Why inequality is rising

Why wealth inequality is rising and why this is terrible news

Wealth inequality is rising in the world and the trend is not being bucked, but is actually gathering pace. If we continue like this, the world we will be living in 2030 and beyond will be more unequal and unjust than the one we are living in today. This will have a profound impact on the future of society and the Future of Work.

There are many different ways to measure inequality and not all of them are easy to carry out accurately, but data seems to support the thesis that inequality is rising in the world overall. Let’s look at some of the main ideas about it.

Not Marx’s Capital, but the other one

It is a tribute to the prominence inequality has taken as a social issue that a rather dry 700 pages tome discussing the economics of it became an unexpected bestselling hit in 2014. The book in question is, of course, French economist Thomas Piketty’s Capital in the Twenty-First Century, aka Capital, which postulates that inequality is ingrained in the capitalist system, it is a feature of it, and can only be fought through state intervention.

Piketty painstakingly gathered data from many countries going back decades and realised that the return on capital exceeds economic growth rate, or in other words, wealth grows faster than income. This means the return of capital is higher than the income received from labour. Since wealth is highly concentrated, this brings about an ever increasingly unequal society, unless the state intervenes. Piketty’s ideas, however popular, have also received ample criticism from different sectors, but there are many other ways to look at inequality.

Gini as a measure

One way in which inequality can be measured is the Gini coefficient, which is a single number that captures how incomes are spread out in a particular country or geographical entity: 0 is perfect income distribution or everybody earning the same, while 1 is the most inequal of all, with one member of society amassing all the wealth.

The Gini coefficient has been rising considerably since the 80s in most developed countries, and even more so due to the Covid-19 pandemic, whereas in developing countries it has been more or less stable, but always in very high numbers, signalling higher inequality*.

The most egalitarian societies are the Nordics, followed by Western European countries. The USA has one of the highest Gini coefficients amongst rich countries, signalling that the land of opportunity only bestows real opportunities to a selected few.

The Gini coefficient stands out for its simplicity, but many argue that it is too simple, and a single number cannot capture a complex phenomenon like inequality in its entirety. Another way could be to look at the distribution of income growth across the entire spectrum, or the share of the total wealth of the population by the top 10%, 1% or 0.1%, whichever top percentile you want to take.

Whichever way you look at it, it seems that until the 80s income growth was similar across different income groups, but since then the incomes of the bottom half have stagnated whereas those of the top have increased considerably. The higher you are in the income spectrum, the more your wealth has increased in all these years. Inequality is growing, not going down.

The Meritocracy Trap

Daniel Markovits, in his book The Meritocracy Trap, postulates some interesting ideas about inequality and how it is formed in today’s meritocratic society. He argues that previous societies were also very unequal and unjust, as wealth and privilege were inherited and upwards social mobility was nigh impossible. Then meritocracy became the norm, ushering a system in which only those that were talented, worked hard and had great ideas would succeed and become rich.

This was inherently a fairer society than the one we had before, but he thinks that this system has run its course and is now entrenching inequality in different ways. Successful individuals in society not only pass their genes (that worked well for them) to their children, but they also have more resources to educate them and are much better at training them and creating the right environment at home to prepare them for successful careers.

The top jobs in corporate America, for example, are going to the graduates of the same top universities. If your parents don’t have the hundreds of thousands of dollars required for a top level education, nor the dedication and exigence to instil the right mindset in you during your upbringing, it will be very difficult for you to make it to the real elite that shares the biggest slice of the pie.

The people who made it will think they worked hard and they deserve it, and they will be partly right (the rich of today aren’t the leisurely class of old; they work longer hours than the rest of the population), and this makes any sort of redistribution policy much more difficult to implement, but undeniably there is also some amount of luck involved: the genetic lottery they won, the parents and upbringing they had, the predisposition to work harder and be more self-driven than others, and of course, being in the right place with the right idea at the right time.

Is automation creating more inequality?

As I mentioned here, automation is increasing due to advances in AI and robotics. The jury is still out on its impact on employment, as traditionally automation has generated more jobs than what it has eliminated, but it seems this time it may be different.

It is replacing more and more middle skilled jobs that were relatively well-paid middle-class jobs, creating what is known as the hollowing-out or polarization of the economy. There is increasing demand for highly qualified jobs that get exorbitant salaries, but for which the people whose jobs are disappearing in the middle are not prepared to opt to, so they need to opt for the jobs with lower skill requirements. This again increases inequality.

As machines get better, productivity will increase. The gains coming from increased productivity will not end up in the workers’ pockets, but in increased profits, so as robots get better at their jobs and they displace workers, the wealth they generate will increasingly go to the owners of the robots (the owners of capital), not to labour. This is Piketty again, but with a different twist: capital will grow more than overall income due to advances in technology.

You too, Globalization?

Globalization is often cited as another culprit for the increase of inequality, at least in the rich countries. The truth is that the opening up of China and other then developing countries like the Asian Tigers a few decades ago added a couple of billion people to the world’s labour force. This was not spread equally across all job categories, but was concentrated on low-skilled jobs in the manufacturing sector.

This obviously had a depressing effect for salaries of this population in developed economies, but many people higher up the income scale benefitted handsomely. They had no direct competition from these countries, so their salaries kept increasing, and they could now buy cheaper products manufactured abroad.

