A Map of Inequality in Countries

IMF Blog, November 6, 2019

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Authors: William Gbohoui, Raphael Lam, Victor Lledo
Date: November 6, 2019
Theme: Social and economic inequality between and within regions in countries has risen in many advanced economies; regional disparities in income are large, persistent, and increasing over time.

Disparity of income between regions has been large in many advanced countries even after accounting for regional price differences.
Regions with low income levels tend to have less access to healthcare, lower education levels, and higher unemployment rates.
Disparity of income between regions is persistent and has risen over the past 15 years.
Regions that have fallen behind—those with high unemployment rates—have on average a 70 percent chance of remaining behind.
In some countries (for example, Italy and Canada) the chance of lagging behind can be even higher than the average.
Regions that lagged in some countries grew at a slower rate—by as much as 1 percentage point of GDP over three years.

Higher average income in prosperous regions is often offset by higher cost of living, making net gains from moving smaller for many households.
Housing costs and limited availability of high-paying jobs for low-skilled workers reduce mobility to booming cities.
Over the last decade, estimates suggest that the net benefits to move to higher income regions have fallen by 25 to 35 percent in Spain and in the United States for low-income households.

Policy options include increasing income redistribution through taxes and transfer payments.
Growth-friendly policies to improve education, healthcare, infrastructure, and affordable housing can ease mobility and job access for less-skilled, low-income people.
The paper provides options for policymakers on whether, when, and for whom to use targeted, place-based policies (subsidies, grants, public investment).
Examples of geographically-targeted policies: European structural and investment funds; enterprise zones in the United States.
Geographically-targeted policies can complement existing social transfers (such as unemployment insurance) particularly when:
- Recipients are highly concentrated in lagging regions (for example, Mexico and the United States), and/or
- Countries find it hard to target selected individuals nationwide (for example, through means-testing).
Under such circumstances, geographically-targeted policies promoting jobs in lagging regions can have a stronger impact and complement existing measures.

Choice of implementation level (local, state, federal) depends on the country’s fiscal decentralization and intergovernmental fiscal arrangements.
High revenue and spending decentralization implies subnational governments may have more control and capacity to design and implement geographically-targeted policies.
Coordination among government levels is key given shared responsibilities.
General principle: central government usually leads on policy design; subnational governments are more involved in implementation because they know local needs and preferences.
In federal or highly decentralized countries (for example, the United States), subnational governments have greater autonomy to determine income and property tax rates and spending on education and healthcare.
Other considerations: existing system of intergovernmental transfers and technical capacity of subnational governments.

Finding: Regional income disparities are large, persistent, and increasing over the past 15 years.
Finding: Regions that fall behind have, on average, a 70 percent chance of remaining behind; in some countries the probability is higher.
Finding: Lagging regions in some countries grew up to 1 percentage point of GDP more slowly over three years.
Finding: Net benefits of moving to higher-income regions for low-income households have fallen by 25 to 35 percent in Spain and the United States over the last decade.
Recommendation: Use a mix of national redistribution and place-based policies—taxes, transfers, education, healthcare, infrastructure, affordable housing, subsidies, grants, and public investment—to mitigate regional inequality.
Recommendation: Consider geographically-targeted policies when recipients are concentrated in lagging regions or when nationwide individual targeting is difficult.
Recommendation: Determine the appropriate level of government for policy design and implementation based on fiscal decentralization, intergovernmental transfer systems, and subnational capacity; ensure coordination across levels.

Source: IMF blog post "A Map of Inequality in Countries" (William Gbohoui, Raphael Lam, Victor Lledo; November 6, 2019).