1
Chapter 5: Drivers of Changes in Inequality .........................................................................................2
1. Introduction ................................................................................................................................2
1.1. Inequality has increased in most OECD countries ..................................................................2
1.2. Possible causes .....................................................................................................................3
1.2.1. Globalization .................................................................................................................3
1.2.2. Technological process ....................................................................................................3
1.2.3. Policy choices and regulations .......................................................................................3
1.3. Conclusion............................................................................................................................3
2. Drivers of changes in inequality: A general overview ...................................................................4
2.1. The drivers ...........................................................................................................................4
2.1.1. Macro-economic structure ............................................................................................4
2.1.2. Globalization and technological change .........................................................................5
2.1.3. Political processes..........................................................................................................5
2.1.4. Labour institutions and regulations ................................................................................6
2.1.5. Redistribution ................................................................................................................6
2.1.6. Demographic and social structure ..................................................................................7
2.2. Usually assessed in isolation .................................................................................................7
2.3. It’s all intertwined ................................................................................................................7
3. Drivers of changes in inequality: An in-depth empirical analysis (1980-2010)...............................8
3.1. Policies and institutions – Globalization – Technological change ...........................................8
3.2. (Un)employment effects – Individual wage dispersion – Individual earnings dispersion ...... 10
3.3. Individual earnings dispersion – Household earnings inequality – Changes in household
structure and employment patterns .......................................................................................... 11
3.4. Changes in distribution of other market incomes – Household earnings inequality –
Household market income inequality ........................................................................................ 13
3.5. Household market income inequality – Household disposable income inequality – Changes
in household taxes and cash transfers ....................................................................................... 15
, 2
Chapter 5: Drivers of Changes in Inequality
1. Introduction
1.1. Inequality has increased in most
OECD countries
This table show an increase in income
inequality across various OECD
countries from the mid-1980s to the
late 2000s. We see that household
incomes increased faster at the top;
Income grew more rapidly for the top
10% of incomes, compared to the
bottom 10%.
What are the possible causes?
• Changes in household structures
(like an aging population or
smaller households) contributed
to these trends in several
countries
• The effectiveness of income taxes
and cash transfers in reducing
inequality has diminished in half
of the OECD countries, particularly
in the late 1990s and early 2000s.
This figure shows that income
inequality has increased in most
OECD countries
, 3
1.2. Possible causes
1.2.1. Globalization
• Political perspective: Many people believe that globalization mainly benefits highly skilled and
well-educated workers. Over the past two decades, these workers have seen most of the gains
from increased productivity, while those with lower skills have been left behind. This has led to
protectionist attitudes, where people support policies to protect local jobs and industries.
• Economic perspective: According to traditional economic theory, when countries increase
trade with each other, skilled workers in wealthier countries tend to earn more. This can lead to
greater inequality within those countries because the wage gap between skilled and unskilled
workers widens.
However, the data show mixed results:
• Some studies show that globalization has increased inequality in both wealthy and less wealthy
countries, which contradicts traditional economic theory.
• Other research suggests that increased imports from developing countries might actually
reduce inequality in advanced nations.
• Recently, some trade economists have come to realize that the impact of trade integration on
inequality is larger than previously thought. They now believe that globalization has
significantly influenced income distribution in the United States, not just through trade, but
also through other factors such as foreign direct investment (FDI) and offshore activities.
1.2.2. Technological process
Advances in information and communication technology (ICT) are seen as favoring skilled workers,
which can increase inequality. Some studies even suggest that the ICT revolution is a stronger cause
of rising inequality instead of globalization.
However, it’s difficult to separate the effects of technological change from globalization since both
tend to increase the value of skills. F. Ex., Technology has led to the splitting up of economic activities
and the offshoring of production, with both processes closely linked to globalization.
1.2.3. Policy choices and regulations
Government policies, regulations, and institutions play a crucial role in shaping how globalization and
technological changes affect income distribution, but they can also directly influence income
distribution through actions like deregulating markets, altering social transfers, changing how wages
are set, or affecting workers' bargaining power.
However, linking these factors to overall wage and household income inequality is complex because
policy and regulatory changes can have mixed effects on employment and wage differences.
1.3. Conclusion
The evidence on what causes inequality is not clear-cut, partly due to the lack of precise definitions
and concepts used in different studies. o better understand why inequality is increasing, three key
things need to be clearly defined:
1) Inequality: What kind of inequality are we talking about?
2) Globalization: How is globalization being measured?
3) Reference populations: Which groups of people are being studied?
