Introduction to Inequality

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Introduction to Inequality

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Measures and concepts

• Income Inequality refers to the extent to which income is evenly distributed within a population.
• Related concepts:
  • Lifetime Inequality: inequality in incomes for an individual over his or her lifetime.
  • Inequality of Wealth: distribution of wealth across households or individuals at a moment in time.
  • Inequality of Opportunity: impact on income of circumstances over which individuals have no control (for example, family socioeconomic status, gender, or ethnic background).
• Gini coefficient:
  • Varies between 0 and 1, with 0 representing perfect equality and 1 perfect inequality.
  • Unless specified otherwise, Gini income inequality refers to disposable income or consumption, reflecting redistribution through taxes and transfers.

Key drivers of income inequality

• Global factors:
  • Technological progress (contributed to the skill premium and job polarization).
  • Globalization.
  • Commodity price cycles.
• Country-specific factors:
  • Economic developments and economic stability.
  • Domestic policies, including financial integration, redistributive fiscal policies, and liberalization and deregulation of labor and product markets.
• Literature findings:
  • Technological advancement increased the skill premium because individuals with higher education have a comparative advantage in using new technologies.
  • In Western Europe and the United States, technological progress has translated into hollowing out of middle-class jobs (job polarization).

Trends in global and within-country inequality

• Long-run global trend:
  • Global inequality increased during the nineteenth and most of the twentieth centuries, reflecting widening disparities between countries’ per capita income as advanced economies took off.
  • Since the middle twentieth century, per capita GDP growth accelerated in less developed countries—particularly in Asia—leading to convergence in income levels across countries and a rapid decline in global income inequality since the 1990s.
  • Not all regions experienced convergence; Sub-Saharan Africa had more modest income growth than Asia.
  • Some gains in reduction of global inequality are likely to be reversed as a result of the COVID-19 crisis because advanced economies generally have more resources to deal with the fallout and recovery effort.
• Within-country trends:
  • Within-country inequality has risen in most countries over the past three decades.
  • More than half of the countries and close to 90 percent of advanced economies have seen an increase in income inequality.
  • Some countries recorded an increase in their Gini coefficients exceeding two points.
  • Factors cited include technological progress, globalization, commodity price cycles, and domestic economic policies.

Fiscal policy, redistribution, and social spending

• Fiscal policy is a key instrument for distributional objectives.
• In advanced economies:
  • Taxes and transfers decrease income inequality by one-third, with most of this achieved via public social spending (such as pensions and family benefits).
  • The redistributive impact is higher if in-kind spending (such as education and health) is included.
• Policy implications:
  • It is important to ensure social spending is adequate, effective, and sustainable.
  • Progressive income taxes play an important redistributive role in some countries.
  • Lower redistributive impact of fiscal policy in developing economies contributes to higher inequality levels.

IMF analysis, policy recommendations, and institutional role

• IMF activities relating to inequality:

1. Lending to support macroeconomic adjustment programs. 2. Macroeconomic surveillance, including related policy analysis. 3. Technical assistance to build capacity, especially on government taxation and spending.

• Lessons from IMF experience:
  • IMF-supported programs facilitated greater attention to social safety nets and safeguarding access to basic public services (health and education).
  • Introduction of the Poverty Reduction and Growth Facility in 1999 and initiatives like the Heavily Indebted Poor Countries debt-relief initiative brought growth and poverty reduction objectives into program design for low-income countries.
  • IMF-supported programs were successful in raising social spending, including compared with similar countries without programs.
• Policy recommendations and options highlighted:
  • Boost access to basic health and education services and reduce barriers to female labor market participation to help raise growth and meet equity objectives.
  • In fiscal consolidation, consider options that avoid aggravating inequality, such as raising revenues from income taxes and targeted (rather than across-the-board) reductions in social benefits.
  • Favor measures that are good for both equity and efficiency—for example, increases in revenues from recurrent property taxation.
• Recent expansion of IMF work:
  • Deeper cross-country analytical studies and country-level assessments of fiscal consolidation and inequality.
  • Analysis of a variety of fiscal policy instruments to achieve equity goals efficiently and of macroeconomic gains from strengthening gender equity.
  • The IMF intends to continue strengthening analytical work on income distribution and to focus country-level work selectively where issues are critical.

Outlook and COVID-19 implications

• The COVID-19 pandemic is expected to increase income inequality, making IMF work on inequality issues more intense.
• Advanced economies’ greater resources to respond and recover imply the pandemic will likely deteriorate global inequality.

References

• The IMF and inequality
• IMF's work on inequality
• How the IMF Helps Countries Tackle Inequalities