Mentoring Report On Incomes Inequality Between Developing Countries Submitted in partial fulfillment of requirement of Bachelor of Business Administration (B.B.

A) General

BBA V Semester (Morning) Batch !"##$!"#% Submitted to& (r. Ruchi Singhal Associate )rofessor Submitted b'& Vaishali Rama "#*#%#"#+##

,AGA--A./ -.0R-A. O-A1 MA-AG0M0-. S2/OO1 3A13A, 4 -05 (01/

1

2O-.0-.
S.-O
# ! 6 % : ; + * < #" . .10 )AG0.-O

(eclaration Of Student 2ertificate of nternal Mentor Ac7no8ledgement 2hapter 9 ncome inequalit'

Declaration of Student
.his research 8or7 is m' original 8or7 and it has not been submitted else8here. All care has been ta7en to 7eep this pro=ect error free and sincerel' regret for an' unintended discrepancies that might ha>e crept into this report.

Vaishali Rama "#*#%#"#+##

Certificate of Internal Mentor

Date: ..

!" MS #$#%

IT

M&'

C (C#%(
.his is to certif' that student $ais)ali %ama of BBA (!"##$#%) batch has completed her Mentoring )ro=ect on *Income inequality +etween developing countries, under m' guidance. /er 8or7 is up to m' satisfaction and 8orth appreciation. 8ish her all the best for future endea>ors.

(ame:-ro.ect /uide: Dr. %uc)i Sing)al

&c0nowledgement
ta7e this opportunit' to e?press m' deep sense of gratitude to all b' those sharing 8ho their ha>e contributed and significantl' 7no8ledge

e?perience in the completion of this pro=ect 8or7. 8ould li7e to than7s (r. Ruchi Singhal (Associate )rofessor)4 m' mentor under 8hose able guidance this pro=ect 8as carried out. continuous support and mentoring. than7 her for her

Vaishali Rama

2hapter$# ncome nequalit'

.he causes of income inequalit' can >ar' significantl' b' region4 gender4 education and social status. 0conomists are di>ided as to 8hether income equalit' is ultimatel' positi>e or negati>e and 8hat are the implications of such disparit'. the unequal distribution of household or indi>idual income across the >arious participants in an econom'. ncome inequalit' is often presented as the percentage of income to a percentage of population. @or e?ample4 a statistic ma' indicate that +"A of a countr'Bs income is controlled b' !"A of that countr'Bs residents.
6

t is often associated 8ith the idea of income CfairnessC. t is generall' considered CunfairC if the rich ha>e a disproportional larger portion of a countr'Bs income compared to their population. 0conomic inequalit' (also described as the gap bet8een rich and poor4 income inequalit'4 8ealth disparit'4 or 8ealth and income differences) is the difference bet8een indi>iduals or populations in the distribution of their assets4 8ealth4 or income. .he term t'picall' refers to inequalit' among indi>iduals and groups 8ithin a societ'4 but can also refer to inequalit' among countries. .he issue of economic inequalit' in>ol>es equit'4 equalit' of outcome4 equalit' of opportunit'4 and life e?pectanc'.D#E

Opinions differ on the utilit' of inequalit' and its effects. Some studies ha>e emphasiFed inequalit' as a gro8ing social problem.D!E 5hile some inequalit' promotes in>estment4 too much inequalit' is destructi>e. ncome inequalit' can hinder long term gro8th. Statistical studies comparing inequalit' to 'ear$o>er$'ear economic gro8th ha>e been inconclusi>eG ho8e>er in !"##4 researchers from the nternational Monetar' @und published 8or7 8hich indicated that income equalit' increased the duration of countriesB economic gro8th spells more than free trade4 lo8 go>ernment corruption4 foreign in>estment4 or lo8 foreign debt. 0conomic inequalit' >aries bet8een societies4 historical periods4 economic structures and s'stems (for e?ample4 capitalism or socialism)4 and bet8een indi>idualsB abilities to create
8

8ealth. .he term can refer to cross sectional descriptions of the income or 8ealth at an' particular period4 and to the lifetime income and 8ealth o>er longer periods of time. .here are >arious numerical indices for measuring economic inequalit'. A prominent one is the Gini coefficient4 but there are also man' other methods.

Measurement of inequalit' in the modern 8orld

A stud' entitled C(i>ided 8e Stand& 5h' nequalit' 3eeps RisingH b' the OrganiFation for 0conomic 2o$operation and (e>elopment (O02() reported its conclusions on the causes4 consequences and polic' implications for the ongoing intensification of the e?tremes of 8ealth and po>ert' across its !! member nations (O02( !"##$#!$":). C ncome inequalit' in O02( countries is at its highest le>el for the past half centur'. .he a>erage income of the richest #"A of the population is about nine times that of the poorest #"A across the O02(4 up from se>en times !: 'ears ago.
10

n the Inited States inequalit' has increased further from alread' high le>els. COther traditionall' more egalitarian countries4 such as German'4 (enmar7 and S8eden4 ha>e seen the gap bet8een rich and poor e?pand from : to # in the #<*"s4 to ; to # toda'. A stud' b' the 5orld nstitute for (e>elopment 0conomics Research at Inited -ations Ini>ersit' reports that the richest #A of adults alone o8ned %"A of global assets in the 'ear !""". .he three richest people in the 8orld possess more financial assets than the lo8est %* nations combined. .he combined 8ealth of the C#" million dollar millionairesC gre8 to nearl' J%# trillion in !""*.D#!E According to )oliti@act and others4 the top %"" richest Americans Cha>e more 8ealth than half of all Americans combined. n !""#4 %;A of people in sub$ Saharan Africa 8ere li>ing in e?treme
11

po>ert'. -earl' half of all ndian children are undernourished4 ho8e>er4 e>en among the 8ealthiest fifth one third of children are malnourished. An O?fam nternational report stated that the change in net 8orth of the top #"" 8ealthiest indi>iduals from !"## to !"#! 8as four times more than enough to eliminate global malnutrition in !"#6. O?fam 0?ecuti>e (irector ,erem' /obbs said that C5e can no longer pretend that the creation of 8ealth for a fe8 8ill ine>itabl' benefit the man' 9 too often the re>erse is true.C O>er the t8o decades prior to the onset of the global financial crisis4 real disposable household incomes increased an a>erage of #.+A a 'ear in its 6% member countries. /o8e>er4 the gap bet8een rich and poor 8idened in most nations 9 the O02( =ournalist resource (!"##$":) entitled CGro8ing ncome nequalit' in O02(
12

