This study argues that, for those of us who care about the welfare of the poorest and the most vulnerable, income inequality is not a useful measure. Measures of income inequality tell us nothing about the living conditions of the poor, their health and their access to economic opportunity. Income inequality can easily increase in societies in which everyone, including the very poorest individuals, is becoming better off. Conversely, a reduction in inequality can be associated with deterioration in the living conditions of the less well-off members of the society.
While country-based measures of income inequality rose in the developed world in the 1980s, it is not clear that inequality in the developed world since then has constantly been on the rise. UK’s Gini coefficient has been declining since 1998. Furthermore, it is not clear that consumption inequality and inequality in life satisfaction has increased since the 1970s. Hence, much more caution is needed when interpreting the recent data on inequality, and certainly some of the more radical claims about the widening gap between the rich and poor appear unwarranted in light of more nuanced evidence.
The received wisdom about the effects of inequality on social outcomes appears to be largely flawed. Arguments proposed by publications such as The Spirit Level on the negative impact of inequality on health outcomes, homicides, drug use or teenage pregnancies are unconvincing and based on very problematic evidence. Furthermore, as we explain, there is no convincing link that would enable us to associate high levels of income inequality with the financial crisis of 2008. By those standards, that crisis should have occurred at a different time and also in different countries.
Sometimes, rising income inequality can be symptomatic of underlying institutional problems. The growth of executive remuneration in the financial industry, for instance, cannot be dissociated from a cosy relationship which has long existed between policymakers and bankers. The implicit guarantees to the banking sector have led to excessive risktaking and leverage, translating into high bonuses in good economic times and bailouts in bad economic times.
Focusing on income inequality rather than drivers of poverty, obstacles to economic opportunity and systematic injustice obfuscates what works and what doesn’t in the realm of economic policy, and ultimately harms the poor and the vulnerable.