The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [65]
Both technology and globalization increase hugely the potential demand for talent. These “winner take all” markets have spread superstar pay to many other sectors of the economy, outside sport and the performing arts where they were originally observed.35 Moreover, this trend means that the increase in inequality due to skills and technology has what is known as a “fractal” character, which means that it is occurring within categories as well as in the overall income distribution: top lawyers’ pay has risen relative to those on low incomes; but the top top lawyers have pulled further ahead of the average top lawyer too.36
So to sum up, structural changes in the economy driven by new technologies are the fundamental driver of greater inequality, in much the same way that the wave of innovation of early capitalism in the nineteenth century led to great inequality until the workforce as a whole developed the new skills that were needed. Technology has interacted with globalization to exacerbate the trend toward greater inequality, contributing to income inequality within countries through the move of low and medium skill jobs overseas, and creating a rich global elite. The failure of some of the poorest countries to participate at all in these economic trends has made greater inequality a global phenomenon. These structural changes have been universal.37
The extent of the increase in inequality varies between countries depending on the scope of structural economic change they have experienced. In some countries there have also been specific changes in social norms and political conditions that have amplified the increase in inequality, as discussed above. The United States stands out in this respect, but the phenomenon of excessive corporate pay has become widespread. In a world of globalized media and international markets for executive jobs, the creeping social acceptability of huge pay packets for some executives and professions has crossed borders.
Does it matter?
CONSEQUENCES OF INEQUALITY FOR GROWTH
There is some controversy about whether income inequality inhibits economic performance. Poor countries are more unequal than rich ones but it is not clear whether the inequality is a cause or a consequence of their failure to grow. Among the rich countries, there is no obvious relationship between level of income inequality and growth rates.
The United States, the most unequal, has experienced the fastest productivity growth in recent decades. There are some reasons to think that in theory greater inequality will boost growth—first because rich people save more than poor people, and thus build a pool of savings that can finance investment and growth; second because inequality is often addressed with progressive income taxes, which have an adverse effect on work effort and so might reduce growth.
Equally, there are theoretical reasons for thinking inequality will reduce growth, in particular through reducing the ability and incentive of poor people to invest in education and skills for themselves and their children. Another possible channel is that inequality causes social and political instability, which in turn harms economic prospects. Several studies seem to support this empirically. Well-known research by Alberto Alesina and Dani Rodrik, and by Torsten Persson and Guido Tabellini, argued that distributional conflict was associated with higher tax rates and lower growth.38
Given these conflicting theories, and the inconclusive empirical research,39 the evidence is on balance suggestive of inequality harming growth in the long term, but it is hard to stake a lot on these results. Equally, the negative result implied by this is clear: there is no firm evidence that inequality