Why inequality is rising

Why wealth inequality is rising and why this is terrible news

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.

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 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.

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.

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.

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.

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.

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.

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Writer, coach, HR executive. I inspire people to build a humane future of work at https://humanefutureofwork.com/

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