2ountriesC states that 8ith the e?ceptions of onl' @rance4 ,apan and Spain4 8ages of the #"A best$paid 8or7ers ha>e risen relati>e to those of the #"A least$paid 8or7ers and the differential bet8een the top and bottom #"A >aries greatl' from countr' to countr'& K5hile this ratio is much lo8er in the -ordic countries and in man' continental 0uropean countries4 it rises to around #% to # in srael4 .ur7e' and the Inited States4 to a high of !+ to # in 2hile and Me?ico. Although a discussion e?ists about the recent trends in global inequalit'4 the issue is an'thing but clear4 and this holds true for both the o>erall global inequalit' trend and for its bet8een$ countr' and 8ithin$countr' components. .he e?isting data and estimates suggest a large increase in international (and more generall' inter$macro regional) component bet8een #*!" and #<;". t might ha>e slightl' decreased since
13

that time at the e?pense of increasing inequalit' 8ithin countries

ncome in ndia
ndiaBs per capita income (nominal) is J #!#<4 ran7ed #%!nd in the 8orld4E 8hile its per capita )urchasing po8er parit' ()))) of IS J64;"* is ran7ed #!<th.D!E t is estimated that ndiaBs )er 2apita ncome 8ill register an a>erage gro8th rate of #6A during !"##$!"#! so as to reach J %4!"" b' !"!". n the 'ear !"!" ndiaBs real G() is pro=ected to be at J: trillion4 and per capita -ominal G() at J 64;:". ndiaBs per capita purchasing po8er parit' ()))) 8ill be at J #!4*"" in the 'ear !"!". States of ndia ha>e large disparities. One of the critical problems facing ndiaBs econom' is the sharp and gro8ing regional >ariations among ndiaBs different states and territories in terms of per capita income4 po>ert'4
14

a>ailabilit'

of

infrastructure and socio$economic de>elopment. Although income inequalit' in ndia is relati>el' small (Gini coefficient& 6!.: in 'ear #<<<$ !""")G
D%E

ndiaBs nominal Gini inde? rose to 6;.* in

!"":4 8hile real Gini after ta? remained nearl' flat at 6!.;. (espite significant economic progress4 a quarter of the nationBs population earns less than the go>ernment$specified po>ert' belo8 the po>ert' line in !""%9!"":. threshold of J".%"Lda'. !+.:A of the population 8as li>ing

15

&n

verview of /rowing Income #CD Countries:

Inequalities in Main 1indings

2. T)e +ig picture: inequality on t)e rise in most #CD countries O>er the t8o decades prior to the onset of the global economic crisis4 real disposable household incomes increased b' an a>erage #.+A a 'ear in O02( countries. n a large ma=orit'
16

of them4 ho8e>er4 the household incomes of the richest #"A gre8 faster than those of the poorest #"A4 so 8idening income inequalit'. (ifferences in the pace of income gro8th across household groups 8ere particularl' pronounced in some of the 0nglish$spea7ing countries4 some -ordic countries4 and srael.# n ,apan4 the real incomes of those at the bottom of the income ladder actuall' fell compared 8ith the mid$#<*"s (.able #). n O02( countries toda'4 the a>erage income of the richest #"A of the population is about nine times that of the poorest #"A 9 a ratio of < to #. /o8e>er4 the ratio >aries 8idel' from one countr' to another. t is much lo8er than the O02( a>erage in the -ordic and man' continental 0uropean countries4 but reaches #" to # in tal'4 ,apan4 3orea4 and the Inited

17

3ingdomG around #% to # in srael4 .ur7e'4 and the Inited StatesG and !+ to # in Me?ico and 2hile..he Gini coefficient4 a standard measure of income inequalit' that ranges from " (8hen e>er'bod' has identical incomes) to # (8hen all income goes to onl' one person)4 stood at an a>erage of ".!< in O02( countries in the mid$ #<*"s. B' the late !"""s4 ho8e>er4 it had increased b' almost #"A to ".6#;. Significantl'4 it rose in #+ of the !! O02( countries for 8hich long$term data series are a>ailable (@igure #)4 climbing b' more than % percentage points in @inland4 German'4 srael4 1u?embourg4 -e8 Mealand4 S8eden4 and the Inited States. Onl' .ur7e'4 Greece4 @rance4 /ungar'4 and Belgium recorded no increase or small declines in their Gini coefficients. ncome inequalit' follo8ed different patterns across the O02( countries
18

o>er time(@igure !). t first started to increase in the late #<+"s and earl' #<*"s in some 0nglish$ spea7ing countries4 notabl' the Inited 3ingdom and the Inited States4 but also in srael. @rom the late #<*"s4 the increase in income inequalit' became more 8idespread. .he latest trends in the !"""s sho8ed a 8idening gap bet8een rich and poor not onl' in some of the alread' high inequalit' countries li7e srael and the Inited States4 but also 9 for the first time 9 in traditionall' lo8$inequalit' countries4 such as German'4 (enmar74 and S8eden (and other -ordic countries)4 8here inequalit' gre8 more than an'8here else in the !"""s. At the same time4 2hile4 Me?ico4 Greece4 .ur7e'4 and /ungar' reduced income inequalit' considerabl' 9often from >er' high le>els. .here are thus tentati>e signs of a possible con>ergence of

19

inequalit' le>els to8ards a common and higher a>erage le>el across O02( countries.! ncreases in household income inequalit' ha>e been largel' dri>en b' changes in the distribution of 8ages and salaries4 8hich account for +:A of household incomes among 8or7ing$age adults. 5ith >er' fe8 e?ceptions (@rance4 ,apan4 and Spain)4 the 8ages of the #"A best$paid 8or7ers ha>e risen relati>e to those of the #"A lo8est paid. .his 8as due to both gro8ing earningsN shares at the top and declining shares at the bottom4 although top earners sa8 their incomes rise particularl' rapidl' (At7inson4 !""<). 0arners in the top #"A ha>e been lea>ing the middle earners behind more rapidl' than the lo8est earners ha>e been drifting a8a' from the middle.

20

.able #. "ouse)old incomes increased faster at t)e top .rends in real household income b' income group4 mid$#<*"s to late !"""s
&verage annual c)ange3 in percentages Total population Australia Austria Belgium Canada Chile Czech Republic Denmark Finland France Germany Greece Total decile

Top decile

21

Hungary Ireland Israel Italy Japan Lu emb!urg "e ic! #etherlands #e$ %ealand #!r$ay &!rtugal '$eden (urkey )nited *ingd!m 'pain )nited 'tates

22

mpact on the income distribution in the Inited States through trade and other channels4 such as foreign direct in>estment (@( ) and offshore acti>ities.-e?t to globalisation4 there are4 ho8e>er4 other equall' plausible e?planations for the gro8ing inequalit' in the distribution of mar7et income. .echnological progress in particular is often cited. @or e?ample4 ad>ances in information and communication technolog' ( 2.) are often considered to be s7ill$biased and4 therefore4 an inequalit'$increasing factor. Some
23

studies put the 2. re>olution at the forefront of their e?planation of inequalit'& the M@ (!""+)4 for e?ample4 found that Ktechnological progress had a greater impact than globalisation on inequalit' 8ithin countriesH4 8hile an O02( report (O02(4 !""+) suggests that Ktechnical change is a more po8erful dri>er of increased 8age dispersion than closer trade integrationH. n practice4 ho8e>er4 it is >er' difficult to disentangle technological change from globalisation patterns that also increase the >alue of s7ills. Ad>ances in technolog'4for instance4 lie behind the fragmentation of economic acti>ities and the offshoring of production. As @reeman (!""<) puts it4 Koffshoring and digitalisation go togetherH. @inall'4 polic' choices4 regulations4 and institutions can ha>e a crucial impact. .he'

