The gap between rich and poor is growing, and fracturing our societies.  This is a conclusion of the recent World of Work Report produced by the International Labour Organization.

Over the past couple of decades, incomes for high-income households expanded more than for low-income households in most countries.  Among the Advanced Countries, Korea, the United Kingdom and the United States have the highest levels of inequality.  Likewise, the share of wages in total national incomes has declined, especially in Latin America, Asia and the Advanced Economies.  Real wages increased less than productivity.  And the income gap between the top and bottom 10 per cent of wage earners has also increased dramatically, particularly in Brazil, China, India and the United States.  So, while economic and employment growth was strong, it benefited high-income groups more than their medium- and low-income counterparts. 

There is nothing new about this observation.  For many years now, many economists have identified this trend.  But this trend continues, and virtually no-one now denies it.  What economists do quibble about is the cause.  Is it competition from low cost countries like China?  Is it low-skill migration from Mexico?  Or is it "skill-biased technological change", that is, new technologies that require high-skilled workers and reduce the demand for low-skilled workers.

Such economists are worse than a pack of Byzantine theologians.  The pro-globalisation economists like Jagdish Bhagwati put most of the blame on technological change, while liberals (in American parlance) find statistical support for trade and migration (globalization).  But does it even matter? 

The ILO notes that wider income inequality can be helpful!  (Most economists would argue that it is normal, if it reflects productiivity gaps.)  It can provide incentives for greater work effort, innovation and skill development.  Indeed, too little income inequality can weaken the incentive to take risks or invest in human capital tehreby affecting economic growth.

But enough can be enough!  "Excessive inequalities" can lead to major social and economic costs.  Rich people usually live longer, whereas low-income households often lack the resources to maintain and improve their health.  Large income inequalities may result in racial and gender discrimination in the jobs market. 

Income inequality can increase black-market activity and property crimes, as illegal activities often provide better returns for less affluent households even when the risk of punishment is taken into account.  For example, if inequality were reduced from the levels observed in Columbia to those found in the United Kingdom, thefts would fall by some 50 per cent and contact crimes would fall by 85 per cent! 

There can also be a link between inequality, lobbying and even corruption.  A heavy concentration of wealth and income can provide richer people with sufficient resources to lobby to divert public expenditure in their favour (such as to higher education -- children from poorer families are less likely to undertake tertiary education).  It can also provide the incentive to interfere with the political process and democratic governance by offering bribes to politicians and high ranking officials.  They can buy political influence to protect their economic interests and shield themselves from market competition.  In extreme cases, well-connected people of the political and economic elite receive licenses for monopolies!  

Support for open markets and economic growth can be challenged if low- and middle-income groups believe that have little to gain, and if they result in pressures to change for certain segments of the population.  Income inequality can lead to class struggles, and thus inflationary pressures and economic instability.  In the lead-up to the current financial crisis, wage moderation, combined with financial innovation, may have lead to excessive borrowing. as workers borrowed heavily to buy houses and to support consumption.

So, what's the bottom line?  Reducing inequalities is in the interest of everyone, especially for higher income groups.  The very system that has allowed some people to become terribly rich is threatened by the societal fractures that it has created. 

Reference:

World of Work Report 2008, Income Inequalities in the Age of Financial Globalization.  International Labour Organisation.  International Institute for Labour Studies.

http://www.ilo.org/public/english/bureau/inst/index.htm