Chapter 5: Drivers of Changes in Inequality .........................................................................................2
1. Introduction ................................................................................................................................2
1.1. Inequality has increased in most OECD countries ..................................................................2
1.2. Possible causes .....................................................................................................................3
1.2.1. Globalization .................................................................................................................3
1.2.2. Technological process ....................................................................................................3
1.2.3. Policy choices and regulations .......................................................................................3
1.3. Conclusion............................................................................................................................3
2. Drivers of changes in inequality: A general overview ...................................................................4
2.1. The drivers ...........................................................................................................................4
2.1.1. Macro-economic structure ............................................................................................4
2.1.2. Globalization and technological change .........................................................................5
2.1.3. Political processes..........................................................................................................5
2.1.4. Labour institutions and regulations ................................................................................6
2.1.5. Redistribution ................................................................................................................6
2.1.6. Demographic and social structure ..................................................................................7
2.2. Usually assessed in isolation .................................................................................................7
2.3. It’s all intertwined ................................................................................................................7
3. Drivers of changes in inequality: An in-depth empirical analysis (1980-2010)...............................8
3.1. Policies and institutions – Globalization – Technological change ...........................................8
3.2. (Un)employment effects – Individual wage dispersion – Individual earnings dispersion ...... 10
3.3. Individual earnings dispersion – Household earnings inequality – Changes in household
structure and employment patterns .......................................................................................... 11
3.4. Changes in distribution of other market incomes – Household earnings inequality –
Household market income inequality ........................................................................................ 13
3.5. Household market income inequality – Household disposable income inequality – Changes
in household taxes and cash transfers ....................................................................................... 15
, 2
Chapter 5: Drivers of Changes in Inequality
1. Introduction
1.1. Inequality has increased in most
OECD countries
This table show an increase in income
inequality across various OECD
countries from the mid-1980s to the
late 2000s. We see that household
incomes increased faster at the top;
Income grew more rapidly for the top
10% of incomes, compared to the
bottom 10%.
What are the possible causes?
• Changes in household structures
(like an aging population or
smaller households) contributed
to these trends in several
countries
• The effectiveness of income taxes
and cash transfers in reducing
inequality has diminished in half
of the OECD countries, particularly
in the late 1990s and early 2000s.
This figure shows that income
inequality has increased in most
OECD countries
, 3
1.2. Possible causes
1.2.1. Globalization
• Political perspective: Many people believe that globalization mainly benefits highly skilled and
well-educated workers. Over the past two decades, these workers have seen most of the gains
from increased productivity, while those with lower skills have been left behind. This has led to
protectionist attitudes, where people support policies to protect local jobs and industries.
• Economic perspective: According to traditional economic theory, when countries increase
trade with each other, skilled workers in wealthier countries tend to earn more. This can lead to
greater inequality within those countries because the wage gap between skilled and unskilled
workers widens.
However, the data show mixed results:
• Some studies show that globalization has increased inequality in both wealthy and less wealthy
countries, which contradicts traditional economic theory.
• Other research suggests that increased imports from developing countries might actually
reduce inequality in advanced nations.
• Recently, some trade economists have come to realize that the impact of trade integration on
inequality is larger than previously thought. They now believe that globalization has
significantly influenced income distribution in the United States, not just through trade, but
also through other factors such as foreign direct investment (FDI) and offshore activities.
1.2.2. Technological process
Advances in information and communication technology (ICT) are seen as favoring skilled workers,
which can increase inequality. Some studies even suggest that the ICT revolution is a stronger cause
of rising inequality instead of globalization.
However, it’s difficult to separate the effects of technological change from globalization since both
tend to increase the value of skills. F. Ex., Technology has led to the splitting up of economic activities
and the offshoring of production, with both processes closely linked to globalization.
1.2.3. Policy choices and regulations
Government policies, regulations, and institutions play a crucial role in shaping how globalization and
technological changes affect income distribution, but they can also directly influence income
distribution through actions like deregulating markets, altering social transfers, changing how wages
are set, or affecting workers' bargaining power.
However, linking these factors to overall wage and household income inequality is complex because
policy and regulatory changes can have mixed effects on employment and wage differences.
1.3. Conclusion
The evidence on what causes inequality is not clear-cut, partly due to the lack of precise definitions
and concepts used in different studies. o better understand why inequality is increasing, three key
things need to be clearly defined:
1) Inequality: What kind of inequality are we talking about?
2) Globalization: How is globalization being measured?
3) Reference populations: Which groups of people are being studied?
