The Unassuming Economist

Authors Serhan Cevik and Carolina Correa-Caro write that the rich are gleaning most of the fruits of the transition from a system of centrally-planned socialism to a market-oriented economy.

Although per-capita income has grown and the number of people living on less than a $1.25 a day has plummeted, income inequality has skyrocketed, the economists said. The top quintile of earners now pull in nearly half of total income while the poorest quintile of earners account for under 5%.

“China’s widening income inequality is largely a reflection of faster income growth among the rich, rather than stagnant living standards among the poor,” the two economists said.

With an estimated 2.4 million millionaire households, China now has more than any country but the U.S.

China’s credit-fueled investment and export-led development model are likely the primary drivers of the sharp increase in income inequality over the last three decades, they said.

Beijing’s economic strategy has aimed at higher growth rates. Although that effort may have lifted many Chinese out of poverty, the two economists said there’s mounting evidence that the widening income gap could weigh on future growth. That, they said, could come “with significant social consequences, especially in a country like China aiming to move beyond the ‘middle income’ status.”

To relieve those potential pressures, the two economists recommend ramping up taxes to pay for a redistribution of income: raising taxes on higher earners, broadening the personal tax and imposing a value-added tax on services. At the same time, Beijing could lower labor taxes that hit low- and middle-income earners, they said.”

• Declines in unionization have been associated with increases in inequality. The conjecture that the rise in inequality is not just due to trade & technology but to changes in bargaining structures has often been made, including in a very recent NYT column by Nick Kristof. My colleagues Florence Jaumotte and Carolina Buitron present systematic cross-country evidence to show that declines in unionization are associated with increases in the share of income going to the top 10 percent.

• The installation of ATMs did not lead to a decline in the number of bank tellers. At a time when we are told robots may replace us all, Jim Bessen’s article offers this concrete example of hope that technology does not lead to widespread unemployment. Technology however can be associated with increased inequality.

• “Wages are set to grow faster than productivity, at least over the medium term”. That’s the bold prediction from the ILO’s Ekkehard Ernst. But again, inequality’s the rub: “the bulk of that [wage] increase will accrue only to a small group of skilled workers, no more than 20 percent of the global workforce.” 

• The share of immigrants has been quite stable at about 3 percent of the world population since 1960. The World Bank’s Caglar Ozden offers an excellent reminder of the benefits of immigration to society. He contrasts this with the fact that, despite the perception, immigration has remained stable. The result is wage differentials for fairly similar work: “Nurses make seven times more in Australia than in the Philippines; accountants six times more in the United Kingdom than in Sri Lanka; and doctors five times more in the United States than in Egypt—in purchasing power parity terms”.

Near-term outlook:

• The global unemployment rate has returned to its pre-crisis level of 5.6%. But employment growth remains sluggish—about 1.5 percent a year instead of over 2 percent a year before the crisis. See “Picture This” and my article “Seven Lean Years” for details on the global labor market outlook. The labor market outlook for Europe remains dismal. 

• “Without strong growth, it will be difficult to make a sizable dent in (European youth) unemployment.” My colleague Angana Banerji shows that “changes in economic activity explain on average about 50 percent of the increase in youth unemployment; in the case of Spain, poor growth accounts for 90 percent of the increase in the youth unemployment rate during the crisis. Also read the poignant stories of four young people from Bosnia, Egypt, Japan, and the United States.

• Sharan Burrow, General Secretary of the ITUC: “It is time to get the global agenda back on track, making job creation the foremost priority. Another six years of global employment stagnation, accompanied by outright depression in some countries, is unacceptable.”