Economic Growth

Inequality is getting so bad it's threatening the very foundation of economic growth

People prepare their stuff for sale at a flea market in Athens, Greece, June 22, 2015. The European Union welcomed new proposals from Greek Prime Minister Alexis Tsipras as a "good basis for progress" at talks on Monday where creditors want 11th-hour concessions to haul Athens back from the brink of bankruptcy. REUTERS/Marko Djurica - GF10000135655

"Persistent lack of inclusion can fray social cohesion and undermine the sustainability of growth itself." Image: REUTERS/Marko Djurica

Pedro Nicolaci da Costa
Editorial Fellow, Peterson Institute for International Economics
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Economic Progress

Income inequality has been rising so rapidly in the United States and around the world that it threatens to make economic growth less durable, according to research from the International Monetary Fund.

"While strong economic growth is necessary for economic development, it is not always sufficient," four IMF economists write in a new blog.

"Inequality has risen in several advanced economies and remains stubbornly high in many that are still developing," they added.

"This worries policymakers everywhere for good reason. Research at the IMF and elsewhere makes it clear that persistent lack of inclusion—defined as broadly shared benefits and opportunities for economic growth—can fray social cohesion and undermine the sustainability of growth itself."

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That's because growth that excludes large portions of the population reinforces inequality in a variety of ways, like access to education, technology, resources and even social connections that help individuals land jobs and remain relevant in the labor market.

Image: IMF

In many countries, the richest 1% have benefited disproportionately from economic growth in recent years, the IMF says, confirming other studies on the issue.

"The top 1% accounts for around 10% of total income in many G20 countries, with shares even higher in the United States and South Africa," the IFM said in a larger study released in July.

Image: IMF

Even in countries where rapid economic growth helped large swaths of the population emerge from poverty, "top earners have benefitted much more than others."

The average share of income going to workers versus firms has fallen in many countries.

"The decline in the global labor share of income has generally implied higher income inequality," the report said.

"Across countries, those with lower shares in labor income have tended to also experience higher inequality levels in both market income as well as disposable income. Within countries, increases in labor income shares have been associated with declines in income inequality."

Image: IMF
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Related topics:
Economic GrowthEquity, Diversity and Inclusion
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