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Theoretical and Empirical Analyses of the Rise of Income Inequality in Rich Countries

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Inequality

Part of the book series: International Papers in Political Economy ((IPPE))

Abstract

The objective of this chapter is to review, both theoretically and empirically, the main determinants behind the rise in income inequality that OECD countries have experienced over the last three decades. We will show evidences according to which the financialisation of economies along with globalisation generated the main mechanism, which allowed for income inequality increase. These processes have taken place at least since 1990, when labour flexibility intensified, labour market institutions weakened as trade unions lost power, and public social spending started to retrench and did not compensate for the many vulnerabilities created by the globalisation process. In this context, wage share declined and functional income distribution worsened with an increase of profits, rents and financial compensation. A favourable tax policy towards riches, payments of dividends and the structural change occurred in most advanced economies, i.e. a gradual abandonment of manufacturing in favour of services, also contributed to this result.

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Notes

  1. 1.

    According to the World Bank definition, “Listed domestic companies, including foreign companies which are exclusively listed, are those which have shares listed on an exchange at the end of the year. Investment funds, unit trusts, and companies whose only business goal is to hold shares of other listed companies, such as holding companies and investment companies, regardless of their legal status, are excluded. A company with several classes of shares is counted once. Only companies admitted to listing on the exchange are included.” (https://data.worldbank.org/indicator/CM.MKT.LDOM.NO).

  2. 2.

    Obviously not every country’s wage share has displayed the same pattern. See, for example, the case of United Kingdom , which displayed a mildly increasing wage share in the 1990s, until the end of the 2000s.

  3. 3.

    See Pariboni (2016) and Skott (2017) for sceptical views on this stream of literature. The former, in particular, by criticizing the investment function adopted by Marglin and Bhaduri and their neglect of demand components other than induced consumption and investment , questions the validity of the Marglin and Bhaduri’s taxonomy (wage-led versus profit-led).

  4. 4.

    We are referring here to the OECD variable ‘Distributed income of corporations’, for the sector ‘Non-financial corporations’. ‘Distributed income of corporations’ is given by the sum of dividends and withdrawals from income of quasi-corporations, with the latter component being mostly negligible.

  5. 5.

    Market capitalization is a variable with a trend similar to that of other possible proxies for financialisation , as dividend share, FDI and indexes of globalisation , as correlations between the variables show.

  6. 6.

    “The role that financialisation played in lowering workers bargaining power” is recognised and admitted also by OECD (2012, p. 143).

  7. 7.

    See Lapavitsas and Powell (2013) for a comparative analysis of different forms of financialisation in different countries.

  8. 8.

    This is the term used by the EU KLEMS Growth and Productivity Accounts to aggregate services industries like public administration, health, education etc.

  9. 9.

    See Tridico and Pariboni (2017b) for some descriptive evidence.

  10. 10.

    We refer with this term to “the unity and organisational ability of the working classes to assert their (economic) interests” (Stockhammer et al. 2016, p. 1805).

  11. 11.

    This phenomenon goes by the name of Baumol’s disease (see Baumol and Bowen 1965) in the related literature. A qualification and a reassessment of the disease has been advanced by Baumol himself. See, for example, Baumol et al. (1989) and Baumol (2002).

  12. 12.

    See Dünhaupt (2017, p. 290) and the literature reviewed there.

  13. 13.

    In the literature, alternative measures of the institutional factors we proxy by means of EPL are also utilised; for example, Dünhaupt (2017) introduces ‘labour’s bargaining power’—proxied by several variables—among the determinants of the labour share ; Stockhammer (2017) uses ‘welfare state retrenchments’.

  14. 14.

    The downward pressure exerted on wages by unemployment is also reported in OECD (2014).

  15. 15.

    It is however argued that subsidies for inward foreign direct investment were the key factor in fostering Irish economic growth .

  16. 16.

    It has to be recalled that non-mainstream economists tend to reject the very concept of marginal productivity of production factors and the theoretical legitimacy of aggregate production functions. See, for example, Garegnani (1970, 1976). Discussing Garegnani (1970), Petri notices that “income distribution can be seen as reflecting the ‘marginal products’ of an Aggregate Production Function only if the economy produces, to all relevant effects, a single good (that is if capital goods are produced with exactly the same physical input proportions as output), or at least if relative prices are unaffected by changes in distribution along the entire outward envelope of the w(r) curves” (Petri 2004, p. 334). He also adds that “the marginal product of capital – and hence the decreasing demand-for-capital schedule – is not determined without a full-employment-of-labour assumption” (ibid., p. 270). See, for example, Felipe and McCombie (2014) for a recent reassessment of the fundamental flaws of these aspects of Neoclassical theory.

  17. 17.

    In 2000, FDI (net inflows) as a percentage of GDP amounted to 4.35%. The share then steadily decreased until it reached a trough in 2003 (1.81%). The trend was, however, rapidly reversed: in 2007 Foreign Direct Investments were at their top, being equal to about 5.3% of the World GDP. In 2015–2016 the datum has stabilised around 3.05% of GDP.

  18. 18.

    See, for example, Atkinson (1999), Galbraith (2012) and Piketty (2014).

  19. 19.

    Active Policy 2012 (% of GDP), Passive Policy 2012 (% of GDP), Coverage (in % of workers) of trade Unions 2009–2011, Level of coordination bargaining wage, Length of unemployment subsidies (in months) 2011, Substitution rate for unemployment Subsidies (% 2009–2011), Minimum wage, hourly (US$ PPP), EPL and Trade Union density. All data from OECD online database.

  20. 20.

    A similar result was obtained by Butcher et al. (2012) and by Autor et al. (2016) who found that minimum wages have little effect on employment, but do have impacts on wage inequality, in particular in the UK and in the US during the 1990s and 2000s.

  21. 21.

    See Tridico (2018).

  22. 22.

    See, for example, the already mentioned Barba and Pivetti (2009), Rajan (2010), Stockhammer (2015).

  23. 23.

    Orhangazi (2008) finds empirical evidence of a negative influence of financialisation on real investment , using data on US non-financial corporations for the 1973–2003 period. Similar results can be found in Onaran et al. (2011), regarding the US economy in 1960–2007. More recently, Tori and Onaran’s analysis of the behaviour of physical investment in selected European countries show that “financialisation , depicted as the increasing orientation towards external financing, shareholder value orientation and the internal substitution of fixed investment by financial activity, had a fundamental role in suppressing investment in the NFCs (non-financial corporations)” (Tori and Onaran 2017, p. 35).

  24. 24.

    See Tridico and Pariboni (2017a) for an empirical validation of this extended version of the Sylos Labini productivity equation.

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  1. Department of Economics, Roma Tre University, Rome, Italy

    Pasquale Tridico & Riccardo Pariboni

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Tridico, P., Pariboni, R. (2018). Theoretical and Empirical Analyses of the Rise of Income Inequality in Rich Countries. In: Arestis, P., Sawyer, M. (eds) Inequality. International Papers in Political Economy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-91298-1_4

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  • DOI: https://doi.org/10.1007/978-3-319-91298-1_4

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  • Publisher Name: Palgrave Macmillan, Cham

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  • Online ISBN: 978-3-319-91298-1

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