24

can shape ho8 globalisation and technological changes affect the distribution of income. .he' can also influence income distribution directl'4 e.g. through deregulation in product mar7ets4 changes in social transfers4 8age$ setting mechanisms4 or 8or7ersN bargaining po8er. /o8e>er4 connecting these factors 8ith o>erall earnings inequalit' and household income inequalit' is not straightfor8ard4 as regulator' and polic' reforms ma' ha>e counteracting effects on emplo'ment and 8age inequalit' among 8or7ers. .he empirical e>idence as to the 7e' dri>ers of inequalit' remains largel' inconclusi>e and is made more so b' a lac7 of precise definitions and concepts used in different studies. 5hen assessing the possible causes of increased inequalit'4 three main issues require particularl' precise definition. .he' are&
25

i) inequalit' itself4 ii) globaliFation4 and iii) reference populations. @irst4 use of term Kinequalit'H should clearl' state inequalit' of 8hat and among 8hom. (ifferent income aggregates% and population subgroups 8ill be affected differentl' b' different dri>ing forces. t is useful4 therefore4 to consider the follo8ing concepts& (ispersion of hourl' 8ages among full$time (or full$time equi>alent) 8or7ers. 5age dispersion among 8or7ers (e.g. annual 8ages4 including 8ages from part$time 8or7 or 8or7 during onl' part of the 'ear). ndi>idual earnings inequalit' among all 8or7ers (including the self$emplo'ed). ndi>idual earnings inequalit' among the entire 8or7ing$age population (including those 8ho are inacti>e4 i.e. not 8or7ing).
26

/ousehold earnings inequalit' (including the earnings of all household members). /ousehold mar7et income inequalit' (including incomes from capital4 sa>ings and pri>ate transfers). /ousehold disposable income inequalit' (ta7ing into account public cash transfers recei>ed and direct ta?es paid). /ousehold ad=usted disposable income inequalit' (ta7ing into account the >alues of publicl' pro>ided ser>ices such as health or education).

27

chapter$! @actors impacting economic inequalit'

.here are man' reasons for economic inequalit' 8ithin societies. Recent gro8th in o>erall income inequalit'4 at least 8ithin the O02( countries4 has been dri>en mostl' b' increasing inequalit' in 8ages and salaries. 2ommon factors thought to impact economic inequalit' include& labor mar7et outcomes GlobaliFation
28

technological changes polic' reforms more regressi>e ta?ation computeriFation and increased racial discrimination gender discrimination >ariation in natural abilit'

plutocrac' technolog'

nepotism

.he labor mar7et

A ma=or cause of economic inequalit' 8ithin modern mar7et economies is the determination of 8ages b' the mar7et. Some small part of economic inequalit' is caused b' the differences in the suppl' and demand for different t'pes of 8or7. /o8e>er4 8here competition is imperfectG
29

information une>enl' distributedG opportunities to acquire education and s7ills unequalG and since man' such imperfect conditions e?ist in >irtuall' e>er' mar7et4 there is in fact little presumption that mar7ets are in general efficient. .his means that there is an enormous potential role for go>ernment to correct these mar7et failures. n a purel' capitalist mode of production (i.e. 8here professional and labor organiFations cannot limit the number of 8or7ers) the 8or7ers 8ages 8ill not be controlled b' these organiFations4 or b' the emplo'er4 but rather b' the mar7et. 5ages 8or7 in the same 8a' as prices for an' other good. .hus4 8ages can be considered as a function of mar7et price of s7ill. And therefore4 inequalit' is dri>en b' this price. Inder the la8 of suppl' and demand4 the price of s7ill is determined b' a race bet8een the demand for the s7illed 8or7er and the suppl' of the s7illed
30

8or7er. COn the other hand4 mar7ets can also concentrate 8ealth4 pass en>ironmental costs on to societ'4 and abuse 8or7ers and consumers.C CMar7ets4 b' themsel>es4 e>en 8hen the' are stable4 often lead to high le>els of inequalit'4 outcomes that are 8idel' >ie8ed as unfair. 0mplo'ers 8ho offer a belo8 mar7et 8age 8ill find that their business is chronicall' understaffed. .heir competitors 8ill ta7e ad>antage of the situation b' offering a higher 8age to snatch up the best of their labor. @or a businessman 8ho has the profit moti>e as the prime interest4 it is a losing proposition to offer belo8 or abo>e mar7et 8ages to 8or7ers.D6%E A =ob 8here there are man' 8or7ers 8illing to 8or7 a large amount of time (high suppl') competing for a =ob that fe8 require (lo8 demand) 8ill result in a lo8 8age for that =ob. .his is because competition bet8een 8or7ers
31

dri>es do8n the 8age. An e?ample of this 8ould be =obs such as dish$8ashing or customer ser>ice. 2ompetition amongst 8or7ers tends to dri>e do8n 8ages due to the e?pendable nature of the 8or7er in relation to his or her particular =ob. A =ob 8here there are fe8 able or 8illing 8or7ers (lo8 suppl')4 but a large need for the positions (high demand)4 8ill result in high 8ages for that =ob. .his is because competition bet8een emplo'ers for employees 8ill dri>e up the 8age. 0?amples of this 8ould include =obs that require highl' de>eloped s7ills4 rare abilities4 or a high le>el of ris7. 2ompetition amongst emplo'ers tends to dri>e up 8ages due to the nature of the =ob4 since there is a relati>e shortage of 8or7ers for the particular position. )rofessional and labor organiFations ma' limit the suppl' of 8or7ers 8hich results in higher demand and greater incomes for members.
32

Members ma' also recei>e higher 8ages through collecti>e bargaining4 political influence4 or corruption. .hese suppl' and demand interactions result in a gradation of 8age le>els 8ithin societ' that significantl' influence economic inequalit'. )olariFation of 8ages does not e?plain the accumulation of 8ealth and >er' high incomes among the #A. ,oseph StiglitF belie>es that C t is plain that mar7ets must be tamed and tempered to ma7e sure the' 8or7 to the benefit of most citiFens.

