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The Economics of Trust

May 10, 2017

Trust in other people—the glue that holds society together—is increasingly in short supply in the United States and Europe, and inequality may be the culprit.

In surveys over the past 40 years, the share of Americans who say that most people can be trusted has fallen to 33 percent from about 50 percent. The erosion of trust coincides with widening disparities in incomes.

But does inequality reduce trust? There is evidence that it does, according to research by Eric D. Gould, a professor of economics at Hebrew University, and Alexander Hijzen, a senior economist at the Organisation for Economic Cooperation and Development. They analyzed data from the American National Election Survey from 1980 to 2010. The results show that wider income inequality explains 44 percent of the drop in trust. The authors, who reported their findings in an IMF working paper, found similar results in Europe (working papers do not represent the views of the IMF).

Pressing Problems

Does any of this matter? A substantial body of research shows that governments may be unable to find the support needed to solve pressing problems in a society that is divided and distrustful. Distrust also prevents policies from being implemented effectively. At the same time, there is growing evidence that trust promotes economic growth because people who trust each other are more likely to collaborate in trade, innovation, and entrepreneurship.

Surprisingly, inequality doesn’t appear to spur greater demand for redistribution, the authors found. So policies that seek to restore trust by reducing market wage dispersion before taking into account taxes and benefits—raising the minimum wage or strengthening collective bargaining, for example—appear a more promising path.

You can read more in the article published in the March 2017 issue of Finance & Development