The coming reversal of inequality


We're consistently told that the current level of economic inequality is unsupportable and that therefore something must be done. You know, that death of capitalism thing and why don't we just all sing Kumbaya together? However, it is rather necessary to work out why inequality has been increasing and even what sort of inequality has been increasing. As it happens global inequality has been falling: the poor are getting richer faster than everyone else so the gap between the top and the bottom is closing. So, that's good from any angle: absolute poverty is being beaten, the sort of thing we worry about, and inequality is reducing, the sort of thing others worry about and we don't. However, inequality within rich countries has been increasing: as before, not something we worry about very much if at all although obviously others do.

But why? And the real underlying reason is that in he past few decades we've added a few billion people to the global labour market. That's really what globalisation has done: and it's why poverty and overall inequality are receding. but that has meant something of a change in relation to capital and labour. Roughly the same amount of capital (and this is true of human of financial capital, true of highly skilled labour or pure capital) is being added to vastly more labour. Relative scarcity thus tells us that the returns to capital (again, both human and financial) will rise as against the returns to labour. Given that capital is very much more concentrated in ownership than labour thus inequality rises.

And that's usually the point at which the analysis stops. Something must be done and usually it's tax capital much more so as to give to labour. But the actual point we want an answer to is, well is this going to continue?

No, actually, it's not:

Based on UN population estimates, the number of people in the developed world aged between 16 and 64 peaked in 2010, while the number of people aged 60 and over will exceed the number of children for the first time in 2047, and more than double from 841m in 2013 to two billion by 2050. In the UK, the average age is expected to rise from 40 years in 2014 to 42.9 by mid-2039, when one in 12 people is projected to be aged 80 or over, according to the Office for National Statistics (ONS).

This is not just a rich world phenomenon. It's almost certainly true that we've reached, or are just about to, Peak Labour. From here on in demographic changes mean that labour is going to become more scarce relative to capital, not as in recent decades in glut. Thus we would expect the relative prices to snap back and thus that globalisation induced increase in inequality to go away again.

Meaning, of course, that we don't need to tax the rich into penury at all.