.a?es
Another cause is the rate at 8hich coupled 8ith the progressi>el' of the ta? s'stem. A progressi>e ta? is a ta? b' 8hich the ta? rate increases as the ta?able base amount

33

increases. n a progressi>e ta? s'stem4 the le>el of the top ta? rate 8ill often ha>e a direct impact on the le>el of inequalit' 8ithin a societ'4 either increasing it or decreasing it4 pro>ided that income does not change as a result of the change in ta? regime. Additionall'4 steeper ta? progressi>el' applied to social spending can result in a more equal distribution of income across the board. .he difference bet8een the Gini inde? for an income distribution before ta?ation and the Gini inde? after ta?ation is an indicator for the effects of such ta?ation. .here is debate bet8een politicians and economists o>er the role of ta? polic' in mitigating or e?acerbating 8ealth inequalit'. 0conomists such as )aul 3rugman 4)eter OrsFag4 and 0mmanuel SaeF ha>e argued that ta? polic' in the post 5orld 5ar
34

era has

indeed increased income inequalit' b' enabling the 8ealthiest Americans far greater access to capital than lo8er$income ones.

#ducation
One important factor in the creation of inequalit' is >ariation in indi>idualsB access to education. 0ducation4 especiall' in an area 8here there is a high demand for 8or7ers4 creates high 8ages for those 8ith this education ho8e>er4 increases in education first increase and then decrease gro8th as 8ell as income inequalit'. As a result4 those 8ho are unable to afford an education4 or choose not to pursue optional education4
35

generall' recei>e much lo8er 8ages. .he =ustification for this is that a lac7 of education leads directl' to lo8er incomes4 and thus lo8er aggregate sa>ings and in>estment. n particular4 the increase in famil' income and 8ealth inequalit' leads to greater dispersion of educational attainment4 primaril' because those at the bottom of the educational distribution ha>e fallen further belo8 the a>erage le>el of education. 2on>ersel'4 education raises incomes and promotes gro8th because it helps to unleash the producti>e potential of the poor. (uring the mass high school education mo>ement from #<#"9#<%"4 there 8as an increase in s7illed 8or7ers4 8hich led to a decrease in the price of s7illed labor. /igh school education during the period 8as designed to equip students 8ith necessar' s7ill sets to be able to perform at 8or7. n fact4 it
36

differs from the present high school education4 8hich is regarded as a stepping$stone to acquire college and ad>anced degrees. .his decrease in 8ages caused a period of compression and decreased inequalit' bet8een s7illed and uns7illed 8or7ers. 0ducation is >er' important for the gro8th of the econom'4 ho8e>er educational inequalit' in gender also influence to8ards the econom'. 1agerlof and Galor stated that gender inequalit' in education can result to lo8 economic gro8th4 and continued gender inequalit' in education4 thus creating a po>ert' trap. t is suggested that a large gap in male and female education ma' indicate bac78ardness and so ma' be associated 8ith lo8er economic gro8th4 8hich can e?plain 8h' there is economic inequalit' bet8een countries. More of Barro studies also find that female secondar' education is positi>el' associated
37

8ith gro8th. /is findings sho8 that countries 8ith lo8 female educationG increasing it has little effect on economic gro8th4 ho8e>er in countries 8ith high female education4 increasing it significantl' boosts economic gro8th. More and better education is a prerequisite for rapid economic de>elopment around the 8orld. 0ducation stimulates economic gro8th and impro>es peopleBs li>es through man' channels. B' increasing the efficienc' of the labour force it create better conditions for good go>ernance4 impro>ing health and enhancing equalit'. 1abor mar7et success is lin7ed to schooling achie>ement4 the consequences of 8idening disparities in schooling is li7el' to be further increases in earnings inequalit'

0conomic neoliberal >ie8s

38

,ohn Schmitt and Ben Mipperer (!"";) of the 20)R point to economic liberalism and the reduction of business regulation along 8ith the decline of union membership as one of the causes of economic inequalit'. n an anal'sis of the effects of intensi>e Anglo$American neoliberal policies in comparison to continental 0uropean neoliberalism4 8here unions ha>e remained strong4 the' concluded C.he I.S. economic and social model is associated 8ith substantial le>els of social e?clusion4 including high le>els of income inequalit'4 high relati>e and absolute po>ert' rates4 poor and unequal educational outcomes4 poor health outcomes4 and high rates of crime and incarceration. At the same time4 the a>ailable e>idence pro>ides little support for the >ie8 that I.S.$st'le labor$mar7et fle?ibilit' dramaticall' impro>es labor$mar7et outcomes. (espite popular pre=udices to the
39

contrar'4 the I.S. econom' consistentl' affords a lo8er le>el of economic mobilit' than all the continental 0uropean countries for 8hich data is a>ailable.

Vie8s on globaliFation
.rade liberaliFation ma' shift economic inequalit' from a global to a domestic scale.
D%:E

5hen rich countries trade 8ith poor countries4

the lo8$s7illed 8or7ers in the rich countries ma' see reduced 8ages as a result of the competition4 8hile lo8$s7illed 8or7ers in the poor countries ma' see increased 8ages. .rade economist )aul 3rugman estimates that trade liberaliFation has had a measurable effect on the rising inequalit' in the Inited States. /e attributes this trend to increased trade 8ith poor

40

countries and the fragmentation of the means of production4 resulting in lo8 s7illed =obs becoming more tradable. /o8e>er4 he concedes that the effect of trade on inequalit' in America is minor 8hen compared to other causes4 such as technological inno>ation4 a >ie8 shared b' other e?perts. 1a8rence 3atF estimates that trade has onl' accounted for :$#:A of rising income inequalit'. Robert 1a8rence argues that technological inno>ation and automation has meant that lo8$s7illed =obs ha>e been replaced b' machine labor in 8ealthier nations4 and that 8ealthier countries no longer ha>e significant numbers of lo8$s7illed manufacturing 8or7ers that could be affected b' competition from poor countries.

41

mpact of gender

Median 8ee7l' earnings of full$time 8age and salar' 8or7ers in the ISA4 b' se?4 race4 and ethnicit'4 !""<. n man' countries4 there is a gender income gap 8hich fa>ors males in the labor mar7et. @or e?ample4 the median full$time salar' for I.S. 8omen is ++A of that of I.S. men. Se>eral factors other than discrimination ma' contribute to this gap. On a>erage4 8omen are more li7el' than men to consider factors other than pa' 8hen loo7ing for 8or74 and ma' be less 8illing to tra>el or relocate. .homas So8ell4 in his

42

boo7 3no8ledge and (ecisions4 claims that this difference is due to 8omen not ta7ing =obs due to marriage or pregnanc'4 but income studies sho8 that that does not e?plain the entire difference. A I.S. 2ensusBs report stated that in IS once other factors are accounted for there is still a difference in earnings bet8een 8omen and men. .he income gap in other countries ranges from :6A in Bots8ana to $%"A in Bahrain. Gender inequalit' and discrimination is argued to cause and perpetuate po>ert' and >ulnerabilit' in societ' as a 8hole. Gender 0quit' ndices see7 to pro>ide the tools to demonstrate this feature of equit'.

