With income inequality at its worst in the US since the 1920s and President Barack Obama calling widening income inequality the “defining challenge of our time,” there has been an expansive push to address the issue.
In a new report, Causes and Consequences of Income Inequality: A Global Perspective, the IMF aims to show why policymakers need to focus more on the poor and the middle class, determined that income inequality and income distribution matter for growth and its sustainability in a country.
To blame for the rising inequalities are a few different factors, which differ whether in emerging markets or developed economies. Technological progress that led to higher salaries and resulted in some labour market declines, is a big factor in both types of economies and globalization has also reinforced the trend.
It also found that when the income share of the top 20% increases, the country’s GDP declines over the medium term. On the other hand, GDP growth is associated with income increase among the poorest 20% of the population.
Yet globally, the top 1% has experienced the largest gains, according to the report. That group now accounts for about 10% of total income in developed economies, while poverty has increased in those countries. And while it is hard to find exact percentages for emerging markets, the little data available indicates that the top incomes have risen in China — where more than one-third of the country’s wealth is concentrated in the top 1% — and in India.
One of the reasons for this phenomenon is that corporate profits often translate into extremely high executive salaries, in both advanced and large emerging economies.
Yet despite the fact that the top 1% got richer everywhere, poverty in emerging countries has been declining and poverty in advanced countries has largely risen. When using the method of comparing the earnings of the 90th percentile to the earning of the 10th percentile, inequality grew most in the US and the UK.
The report also distinguishes between inequality of outcomes and inequality of opportunities. To determine inequality of outcomes, it looked mostly at wealth and income disparities. And to determine inequality of opportunities it looked at health, education, and human-development outcomes by income group, and assessed access to those basic services and opportunities.
The report found out that inequality in health outcomes was much more present in the emerging economies compared to advanced ones, but that inequality in healthcare access was more widespread in developed countries.
The report then assess that, no matter whether in emerging or developed economies, better social policies, which include access to education and health and make sure that the poor have a certain level of protection vis-a-vis labour market institutions.