How the rich are getting richer: Does Inequality Matter?

Economics: Does inequality matter - at - the best of the week's international financial media.

Why the interest in inequality? Because the gap between rich and poor was supposed to close as societies got richer. But there is increasing evidence to suggest that this is not happening. In Latin America, for example, high rates of inequality have persisted over the past 30 years, despite a wide range of different economic policies, notes a recent report by the World Bank. One of the main measures of inequality is the gini coefficient. In Britain, the average disposable income of the top 25% of of earners has risen by 25% since Labour came to power, while that of the bottom 10% rose by just 8%. The gini coefficient, the economists preferred measure of inequality, shows that the gap between rich and poor has increased since Labour came to power. In Asia and Eastern Europe, rapid economic growth has been accompanied by a marked rise in inequality.

Is America becoming more unequal?

Yes, according to a book edited by Professor Eileen Appelbaum of Rutgers University, Low Wage America: How Employers are Reshaping Opportunity in the Workplace. Despite the huge rise in executive pay over the past decade, Appelbaum says that in 2001 some 34m Americans, or 24% of the workforce, were earning less than $8.70 an hour - a figure she describes as close to the poverty line for a family of four. Moreover in 2001, the minimum wage was $5.15 an hour - 28% lower in real terms than in 1974. Not only has rising prosperity failed to close income gaps, but it seems to have had a negative effect on upward mobility - the very essence of the American dream.

What has happened to upward mobility in America?

According to an analysis of decade-long income trends up to 2001 by economists at the Bureau of Labor Statistics, relative mobility - the share of Americans changing income quintiles in any direction up or down - slipped during the 1990s by 2% to 62%. Economists at the Federal Reserve Bank of Boston have confirmed this trend. They looked at families' incomes over the last three decades and found the number of people who stayed stuck in the same income bracket - at the bottom or at the top - over the course of a decade increased in the 1990s. Some 40% of families didn't change income brackets over the decade, compared to 36% in the 1970s. Some 49% of families who started the 1970s in poverty were still stuck there at the end of the decade. During the 1990s, that figure jumped to 53%.

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Why is upward mobility stalling?

Partly because of changes in the labour market. Americans talk of the "Wal-Martisation of business" - a term that reflects the controversial employment practices of the giant retailer, which are now being copied by employers across the United States. Companies are cutting middle income jobs, while at the same time recruiting more part-time and temporary staff. The disappearance of so many middle-ranking jobs has made it far harder for those on the bottom rung to pull themselves up into higher socio-economic groups, reducing upward mobility and entrenching inequality.

Does inequality matter?

Most economists say not. They argue that inequality is an inevitable feature of a functioning capitalist economy - and that capitalism is the only path to economic growth. Inequality is a spur to innovation. Creative people are drawn to the US by the opportunity to make vast amounts of money. America's tax regime, for example, is less confiscatory than Europe's or Canada's. This makes the US an investors' destination, says Amity Shlaes in the Financial Times. And this ensures that growth tends to happen more in the US than elsewhere. Nor does it matter that this growth in the first instance benefits only the few, since the rich ultimately use their wealth to create jobs. "In American waters," says Slaes, "a rising tide really does lift all boats."

Does everybody share this view?

No. Not only is empirical evidence suggest that inequality is harmful to growth, but there is plenty of evidence that it hurt societies in other ways, including higher crime rates and more-stress-related illness. Some 65 of the 78 most common causes of death in men are more common among manual than non-manual workers for example, notes Michael Prowse in the Financial Times. One explanation is clearly the lack of social status felt by manual workers. This theory is supported by experiments with primates. Researchers manipulated the social status of macaque monkeys while keeping other factors such as diet constant. High status macaques from different troupes were put together so some would have to decline in status. "The stressed-out socially downgraded monkeys got ill and died prematurely, just like socially marginalised human beings.

What can be done to boost upward mobility?

Research shows that the key to upward mobility in the US is a university education. Any efforts to improve upward mobility and reduce inequality must therefore focus on increasing access to further education. The problem is that access to university in the US is restricted along class lines to those whose parents already have money or education. Although college enrollment has soared for higher-income students, notes BusinessWeek, more children from poor families can only afford to go to community colleges, which typically don't offer bachelor's degrees. The number of poor students who get a degree - fewer than 5% in 2001 - has barely budged in 30 years.