequality in Europe has remained relatively stable since 1980.
Income distribution inequality raises a number of questions, particularly the challenge of achieving strong and sustainable growth. If growth only benefits a very small minority, then our aims cannot merely be restricted to growth at any price. The trickle-down theory whereby the poor derive benefits when the rich get richer is clearly not working, so it is vital to come up with different targets and mechanisms alongside growth to ensure a more balanced society. Continue reading
This graph illustrates an article by David Leonhardt (NY Times) on the US income distribution.
It shows how the income distribution has changed between 1980 and 2014.
In 1980, there was a catch-up effect for low incomes. Their growth rate was higher than the average and higher than high incomes. For the lowest 20%, the 1980 income growth was higher than the average (2.5% inflation adjusted growth)
In 2014, every percentile has an income growth that is lower than percentiles higher on the distribution. There is no more catch-up but divergence.
For the highest 20%, the 2014 income growth was higher than the average (1.4% inflation adjusted growth).
The proposal made by Donald Trump and the Republicans to lower tax rates would accentuate the divergence of the income distribution. It would be negative for the economy.
« Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough. »
This morning, Tuesday, I was at a meeting in Juan les pins in the south of France. It took place at the villa where Scott and Zelda Fitzgerald lived at the beginning of the 1920s’. The meeting was organized by the Caisse d’Epargne Côte d’Azur and the Caisse d’Epargne Provence Alpes Corse (two important banks in the BPCE banking network)
For an economist, Scott Fitzgerald was the author of “The Great Gatsby” a book on the American bourgeoisie with the character of Gatsby who was immensely rich.
In 2012, Alan B. Krueger was the head of the Council of Economic Advisers of Barak Obama. In a speech he spoke of the Gatsby curve. The source of this curve was a paper written by Miles Corak.
This curve reflects a link between income inequality and intergenerational mobility. The question asked is the relation between income inequality and the possibility for a generation to have an income that could be independent from the previous one.
In other words, do higher income inequalities imply a stronger social rigidity between generations? If this is the case then depending on where you’re born is major to your life profile. Your income will be dependent on your parents’ income and your possibility to move along the social ladder is reduced.
Therefore, a policy that fights income inequalities can increase the social mobility, increasing the capacity for everyone to define his own trajectory.
The graph below comes from Corak’s paper. The relation between income inequalities and intergenerational mobility can be understood as: more income inequalities are consistent with weaker intergenerational mobility. Nordic countries have low income inequalities and every citizen’s trajectory is dependent on himself and not on the situation of the previous generation. This is clearly not the case in Latin America.