(e>elopment patterns

43

A 3uFnets cur>e 0conomist Simon 3uFnets argued that le>els of economic inequalit' are in large part the result of stages of de>elopment. According to 3uFnets4 countries 8ith lo8 le>els of de>elopment ha>e relati>el' equal distributions of 8ealth. As a countr' de>elops4 it acquires more capital4 8hich leads to the o8ners of this capital ha>ing more 8ealth and income and introducing inequalit'. 0>entuall'4 through >arious possible redistribution mechanisms such as social 8elfare programs4 more de>eloped countries mo>e bac7 to lo8er le>els of inequalit'. )lotting the relationship bet8een le>el of income and
44

inequalit'4 3uFnets sa8 middle$income de>eloping economies le>el of inequalit' bulging out to form 8hat is no8 7no8n as the 3uFnets cur>e. 3uFnets demonstrated this relationship using cross$sectional data. /o8e>er4 more recent testing of this theor' 8ith superior panel data has sho8n it to be >er' 8ea7. 3uFnetsB cur>e predicts that income inequalit' 8ill e>entuall' decrease gi>en time. As an e?ample4 income inequalit' did fall in the Inited States during its /igh School Mo>ement in the #<%"s and after. /o8e>er4 recent data sho8s that the le>el of income inequalit' began to rise after the #<+"s. .his does not necessaril' dispro>e 3uFnetsB theor'. t ma' be possible that another 3uFnetsB c'cle is occurring4 specificall' the mo>e from the manufacturing sector to the ser>ice sector. .his implies that it ma' be possible for

45

multiple 3uFnetsB c'cles to be in effect at an' gi>en time.

(i>ersit' of preferences
Related to cultural issues4 di>ersit' of preferences 8ithin a societ' ma' contribute to economic inequalit'. 5hen faced 8ith the choice bet8een 8or7ing harder to earn more mone' or en=o'ing more leisure time4 equall' capable indi>iduals 8ith identical earning potential ma' choose different strategies. .he trade$off bet8een 8or7 and leisure is particularl' important in the suppl' side of the labor mar7et in labor economics.

46

1i7e8ise4 indi>iduals in a societ' often ha>e different le>els of ris7 a>ersion. 5hen equall'$ able indi>iduals underta7e ris7' acti>ities 8ith the potential of large pa'offs4 such as starting ne8 businesses4 some >entures succeed and some fail. .he presence of both successful and unsuccessful >entures in a societ' results in economic inequalit' e>en 8hen all indi>iduals are identical.

5ealth concentration
5ealth concentration is a theoretical process b' 8hich4 under certain conditions4 ne8l' created 8ealth concentrates in the possession of alread'$8ealth' indi>iduals or entities. According to this theor'4 those 8ho alread' hold 8ealth ha>e the means to in>est in ne8 sources of creating 8ealth or to other8ise le>erage the

47

accumulation of 8ealth4 thus are the beneficiaries of the ne8 8ealth. O>er time4 8ealth condensation can significantl' contribute to the persistence of inequalit' 8ithin societ'.

Rent$see7ing
0conomist ,oseph StiglitF argues that rather than e?plaining concentrations of 8ealth and income4 mar7et forces should ser>e as a bra7e on such concentration4 8hich ma' better be e?plained b' the non$mar7et force 7no8n as Crent$see7ingC. 5hile the mar7et 8ill bid up compensation for rare and desired s7ills to re8ard 8ealth creation4 greater producti>it'4 etc.4 it 8ill also pre>ent successful entrepreneurs from earning e?cess profits b' fostering

48

competition to cut prices4 profits and large compensation.D:#E A better e?plainer of gro8ing inequalit'4 according to StiglitF4 is the use of political po8er generated b' 8ealth b' certain groups to shape go>ernment policies financiall' beneficial to them. .his process4 7no8n to economists as rent$see7ing4 brings income not from creation of 8ealth but from Cgrabbing a larger share of the 8ealth that 8ould other8ise ha>e been produced 8ithout their effort Rent see7ing is often thought to be the pro>ince of societies 8ith 8ea7 institutions and 8ea7 rule of la84 but StiglitF belie>es there is no shortage of it in de>eloped societies such as the Inited States. 0?amples of rent see7ing leading to inequalit' include the obtaining of public resources b' Crent$collectorsC at belo8 mar7et prices (such as granting public land to

49

railroads4 or selling mineral resources for a nominal price in the IS)4 selling ser>ices and products to the public at abo>e mar7et prices (Medicare drug benefit in the IS that prohibits go>ernment from negotiating prices of drugs 8ith the drug companies4 costing the IS go>ernment an estimated J:" billion or more per 'ear)4 securing go>ernment tolerance of monopol' po8er (.he richest person in the 8orld in !"##4 2arlos Slim4 controlled Me?icoBs ne8l' pri>atiFed telecommunication industr'. Since rent see7ing aims to Cpluc7 the goose to obtain the largest amount of feathers 8ith the least possible amount of hissingC 9 it is b' nature obscure4 a>oiding public spotlight in legal fine print4 or camouflaged its e?traction 8ith 8idel' accepted rationaliFations (mar7ets are naturall'

50

competiti>e and so need no go>ernment regulation against monopolies.

#ffects of inequality
Among the effects of inequalit' researchers ha>e found include higher rates of health and social problems4 and lo8er rates of social goods4 a lo8er le>el of economic utilit' in societ' from resources de>oted on high$end consumption4 and e>en a lo8er le>el of economic gro8th 8hen human capital is neglected for high$end consumption.

51

!"#6 0conomics -obel priFe 8inner Robert ,. Shiller said that rising inequalit' in the Inited States and else8here is the most important problem.D+!E ncreasing inequalit' harms economic gro8th. /igh and persistent unemplo'ment4 in 8hich inequalit' increases4 has a negati>e effect on subsequent long$run economic gro8th. Inemplo'ment can harm gro8th not onl' because it is a 8aste of resources4 but also because it generates redistributi>e pressures and subsequent distortions4 dri>es people to po>ert'4 constrains liquidit' limiting labor mobilit'4 and erodes self$ esteem promoting social dislocation4 unrest and conflict. )olicies aiming at controlling unemplo'ment and in particular at reducing its inequalit'$associated effects support economic gro8th.

52

"ealt) and social co)esion

British researchers Richard G. 5il7inson and 3ate )ic7ett ha>e found higher rates of health and social problems (obesit'4 mental illness4 homicides4 teenage births4 incarceration4 child conflict4 drug use)4 and lo8er rates of social goods (life e?pectanc'4 educational performance4 trust among strangers4 8omenBs status4 social mobilit'4 e>en numbers of patents issued) in countries and states 8ith higher inequalit'. Ising statistics from !6 de>eloped countries and the :" states of the IS4 the' found socialLhealth problems lo8er in countries li7e ,apan and @inland and states li7eItah and -e8 /ampshire 8ith high le>els of equalit'4 than in countries (IS and I3) and states (Mississippi and -e8 Oor7) 8ith large differences in household income.

