Explanations of increasing inequality and distribution- growth dynamics Jörg Mayer Division on Globalisation and Development Strategies UNCTAD Geneva Circle on Global Economic Governance: “Increased Income Inequality without Employment Growth: Causes and Remedies” Geneva, 24 April 2012

Causes for persistent cross-country differences in levels of income distribution Stage of development and economic structure –Kuznets’ inverted U-curve … –… which may need to be augmented because of post-industrial stages, such as finance, and because of strong global forces –Important role of distribution of production factors, in addition to returns on them National preferences regarding social welfare and individual responsibility

Common factors driving long-term changes in income distribution across countries Global trends of income inequality measured within countries (peak 1920s; trough end of 1970s) with turning point in due to: –Global finance (Galbraith) –Reagan-Thatcher-inspired policy shifts

More specific factors driving changes in within-country income distribution Skill-biased technological change (quasi consensus in early-1990s debate) Trade and outsourcing through entry of low-wage economies and decline in transport and communication costs (affecting middle incomes) Finance –Top incomes move with prices of financial assets –Over-expanded financial sector causes macroeconomic volatility Policies (macro, taxation, transfers, social services, labour market)

Distribution-growth dynamics Traditional view: higher inequality spurs savings, capital accumulation and growth (including through reinvested profits) Newer view – lower inequality fosters investment and productivity by promoting: –Education –Socio-economic stability Reconciliation of two views if, as economic development advances, relative importance of physical capital accumulation decreases and that of human capital increases

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