Inequality – is the Gini out of the bottle?

Global economy watch - April 2014 PDF download

Fig 4 - The wage share of the economy has been falling in several advanced economies

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Fig 5 - Less inequality is associated with better conditions for growth

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Fig 6 - Three quarters of business leaders believe that their firm has a role to play in society

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Inequality is on the rise in key advanced economies

As the economic recovery continues to take hold in advanced economies, substantial levels of inequality mean that the benefits of recovery are not being felt equally throughout the economy.  For example the top 10% of wage earners in the US earned 48%  of total income in 2012.

Rising inequality is not a new phenomenon - in fact this is a trend lasting more than 20 years. Figure 1 shows that the Gini coefficient (a standard measure of inequality) rose in each of the G7 economies from around 1985 to around 2010. During that period the top 1% of the income earners in the US increased their share of total income by 10 percentage points from 1985 to 2012.   

Global Megatrends can help to explain why

We think there are some important structural trends at play which can linked to broader “megatrends” in the global economy. In particular:

  • Technological breakthroughs are changing the role of labour in the production process. During the industrial revolution, technology reduced the need for labour to do physically repetitive tasks. Now, the digital revolution is reducing the need for labour to do mentally repetitive tasks. This partly explains why, in the US, we have seen the share of wages as a proportion of the economy decrease from around 61% in 1990 (approximately when the world wide web was invented) to 56% in 2013.
  • The shift in global economic power from the West to the East has given businesses in advanced economies more flexibility in deciding where to operate parts of their business. One side-effect of this has been offshoring of some lower value added activities to low-wage destinations.

Inequality levels can have important implications for businesses. Recent IMF* research suggests that higher levels of inequality are associated with lower levels of economic growth (see Figure 5). More equal economies can also mean a “broader base” of consumer spending, expanding the range of products that businesses can bring to market. They can also add to social cohesion, which may be important for sustainable growth.

What does this mean for businesses?

Technological advances and declining wage gaps with China and other emerging markets may mean reshoring of some jobs makes more commercial sense in future. For example, in our recent UK Economic Outlook, we estimated that reshoring could bring approximately 100,000-200,000 jobs back to the UK over the next decade.

But it’s not just the bottom line, businesses are increasingly looking “beyond profit” to wider social issues (See Figure 6). One approach here is to look at alternative models with greater employee ownership of firms. This could help supplement wages, while also better aligning the interests of employees and the firm. There could be other upsides too: data suggests  that listed UK companies with 10% or greater employee ownership have outperformed the FTSE All Share by an average of 7.7% a year since 2003.

*“Redistribution, inequality and growth”, IMF Staff Discussion Note, February 2014