53

ncome inequalit' and mortalit' in !*! metropolitan areas of the Inited States. Mortalit' is strongl' associated 8ith higher income inequalit'4 but4 8ithin le>els of income inequalit'4 not 8ith per capita income. @or most of human histor' higher material li>ing standards 9 full stomachs4 access to clean 8ater and 8armth from fuel 9 led to better health and longer li>es. .his pattern of higher incomes$ longer li>es still holds among poorer countries4 8here life e?pectanc' increases rapidl' as per
54

capita income increases4 but in recent decades it has slo8ed do8n among middle income countries and plateaued among the richest thirt' or so countries in the 8orld.E Americans li>e no longer on a>erage (about ++ 'ears in !""%) than Gree7s (+* 'ears) or -e8 Mealanders (+*)4 though the ISA is almost t8ice as rich. 1ife e?pectanc' in S8eden (*" 'ears) and ,apan (*!) 9 8here income 8as more equall' distributed 9 8as longer. n recent 'ears the characteristic that has strongl' correlated 8ith health in de>eloped countries is income inequalit'. 2reating an inde? of C/ealth and Social )roblemsC from nine factors4 authors Richard 5il7inson and 3ate )ic7ett found health and social problems Cmore common in countries 8ith bigger income inequalitiesC4 and more common among states in the IS 8ith larger income inequalities. Other
55

studies ha>e confirmed this relationship. .he I- 20@ inde? of Cchild 8ell$being in rich countriesC4 stud'ing %" indicators in !! countries4 correlates 8ith greater equalit' but not per capita income. )ic7ett and 5il7inson argue that inequalit' and social stratification lead to higher le>els of ps'chosocial stress and status an?iet' 8hich can lead to depression4 chemical dependenc'4 less communit' life4 parenting problems and stress$related diseases.

Social co)esion
Research has sho8n an in>erse lin7 bet8een income inequalit' and social cohesion. n more equal societies4 people are much more li7el' to trust each other4 measures of social capital (the benefits of good8ill4 fello8ship4 mutual s'mpath' and social connectedness
56

among groups 8ho ma7e up a social units) suggest greater communit' in>ol>ement4 and homicide rates are consistentl' lo8er. 2omparing results from the question C8ould others ta7e ad>antage of 'ou if the' got the chancePC in I.S General Social Sur>e' and statistics on income inequalit'4 0ric Islaner and Mitchell Bro8n found there is a high correlation bet8een the amount of trust in societ' and the amount of income equalit'.EA !""* article b' Andersen and @etner also found a strong relationship bet8een economic inequalit' 8ithin and across countries and tolerance for 6: democracies. n t8o studies Robert )utnam established lin7s bet8een social capital and economic inequalit'. /is most important studies established these lin7s in both the Inited States and in tal'. /is e?planation for this relationship is that
57

2ommunit' and equalit' are mutuall' reinforcing... Social capital and economic inequalit' mo>ed in tandem through most of the t8entieth centur'. n terms of the distribution of 8ealth and income4 America in the #<:"s and #<;"s 8as more egalitarian than it had been in more than a centur'... D.Ehose same decades 8ere also the high point of social connectedness and ci>ic engagement. Record highs in equalit' and social capital coincided. 2on>ersel'4 the last third of the t8entieth centur' 8as a time of gro8ing inequalit' and eroding social capital... .he timing of the t8o trends is stri7ing& some8here around #<;:9+" America re>ersed course and started becoming both less =ust economicall' and less 8ell connected sociall' and politicall'. Albre7t 1arsen has ad>anced this e?planation b' a comparati>e stud' of ho8 trust increased in
58

(enmar7 and S8eden in the latter part of the !"th centur' 8hile it decreased in the IS and I3. t is argued that inequalit' le>els influence ho8 citiFens imagine the trust8orthiness of fello8 citiFens. n this model social trust is not about relations to people 'ou meet (as in )utnamBs model) but about people 'ou imagine. .he economist ,oseph StiglitF has argued that economic inequalit' has led to distrust of business and go>ernment.

Crime
2rime rate has also been sho8n to be correlated 8ith inequalit' in societ'. Most studies loo7ing into the relationship ha>e concentrated on homicides 9 since homicides are almost identicall' defined across all nations and =urisdictions. .here ha>e been o>er fift' studies sho8ing tendencies for >iolence to be more
59

common in societies 8here income differences are larger. Research has been conducted comparing de>eloped countries 8ith unde>eloped countries4 as 8ell as stud'ing areas 8ithin countries. (al' et al. !""#found thatamong I.S States and 2anadian )ro>inces there is a tenfold difference in homicide rates related to inequalit'. .he' estimated that about half of all >ariation in homicide rates can be accounted for b' differences in the amount of inequalit' in each pro>ince or state. @a=nF'lber et al. (!""!) found a similar relationship 8orld8ide. Among comments in academic literature on the relationship bet8een homicides and inequalit' are& .he most consistent finding in cross$national research on homicides has been that of a positi>e association bet8een income inequalit' and homicides.

60

0conomic inequalit' is positi>el' and significantl' related to rates of homicide despite an e?tensi>e list of conceptuall' rele>ant controls. .he fact that this relationship is found 8ith the most recent data and using a different measure of economic inequalit' from pre>ious research4 suggests that the finding is >er' robust.

Social3 cultural3 and civic participation

/igher income inequalit' led to less of all forms of social4 cultural4 and ci>ic participation among the less 8ealth' 5hen inequalit' is higher the poor do not shift to less e?pensi>e forms of participation.

4tility3 economic welfare3 and distri+utive efficiency

61

@ollo8ing the utilitarian principle of see7ing the greatest good for the greatest number 9 economic inequalit' is problematic. A house that pro>ides less utilit' to a millionaire as a summer home than it 8ould to a homeless famil' of fi>e4 is an e?ample of reduced Cdistributi>e efficienc'C 8ithin societ'4 that decreases marginal utilit' of 8ealth and thus the sum total of personal utilit'. An additional dollar spent b' a poor person 8ill go to things pro>iding a great deal of utilit' to that person4 such as basic necessities li7e food4 8ater4 and healthcareG 8hile4 an additional dollar spent b' a much richer person 8ill >er' li7el' go to lu?ur' items pro>iding relati>el' less utilit' to that person. .hus4 the marginal utilit' of 8ealth per person (Cthe additional dollarC) decreases as a person becomes richer. @rom this standpoint4 for an' gi>en amount of 8ealth in societ'4 a societ' 8ith more equalit' 8ill ha>e higher
62

aggregate utilit'. Some studies ha>e found e>idence for this theor'4 noting that in societies 8here inequalit' is lo8er4 population$8ide satisfaction and happiness tend to be higher. 0conomist Arthur 2ecil )igou argues that ... it is e>ident that an' transference of income from a relati>el' rich man to a relati>el' poor man of similar temperament4 since it enables more intense 8ants4 to be satisfied at the e?pense of less intense 8ants4 must increase the aggregate sum of satisfaction. .he old Cla8 of diminishing utilit'C thus leads securel' to the proposition& An' cause 8hich increases the absolute share of real income in the hands of the poor4 pro>ided that it does not lead to a contraction in the siFe of the national di>idend from an' point of >ie84 8ill4 in general4 increase economic 8elfare.

