The theme of unjust inequalities has become a central problem of our times. The 2016 US presidential election was fought largely on this issue. The three most important Presidential contenders emphatically criticized the globalized capitalist system precisely for this. In Hillary Clinton’s program , out of five propositions, the correction of the wage/profit gap was the third and the fourth most important promise.1 Donald Trump and Bernie Sanders (for various reasons, Trump for national radicalism, Sanders for social radicalism) went even further. They agreed that, as far as income distribution is concerned, the “entire game is rigged”. This intellectual battle has not come to an end with the US elections. In August 2018 The Economist newspaper started a one week open debate on its website under the title “Is capitalism rigged in favor of elites?”2 Out of more than 15 thousand readers who casted their votes, 76% answered “yes”.
Arguably, the public political discourse has arrived into a new age. While the question of inequality was a central theme to the nineteenth century economics, in the twentieth century the issues of inequality of distribution of incomes and wealth tended to be neglected in economics (though it emerged as a central theme in sociology). When it was brought back to the center of attention, for instance by Kuznets (1955), it was assumed that economic growth would automatically take care of the issue. Over the past few years, however, the topic has received increasing attention, especially with the path-breaking works of Joseph Stiglitz , The Price of Inequality (first published in 2012) and Thomas Piketty’s Capital in the Twenty-First Century (first published in French in August 2013). Anthony Atkinson (2015) is one of the rare economists who studied income distribution, inequality , and poverty over the past several decades, recently adding another impressive volume Inequality : What Can Be Done? to his many publications on the topic. Intriguingly while research of inequality was a way sociologists defined what their profession is, during the past two-three decades most major books were written by economists.
Few scholars share the optimism of Kuznets today: growth is not a guaranteed solution to reduce inequalities. Piketty’s main finding and his main prediction were enthusiastically received by many intellectuals, the wider public, and several international organizations as the right answer to the dilemmas generated by the international financial crisis of 2008.
The question of poverty , always of central concern for sociologists who studied inequality also attracted the attention of economists. The World Bank, which has been the target of criticism of left-leaning sociologist, accusing the institutions for “monetarism” and “neo-liberal economics”, “market fundamentalism”3 took on a leading role in research on poverty . A study of the Bank, beyond offering new careful methods to measure poverty , is also focusing on the future. As it is explained in World Bank (2013), the aim of the ongoing Shared Prosperity Program is to condense extreme poverty from the present 20% below 3% by 2030 at the world level through policies targeting the bottom 40% of the income scale in each and every country of the world. Concurrently, in a flagship publication of the OECD (2015) experts claimed that income inequality had had a sizeable and statistically significant negative impact on the long-term growth in 19 core OECD countries between 1990 and 2010. In an IMF staff-paper—Ostry et al. (2014)—similar findings were reported. Note, however, that these econometric works are challenged by others. E.g. Fuest et al. (2018) compiled a data set covering 110 countries over the years from 1970 to 2010 and run multivariate regressions pertaining to the growth—inequality linkage with control variables depicting the sample countries’ other political and social characteristics. Their conclusion, not very surprising for the present authors, was that a negative correlation between inequality and growth can only be detected if per capita GDP remains below 5000 US dollars.
When economists or sociologists start writing about inequalities, it is indispensable to start with numerous caveats. First, and foremost, wealth concentration is twice the level of income inequality across the advanced market economy countries.4 Secondly, everywhere in the world, political discussions on inequality often conflate two related but distinct issues: equality of income and wealth on the one hand, and equality of opportunities and social mobility on the other. As the title of our book promises, three sources of income inequalities—wages, profits, and rents—are in the focus of our research. The long-term social consequences of wealth inequalities—for instance on fluidity , or relative mobility —are mentioned in the book several times, but we don’t claim to say anything particularly novel on this.5
All specialists of the subject know that there are intrinsic difficulties in measuring the levels of statistical inequality in a precise way. In medium-size and small countries, survey methods are simply not suitable to obtain reliable information of the top 1% or the top 0.1% of the population. Even incomes of the top 10% are difficult to estimate due to the increasing refusal rate in surveys. The smaller is the country, the bigger is the measurement error arising from this. If the measurement of absolute levels is difficult, it is also difficult to assess the changes in inequality in the short-run, say during the 3–4 years of tenure of a given government. It is very common that the two most widely used indicators move into opposite directions in such a short time (i.e. the Gini coefficient and the percentage share of people living at a pre-defined poverty level). Although conceptually it is easy to make a distinction between pre-tax and after-tax incomes, in real life, it is difficult to know whether the system of taxation is not sufficiently progressive6 or the crux of the problem is merely tax evasion (cheating). A further statistical complication arises from the fact that the Gini coefficient is not applicable to measure wealth inequalities, if many households report negative wealth—which is actually quite common among young families living in their own houses burdened with a long-term mortgage.
Our last caveat pertains to the seemingly paradoxical impact of globalization. Rapidly increasing foreign trade and various forms of foreign direct investments lead to the cross-country equalization of incomes (e.g. if China and the United States are compared), while the within-country inequalities rise both in the mo...