Income inequality: a case of tunnel vision?  

Globally there has been a significant decline in between-country inequality in the last 40 years1, even though some of that progress has been undone recently by COVID and rising food and energy prices.2 At the same time, inequality within many countries has been consistently on the rise for decades now and is approaching very high levels in many developed countries3. It is a growing concern as inequality matters for several reasons.  

High levels of inequality have societal consequences – people feel let down by their governments, which in turn leads to increased instability. Increasing concentration of incomes also reduces aggregate demand and undermines economic growth. There is a lack of persuasive evidence that high levels of inequality boost the economy or improve wellbeing4,5. It is therefore clear that tackling inequality is important and necessary, not only for social reasons but also because a healthy economy underpins the performance of all investments. 

When it comes to climate change, we tend to focus on carbon emissions, forgetting other important, interconnected issues such as air pollution, biodiversity loss and water scarcity. Might we be making the same mistake with inequality, limiting our focus to the distribution of income and forgetting other important issues such as unequal access to education, employment and health care? After all, fairness is much more than just equal financial outcomes. 

Income inequality is a widely used approach to measuring inequality as it is simple and trackable. Other inequality issues are also, however, very important and should not be overlooked.  

A recently published working paper Intergenerational Income Mobility in England and the Importance of Education found that the level of mobility varies significantly across the country and points to educational achievement as one of the reasons for it. “More than 45% of the variation in absolute mobility across areas can be explained by differences in educational attainment of children from low-income backgrounds across areas for women, while the equivalent for men is 25%.” The report highlights that “this indicates education policy has an important role to play to equalise opportunities of children from low-income families across the country, though will not be sufficient to fully do so on its own.” 6 Hence the need to look at this in the context of wealth inequality. This is where the biggest divide in society is, and this divide has been rapidly increasing in recent years. According to the World Inequality Report 20227, the global top 10% owns 76% of total household wealth while the global bottom 50% owns 2% of wealth. The graph below shows how the rich have accumulated wealth over the last 26 years.  

Average annual wealth growth rate, 1995 – 2021 

Source: World Inequality Report 2022, https://wir2022.wid.world/  

Wealth inequality potentially matters more than the distribution of income. In a society where asset ownership is highly unequal, social mobility becomes severely diminished8 which has a significant negative effect on aggregate economic growth and reduces the effectiveness of educational interventions.9 

These findings point to the multifaceted nature of the inequality issue, which requires a combination of countermeasures.   

While human flourishing should be the ultimate goal of economic activity – it could be argued – the current system appears to have misaligned priorities and falls short of this ideal when it comes to long-term planning and accounting for externalities. Logically therefore, societies cannot flourish with the current level of inequality, so a new system – which has overall public good and wellness as one of its overarching priorities – needs contemplating.  

Much of this thought is contained within the “wedding cake” of sustainable development goals (SDGs) produced by the Stockholm Resilience Centre10. It illustrates the order and significance of economy, society and ecology. Resilient economies are underpinned by a healthy and functioning society, which is underpinned by a healthy biosphere. In other words, elevating the solving of environmental issues can be seen as part of strengthening human capital11 and reducing inequality.   

In this blog I have tried to show that there are many aspects to inequality and therefore there are many required interventions.​ A lot of responsibility for dealing with rising levels of inequality lies with the public sector. However, the investment industry also has a part to play, albeit with a narrower field of influence. Here income inequality might be the more accessible lever. The UN PRI report Why and how investors can respond to income inequality12 specifically focuses on investors’ ability to influence the income inequality issue and provides a list of practical actions.  

The concept of inequality is also deeply embedded within the desire to see a just transition to a net-zero economy. A Thinking Ahead Institute working group, when surveyed, agreed that addressing a just transition will require a culture reset. This means each investment organisation needs to decide whether inequality and addressing it matters to them right now. These decisions will determine whether the necessary culture reset is possible. Inequality will only be reduced if enough people work against it. If we do not reduce it, inequality will continue to pose a risk to all of us through the myriad of negative effects it has on society. 

[7] https://wir2022.wid.world/www-site/uploads/2022/03/0098-21_WIL_RIM_RAPPORT_A4.pdf

[8] https://www.ineteconomics.org/perspectives/blog/industrial-feudalism-and-wealth-inequality 

[9] http://web.worldbank.org/archive/website01066/WEB/IMAGES/127527-2.PDF

[10] https://www.stockholmresilience.org/research/research-news/2016-06-14-the-sdgs-wedding-cake.html

[11] Building Human Capital, World Bank, October 2018, https://elibrary.worldbank.org/doi/epdf/10.1596/978-1-4648-1328-3_ch3

[12] https://www.unpri.org/download?ac=5599