63

2onser>ati>e economist SchmidtF argues that ma?imiFing the sum of indi>idual utilities 8ill harm incenti>es to produce. A societ' that ta7es ,oe RichNs second unit Dof cornE is ta7ing that unit a8a' from someone 8ho has nothing better to do than plant it and gi>ing it to someone 8ho . . . does ha>e something better to do 8ith it. .hat sounds good4 but in the process4 the societ' ta7es seed corn out of production and di>erts it to food4 thereb' cannibaliFing itself. /o8e>er4 in addition to the diminishing marginal utilit' of unequal distribution4 )igou and others point out that a C7eeping up 8ith the ,onesesC effect among the 8ell off ma' lead to greater inequalit' and use of resources for no greater return in utilit'.a larger proportion of the satisfaction 'ielded b' the incomes of rich people comes from their relati>e4 rather than
64

from their absolute4 amount. .his part of it 8ill not be destro'ed if the incomes of all rich people are diminished together. .he loss of economic 8elfare suffered b' the rich 8hen command o>er resources is transferred from them to the poor 8ill4 therefore4 be substantiall' smaller relati>el' to the gain of economic 8elfare to the poor than a consideration of the la8 of diminishing utilit' ta7en b' itself suggests. 5hen the goal is to o8n the biggest 'acht 9 rather than a boat 8ith certain features 9 there is no greater benefit from o8ning #"" metre long boat than a !" m one as long as it is bigger than 'our ri>al. 0conomist Robert /. @ran7 compare the situation to that of male el7s 8ho use their antlers to spar 8ith other males for mating rights. .he pressure to ha>e bigger ones than 'our ri>als leads to an arms race that consumes
65

resources that could ha>e been used more efficientl' for other things4 such as fighting off disease. As a result4 e>er' male ends up 8ith a cumbersome and e?pensi>e pair of antlers4 ... and Clife is more miserable for bull el7 as a group.

#conomic incentives
Man' people accept inequalit' as a gi>en4 and argue that an increased gap bet8een rich and poorincreases incenti>es for competition and inn o>ation 8ithin the 8orld econom'. Some modern economic theories4 such as the neoclassical school4 ha>e suggested that a functioning econom' entails a certain le>el of unemplo'ment. .hese theories argue that unemplo'ment benefits must be belo8 the 8age le>el to pro>ide an incenti>e to 8or74 thereb' mandating inequalit'. Such theories
66

state additionall' that the unemplo'ment rate cannot reduce to Fero. Man' economists belie>e that one of the main reasons that inequalit' might induce economic incenti>e is because material 8ell$being and conspicuous consumption relate to status. n this >ie84 high stratification of income (high inequalit') creates high amounts of social stratification4 leading to greater competition for status. One of the first 8riters to note this relationship4 Adam Smith4 recogniFed CregardC as one of the ma=or dri>ing forces behind economic acti>it'. @rom The Theory of Moral Sentiments in #+:<&5hat is the end of a>arice and ambition4 of the pursuit of 8ealth4 of po8er4 and pre$eminenceP s it to suppl' the necessities of natureP .he 8ages of the meanest labourer can suppl' them.5h' should those 8ho ha>e been educated in the higher
67

ran7s of life4 regard it as 8orse than death4 to be reduced to li>e4 e>en 8ithout labour4 upon the same simple fare 8ith him4 to d8ell under the same lo8l' roof4 and to be clothed in the same humble attireP @rom 8hence4 then4 arises that emulation 8hich runs through all the different ran7s of men4 and 8hat are the ad>antages 8hich 8e propose b' that great purpose of human life 8hich 8e call bettering our conditionP .o be obser>ed4 to be attended to4 to be ta7en notice of 8ith s'mpath'4 complacenc'4 and approbation4 are all the ad>antages 8hich 8e can propose to deri>e from it. t is the >anit'4 not the ease4 or the pleasure4 8hich interests us Modern sociologists and economists such as ,uliet Schor and Robert /. @ran7 ha>e studied the e?tent to 8hich economic acti>it' is fueled b' the abilit' of consumption to represent social status. Schor4 in The Overspent
68

American4 argues that the increasing inequalit' during the #<*"s and #<<"s strongl' accounts for increasing aspirations of income4 increased consumption4 decreased sa>ings4 and increased debt. n the boo7 Luxury Fever4 Robert /. @ran7 argues that satisfaction 8ith le>els of income is much more strongl' affected b' ho8 someoneBs income compares 8ith others than its absolute le>el. @ran7 gi>es the e?ample of instructions to a 'acht architect b' a customer 9 shipping magnateSta>ros -iarchos 9 to ma7e -iarchosB ne8 'acht :" feet longer than that of ri>al magnate Aristotle Onassis. -iarchos did not specif' or reportedl' e>en 7no8 the e?act length of OnassisBs 'acht.

Inequality and economic growt)

69

n the #<;"s4 economist Arthur Mel>in O7un argued that pursuing equalit' could reduce efficienc' (the total output produced 8ith gi>en resources) b' reducing incenti>es to 8or74 sa>e4 and in>est and through the Klea7' buc7etH of 8asteful go>ernment efforts to redistribute (such as a progressi>e ta? code and minimum 8ages). Some resources K8ill simpl' disappear in transit4 so the poor 8ill not recei>e all the mone' that is ta7en from the richH. Along the same lines4 earlier 8riters had argued that 8ealthier indi>iduals sa>e proportionall' more of their incomes4 so that more inequalit' 8ould lead to higher o>erall sa>ings and thus capital accumulation and gro8th.

