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Symposium 2014

Virtual Library File - Capital is back! Rising wealth-to-income ratios, inequality, and growth

The Challenge

Inequality is rising in most parts of the world, irrespective of whether one looks at it in terms of annual income, in terms of wealth (i.e. of accumulated capital and other assets) or in terms of o ...

Inequality is rising in most parts of the world, irrespective of whether one looks at it in terms of annual income, in terms of wealth (i.e. of accumulated capital and other assets) or in terms of opportunity. In most high-income countries, the share of national income earned by households at the top of the income distribution has soared since the past decades (from the 1980s onward). As the World Top Incomes Database shows, the income share of the richest households continued to climb during and after the crisis of the past few years. In 2012, the income of the top 1% of households accounted for 22.5% of total income; the highest figure since 1928. One explanation is that globalization expands the market for a small group of people with sought-after talent, but competes away the income of ordinary employees. In turn, the competition among countries for skilled individuals constrains the ability of governments to maintain high tax rates on the wealthy.

According to many measures, inequality has been increasing in the developed world and is now approaching prewar levels. Income inequality does not tell the whole story. This column documents the increase in the ratio of private wealth to national income. This macroeconomic change, precipitated by slowing GDP growth, exacerbates the problem of wealth inequality and makes the economy more susceptible to bubbles.