Introduction

Is rising income inequality inevitable?

This chapter addresses one of the most important economic issues facing our societies and the world as a whole: rising income inequality. There is a widely held belief that rising inequality is inevitable. Increased inequality is the result of forces, such as technological change, over which we have no control, or the globalisation of world trade, which people believe, despite historical evidence to the contrary, to be irreversible. Kuznets (1955) suggested that income inequality might be expected to follow an inverse U-shape, first rising with industrialisation and then declining. Today, the ‘Kuznets curve’ is commonly believed to have doubled back on itself: the period of falling inequality has been succeeded by a reversal of the trend. Seen in this way, the third quarter of the 20th century was a ‘golden age’, not just for growth and employment, but also for its achievement in lowering economic inequality. On this basis, the marked rise in wage and income inequality observed in the US and the UK in recent decades will unavoidably be followed by rises in other countries, and indeed worldwide. Policy can make little difference.

In this chapter, I take issue with the assertion that rising inequality is inevitable. It may in fact turn out that the 21st century sees rising inequality, but this is not inescapable. We do have some choice. In challenging the popular position, I focus on the experience of OECD countries, since it is these that I know best. However, what is happening in industrialised economies cannot be divorced from what is happening in developing countries. Indeed, one frequently expressed view is that increased wage dispersion in the OECD countries is due to increased competition from low-wage economies. (I have discussed the rival view, that increased wage dispersion is due to technological change, in Atkinson, 2000.)

The chapter falls into three parts. In the first, I present a critique of the generally accepted explanation of the rise in inequality in OECD countries. Economists are sometimes accused of being slow to react to changing events – that they are always seeking to explain the last generation's economic problems. In my view, economists are in fact quick to respond to changing issues; indeed, they could rather be faulted for being too fashion conscious. In the field of income inequality, there has been a swift response.