As globalization added a couple of billion workers, but not so much extra capital, returns to capital or profits increased at the expense of the returns to labour or salaries. As more shares are owned at the higher end of the income spectrum, this increased inequality, at least in the rich countries.

In a worldwide scale however, globalization has massively reduced inequality, as it has lifted from poverty hundreds of millions of people. Of course it has also created plenty of multi-billionaires in China and other middle-income countries.

Race and gender

Another aspect we should not forget, very relevant nowadays, is that of the entrenched inequality due to race, gender and other sociological factors. The initial origin of the protests and social unrest we have seen lately may have been the racist or callous act of a policeman killing George Floyd by putting his knee on his throat for almost nine minutes, but the underlying reasons are systemic racism, unequal opportunities and wealth inequality.

Black people are underrepresented in the top richest percentiles in the US (other racial groups, such as Asians, seem to be overrepresented). Even if black families reach the top 10% of richest families, they are likelier to fall from that group than white ones.

It’s a similar story with women. The lists of the richest and most powerful people published by Forbes and similar publications are full of white men. Women are underrepresented in these lists, but also in the lists of CEOs, company presidents, senior leadership positions, chiefs of state, etc. We have improved a lot closing the gender gap, but we are far from getting there. We still have a lot of work to do.

Atlas did not shrug

Some conservatists and libertarians, probably inspired by Ayn Rand’s great men philosophy, believe that inequality not only isn’t harmful, but is actually desirable for society, as long as the living standards of the poor and the lower classes improve.

In Rand’s Atlas Shrugged novel, the economy is pushed by the enterprise, vision and entrepreneurship of a few great men, who are more and more stifled by bureaucracy, red tape and the misunderstanding from the rest of humanity, who are mired in mediocrity, ignorance and stupidity. These great men, who are holding the world on their shoulders like the titan Atlas, go on strike to show the world they are the ones running the show and that without them the world economy will grind to a halt. It is indeed, as though Atlas shrugged and relinquished any of his obligations about the world he is holding.

Only that in real life, those “great men” aren’t necessarily better than the rest of us and they haven’t shrugged or gone on strike but have continued getting richer and richer.

Inequality is morally wrong and economically damaging

A CEO today makes more money in one day than the average worker in a year: he or she earns 377 more times than the average employee. In 1980 it was “only” 30 times. The 8 richest families in the US have as much wealth as the bottom half.

I think that some people work harder, are smarter, have better communication skills or are more creative than the average person, and they generate more value to society, therefore they should be well rewarded, but nobody is that much more valuable. We are all different and we should all allow for differences in society, by all means, but where is the limit?

Inequality and unfairness are at the root of many of today’s problems, be it massive riots and protests, mental health issues, unemployment, extreme poverty and a long etcetera.

Inequality also dampens economic activity. The lower income population spend a bigger share of their income purchasing goods and services, thus increasing aggregated demand and economic activity. The wealthier part of the population may invest some of their money in new ventures and entrepreneurial projects, which of course add value to the economy, but they also have vast sums of their fortunes parked in savings, offshore tax havens and in other non-productive uses of capital.

Reducing inequality not only is the right thing to do but would also spur the economy and increase growth. A more equal society would also be a more harmonious and happier one.

We need to reduce inequality

Inequality is like a cancer, eating our societies from inside and making them more toxic and harder to live in. We need to find a remedy to fight rising inequality and reign in it. It is one of the scourges of modern (and ancient) society, and if we really want to build a more humane future of work and of society, we need to find a way to reduce it.

I don’t have the secret formula to reduce it. Smarter and wiser people than me have thought long about this issue and have postulated their theories. There are things that can be done via taxes and redistribution, but unless there exists a coordinated global approach on this, the richest will always find ways to pay less taxes or have important parts of their wealth hidden in tax havens. There is also a fine balance to find with the use of taxes, we need to be careful lest they stifle innovation and entrepreneurship.

We need new economics with purposeful and enlightened companies. These companies should pay high rewards to talent and the employees contributing the most to their success, but they should also be fair and equitable in their rewards policies and keep some sense of proportionality between the best and worst paid employees within their ranks. Some will argue that they operate in a free market and if you want to attract talent, you will have to pay for it. Then we need to do something with that market, because it isn’t fair and isn’t distributing wealth in a fair manner.

The free market and the neoliberal doctrine may actually be the root cause of the inequality we are seeing. History has shown that the market is not always fair in the way it distributes wealth in society, and we do need some sort of intervention from the state to avoid some externalities and negative consequences.

European countries are less unequal than the US, for example, not because they distribute wealth better through taxes, which they also do, but also for their pre-distributive work through institutions like public schools, universities and healthcare, which are proven to reduce inequality as they level the playing field.

Inequality is a very key topic that is at the source of many of our problems and I plan to revisit it regularly on this website. It is everywhere and its pernicious effects are felt by all. Rising inequality will be one of the main drivers shaping society and the economy in the coming years, and as such it will have a huge impact on the Future of Work.

We will not be able to say that we have conquered a Humane Future of Work if we haven’t been able to considerably reduce the inequality so damaging to our societies today, so let’s keep fighting to reduce it.

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Originally published at https://humanefutureofwork.com on July 2, 2020.