Unequal Incomes and Economic Performance

To: USW District 3 Locals, USW Staff
Date: October 21, 2011
From: Kim Pollock, Research Representative


The Occupy Wall Street Movement currently spreading to cities across the globe raises the question: “What’s wrong with income inequality?” The answer is, “It’s bad for the economy.”

Even if you believe wide income disparities are fair, it’s worth considering whether or not they are bad economics and for instance, whether they hinder recovery from the global economic meltdown. And in fact, the widening gap between the wealthy and everyone else in the United States for example, may be hindering a broader economic recovery, according to a new study by the International Monetary Fund.

The report found that greater income equality positively correlates with stronger economic growth. Released in September, the IMF study concluded that a 10 percent decrease in inequality increased the expected duration of economic growth by 50 percent.

The IMF studied the economic performance of countries around the world between 1950 and 2006 and found that in countries with more income inequality, such as Jordan and Cameroon, the economy more frequently plunged into deeper recessions, while economic growth lasted much longer in more equal societies. On the other hand, greater levels of income equality corresponded more strongly to sustained economic growth than other economic factors, including lower debt levels, according to the report. “Sustainable economic reform,” the authors write, “is possible only when its benefits are widely shared.”

In the US, income inequality has grown over the past four decades and now more closely compares to the income distributions of Russia and Iran than other developed economies.

Some US corporations are already simply adjusting to a society with more rich and poor and a vanishing middle class. The household-goods manufacturer Procter & Gamble, for example, has reduced emphasis on middle-market goods and is focusing instead on luxury and bargain items, according to The Wall Street

Yet mushrooming income inequality isn’t exclusive to the United States; it has risen 0.3 percent every year from the mid-1980s to the mid-2000s across the most advanced industrial nations. Falling incomes for most workers mean Americans don’t spend like before, which means the economy may not be able to fully recover, since consumer spending makes up about two-thirds of total demand. Historically the backbone of the US economy, the erosion of the middle class has made the economy less dynamic warns University of California at Berkeley labor economist and former Clinton-administration labour secretary Robert Reich. The spending of the rich alone is not enough to lead to “a virtuous cycle of more jobs and higher living standards.”

Nobel Prize-winning economist Joseph Stiglitz agrees. “An economy in which most citizens are doing worse year after year – an economy like America’s – is not likely to do well over the long haul,” he wrote recently in Vanity Fair. It’s no use pretending that what has obviously happened hasn’t happened, says Stiglitz. The upper 1 percent of Americans is now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.

“Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin,” Stiglitz observes.

Here in Canada, income inequality is growing even faster than in the US. A Conference Board report published in July showed the richest segment of Canadians have increased their share of national income but poor and middle-income individuals have lost ground since 1993.

Stiglitz points out that an economy in which the lion’s share of wealth is captured by the rich is not likely to perform well. First, he suggests that the economy will provide fewer opportunities for workers and businesses as it comes to concentrate more on luxury goods rather than consumer goods, machinery and equipment. Second, it undermines economic efficiency, for instance by directing too much of society’s resources into luxury-goods production or financial dealing. Third, it means underinvestment in public infrastructure since the rich are paying less in taxes and don’t need the public services that benefit most people.