Cross5country evidence
Man' authors ha>e empiricall' e?amined the relationship bet8een economic gro8th and income inequalit' in a large group of countries.
70

@ollo8ing the broader economic gro8th literature4 the t'pical approach 8as to relate countriesB real G() per capita gro8th o>er a long period of time (e.g.4 #<;: through #<<") to the income distribution at the start of the period4 simultaneousl' ta7ing into account other standard determinants such as the initial le>el of real G() per capita. A t'pical conclusion 8as that more unequal countries tend to gro8 slo8er (Alesina and Rodri74 #<<%)4 though the e>idence 8as contested. Because of general dissatisfaction 8ith the empirical approach4 including difficulties in determining causalit' and capturing countr'$ specific factors4 attention turned to the anal'sis of ho8 changes in the income distribution affected the gro8th rate in subsequent time period (usuall' fi>e 'ears) in a large group of countries. @orbes (!""") found that an increase
71

in inequalit' tends to raise gro8th during the subsequent period. .his literature did not go too far as Baner=ee and (uflo (!""6) found a comple? relationship bet8een inequalit' and gro8th4 in 8hich changes in inequalit' in either direction lo8ered gro8th subsequentl'.D+E .he' interpreted this finding as supporting the notion that redistribution hurts gro8th4 at least o>er the short$ to medium$run4 but also cautioned about interpreting income distribution$economic gro8th anal'sis of this t'pe. n recent 'ears4 the economic gro8th literature has recogniFed that gro8th in most countries does not follo8 a smooth path4 but is characteriFed b' sharp turning points 9 periods of sustained gro8th and stagnation. .he interesting empirical questions4 then4 are about the determinants of the turning points ()ritchett4 !""").
72

Along these lines4 Andre8 Berg and ,onathan (. Ostr' (!"##) e?amined the question of 8hat sustains long periods of strong gro8th4 and found that one of the most robust and important determinants is the le>el of income inequalit'. n particular4 the' found that high Bgro8th spellsB 8ere much more li7el' to end in countries 8ith less equal income distribution4 and that the measured effect 8as large. @or e?ample4 the' estimate that closing half the inequalit' gap bet8een 1atin America and emerging Asia 8ould more than double the e?pected duration of a Bgro8th spell.B .heir findings 8ere robust to the inclusion of other >ariables in the model4 and to alternate definitions of gro8th spells. According to their stud'4 8hich has featured prominentl' in the financial press4 inequalit' is of course not the onl' thing that matters but it clearl' belongs in the CpantheonC of 8ell$
73

established gro8th factors such as the qualit' of political institutions or trade openness.

Ostr' and Berg (!"##) stud' the factors affecting the duration of economic gro8th in de>eloped and de>eloping countries4 and find that income equalit' has a more beneficial impact than trade openness4 sound political institutions4 and foreign in>estment. Berg and Ostr' postulate that high le>els of inequalit' might damage long term gro8th b' amplif'ing the potential for financial crisis4 discouraging in>estment because of political instabilit'4 ma7ing it more difficult for go>ernments to ma7e difficult choices (such as raising ta?es or cutting public e?penditure) in the
74

face of shoc7s4 or b' discouraging in>estment in education and health for the poor.

Comparisons wit) t)e 4nited States

0conomic sociologist 1ane 3en8orth' has found no correlation bet8een le>els of inequalit' and economic gro8th among de>eloped countries4 among states of the IS4 or in the IS o>er the 'ears from #<%+ to !"":. -or did ,ared Bernstein find a correlation4 plotting 'earl' real G() gro8th and the share of income going to the top #A4 #<!<9!"#".

Mec)anisms
According to economist Bran7o Milano>ic4 8hile traditionall' economists thought inequalit' 8as good for gro8th

75

C.he >ie8 that income inequalit' harms gro8th 9 or that impro>ed equalit' can help sustain gro8th 9 has become more 8idel' held in recent 'ears. .he main reason for this shift is the increasing importance of human capital in de>elopment. 5hen ph'sical capital mattered most4 sa>ings and in>estments 8ere 7e'. .hen it 8as important to ha>e a large contingent of rich people 8ho could sa>e a greater proportion of their income than the poor and in>est it in ph'sical capital. But no8 that human capital is scarcer than machines4 8idespread education has become the secret to gro8th. CBroadl' accessible educationC is both difficult to achie>e 8hen income distribution is une>en and tends to reduce Cincome gaps bet8een s7illed and uns7illed labor.C A stud' b' )erotti (#<<;) e?amines of the channels through 8hich inequalit' ma' affect
76

economic gro8th. /e sho8s that in accordance 8ith the credit mar7et imperfection approach4 inequalit' is associated 8ith lo8er le>el of human capital formation (education4 e?perience4 apprenticeship) and higher le>el of fertilit'4 8hile lo8er le>el of human capital is associated 8ith lo8er gro8th and lo8er le>els of economic gro8th. n contrast4 his e?amination of the political econom' channel refutes the political econom' mechanism. /e demonstrates that inequalit' is associated 8ith lo8er le>els of ta?ation4 8hile lo8er le>els of ta?ation4 contrar' to the theories4 are associated 8ith lo8er le>el of economic gro8th .he credit mar7et b' imperfection and approach4 (#<<6)4 de>eloped Galor Meira

demonstrates that inequalit' in the presence of credit mar7et imperfections has a long lasting

77

detrimental effect on human capital formation and economic de>elopment. .he political econom' approach4 de>eloped b' Alesian and Rodri7 (#<<%) and )ersson and .abellini (#<<%)4 argues that inequalit' is harmful for economic de>elopment because inequalit' generates a pressure to adopt redistributi>e policies that ha>e an ad>erse effect on in>estment and economic gro8th. .he so>ereign$debt economic problems of the late t8ent'$ought do not seem to be correlated to redistribution policies in 0urope. 5ith the e?ception of reland4 the countries at ris7 of default in !"## (Greece4 tal'4 Spain4 )ortugal) 8ere notable for their high Gini$measured le>els of income inequalit' compared to other 0uropean countries. As measured b' the Gini inde?4 Greece as of !""* had more income

78

inequalit' German'.

than

the

economicall'

health'

Inequality and )ousing

A number of researchers ((a>id Rodda4 ,acob Vigdor4 ,anna Matlac74 and ,acob Vigdor)4 argue that a shortage of affordable housing 9 at least in the IS 9 is caused in part b' income inequalit'. (a>id Rodda noted that from #<*% and #<<#4 the number of qualit' rental units decreased as the demand for higher qualit' housing increased (Rhoda older #<<%&#%*). .hrough gentrification of

neighborhoods4 for e?ample4 in 0ast -e8 Oor74 rental prices increased rapidl' as landlords found ne8 residents 8illing to pa' higher mar7et rate for housing and left lo8er income families
79

8ithout rental units. .he ad >alorem propert' ta? polic' combined 8ith rising prices made it difficult or impossible for lo8 income residents to 7eep pace.

&spirational consumption and )ouse)old ris0

@irstl'4 certain costs are difficult to a>oid and are shared care. f b' e>er'one4 such not as the costs these of housing4 pensions4 education and health the state does pro>ide ser>ices4 then for those on lo8er incomes4 the costs must be borro8ed and often those on lo8er incomes are those 8ho are 8orse equipped to manage their finances. Secondl'4 aspiration consumption describes the process of middle income earners aspiring to achie>e the standards of li>ing en=o'ed b' their 8ealthier counterparts and one method of achie>ing this
80

aspiration is b' ta7ing on debt. .he result leads to e>en greater inequalit' and potential economic instabilit'.

81