Causes and Consequences of Income Inequality: A Global Perspective

Staff Discussion Notes, June 15, 2015

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Canonical URL: Causes and Consequences of Income Inequality: A Global Perspective

Authors: Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Franto Ricka, Evridiki Tsounta
Published: June 15, 2015
Series: Staff Discussion Notes

Paper analyzes the extent of income inequality from a global perspective, its drivers, and policy responses.
Key high-level finding: increasing the income share of the poor and the middle class increases growth, while a rising income share of the top 20 percent results in lower growth.
Implication: when the rich get richer, benefits do not trickle down; policies should be country specific and focus on raising the income share of the poor and preventing hollowing out of the middle class.
Regional policy emphasis:
- Emerging and developing countries: financial inclusion is imperative.
- Advanced economies: focus on raising human capital and skills and making tax systems more progressive.

Skill premium associated with technical change and globalization.
Weakening protection for labor.
Lack of financial inclusion in developing countries.
Drivers vary widely across countries; common drivers include those listed above.

Increasing income share of the poor and the middle class: associated with higher growth.
Increasing income share of the top 20 percent: associated with lower growth.
Conclusion: benefits do not automatically trickle down from top income groups to the rest of the population.

Adopt country-specific policies that:
- Raise the income share of the poor.
- Ensure there is no hollowing out of the middle class.
For emerging and developing countries:
- Prioritize financial inclusion to reduce inequality.
For advanced economies:
- Prioritize raising human capital and skills.
- Make tax systems more progressive.