What drives growing inequalities?

Growing income and wealth inequalities in European and other developed countries are being driven by a complex range of factors, according to researchers working on a European Commission-funded project. Their report summarises the findings of a number of separate studies looking at inequalities in income, wealth and education.

Key findings

  • The main drivers of growing income inequalities include: globalization; skill-biased technical change; the increasing importance of capital earnings; and changes in taxation and transfers.
  • There is evidence that economic recessions resulting from the global business cycle have permanent effects on income inequality, with higher unemployment a key mediating factor.
  • Skill-biased technical change in recent years has added to income inequality, by increasing the educational 'premium'.
  • Although earnings are still the most important factor in explaining income distribution, in the last two decades the role of capital has also been 'sizeable' – in particular, the effect of increasing home-ownership and the mortgage interest tax relief linked to it.
  • Taxes and benefits have been less effective in redistributing income since the mid-1990s. Income tax rates have been lowered and indirect taxes have been raised. Changes in tax burdens and benefit entitlements were mostly regressive between 1995 and 2005, especially for single people and childless families.
  • In relation to growing wealth inequalities, the report again points to a range of drivers – including declining inheritance taxes, and rising numbers of people becoming 'super rich' through dramatically worsening income inequality.

Source: Gabriele Ballarino, Francesco Bogliacino, Michela Braga, Massimiliano Bratti, Daniele Checchi, Antonio Filippin, Virginia Maestri, Elena Meschi and Francesco Scervini, Drivers of Growing Inequalities, Intermediate Work Package 3 Report, GINI Project (European Commission)
Link: Report

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