Business·Analysis

Economic inequality: 10 reasons why we can't beat it

From a move to a $15 dollar minimum wage in L.A. to a warning from the OECD that inequality is cutting several points off economic growth, the world seems to be waking up to a growing problem. But if inequality is so bad, why can't we just fix it? Don Pittis looks at some of the reasons.

Even the OECD says inequality is bad. But making it go away is much tougher

Fast food workers in the United States have been among those demanding their wages rise to $15 an hour. The OECD says the wage gap continues to grow even though it is hurting economic growth. (Matt Rourke/The Associated Press)

It almost feels like an old story. Ever since the economy crashed in 2008 a growing chorus of voices has warned that inequality was wiping out the middle class and damaging society.

This week the Organization for Economic Co-operation and Development, the rich countries` think-tank, made headlines for declaring that growing inequality is not only bad for social cohesion, but is actually cutting points off economic growth.

If we all agree, why is it such an intractable problem? The story is complex, but here are just a few reasons why inequality is so hard to fix.

1. Equality where?

While inequality within rich countries has been getting worse, many point out that global inequality has been shrinking.

Countries like the U.S. and Canada used to consume a majority of the world's wealth. As the rich and middle class in places like China and India get a bigger piece of the action, some argue that morally, increasing global equality outweighs a relative decline in wealth by some people in the rich world. 

2. Free trade and globalization

The push to create open trade between countries means that the low- and unskilled workers of rich countries are increasingly competing directly with workers in China, Bangladesh, Vietnam and India. Even within North America, industrial jobs often move to where wages are lowest, meaning middle class industrial jobs disappear.

3. Automation

Even in developing countries, manufacturers are replacing jobs with robots and automation. Here in North America, computerized processes are already taking jobs done by factory workers, clerical workers and even professionals as clever software learns to search legal titles and write simple news stories.

Some warn that humans will never get those jobs back and that eventually rich societies will have to set up a guaranteed basic income.

4. Ideology

Letting markets set wages is a traditional cornerstone of free market ideology. In that economic model, government interference is seen as hurting economic growth.

The U.S. model, where high GDP growth has happened in concert with high inequality, seems to recommend it. However, the relationship may not be cause-and-effect, as other countries with high inequality, such as Portugal, have weak economies. 

5. Chasing GDP

GDP is the most common measure of economic success, but economic commentator Edward Hadas says it may be a poor measure for rich countries.

In the developing world fast growth is directly correlated with overall welfare. But in rich countries, where most people already have the basics, maximizing GDP is in conflict with maximizing welfare, where higher value is placed on environment, job security, "and something GDP measures badly, quality of life."

6. Personal interests

While people may speak out against inequality in the abstract, at the personal level they are unwilling to give up the things that make them better off: the second car, the nice house, the summer cottage.

Attempts to integrate rich and poor in schools result in howls of protest. The rich often seek private alternatives.

Politicians who say they will raise taxes for purposes of redistribution get few votes. And in the U.S. surveys have even shown that people with incomes below the median object to losing the potential of one day being among the rich. 

7. Peace and stability

Since people rarely give up their advantages voluntarily, radical changes such as overthrowing the landowning aristocracy of Europe or raising taxes only arrive during times of upheaval.

The plague times that created labour shortages, the First and Second World Wars and the Great Depression were disruptive enough that governments had the licence to overturn inequality.

But even after the equalizing impact of revolutions in Russia and China, a long period of stability allowed a wealthy commissar class to emerge. 

8. Capital flight

The open borders of global free trade deals mean that even governments that wish to fight inequality may find their hands tied. One of the greatest fears of governments considering raising taxes is capital flight.

Companies and rich people move to places where taxes are low. Investors withdraw their funds to places where returns are high and wages low. 

9. Decline of organized labour

Until the mid-1970s wages were the leading component of inflation. But according to research by a Canadian political economist, since then, wages have fallen behind inflation because fewer private sector workers belong to trade unions.

However, another explanation might be that shrinking demand for the unskilled due to globalization means they have less clout to enforce their demands.

10. Population pyramids

As the OECD notes, one of the reasons for inequality is the divide between the young, forced to take transient work, and older workers entrenched in long term jobs and sitting on nest eggs accumulated before asset prices began their meteoric rise.

However, the population pyramid is beginning to narrow at the bottom, putting a premium on young workers, especially those with skills.

To end on a relatively optimistic note, so long as job creation exceeds population growth, eventually those young people may be back in demand with the clout to demand higher wages.

Follow Don on Twitter @don_pittis

More analysis by Don Pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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