The impact on well-being
As you are already realising, the middle class is being weakened by increasing levels of inequality in many industrial economies.
There are two ways in which inequality affects the well-being of the next generation.
- First, by hurting the middle class, inequality reduces the potential for innovation and long-term economic growth.
- Second, in addition to reducing the rate of growth, inequality reduces the extent to which well-being (ie human development) improves in response to economic growth.
Remember what we discussed earlier: the middle class is the one most likely to drive intellectual improvement and innovation. This means that the prospects for future growth and associated improvement in well-being, all depend on the existence of a large and vibrant middle class.
However, the increase in inequality observed in many industrial economies weakens the middle class. From a purely statistical perspective, a recent research of the International Labour Organization (ILO) shows that the middle class is smaller in countries where inequality is higher. The chart below, sourced from ILO1, summarises this point by showing that the size of the middle class is smaller in countries where the gap between rich and poor is larger.
The increase in inequality therefore threatens the well-being of the future generation by shrinking the size of the middle class and hence reducing the pool of entrepreneurial talent required to generate a much needed fourth industrial revolution.
Inequality and human development outcomes
Economic growth is necessary to improve well-being, at least to the extent that well-being is identified with human development, eg better health, better access to education, absence of poverty, etc.
Yet, the extent to which a given rate of economic growth improves indicators of human development varies significantly depending on changes in inequality. More specifically, the human development impact of economic growth is stronger when inequality declines, as opposed to when inequality increases. The table below, taken from Carmignani and Chowdhury (2011)2, provides some evidence of this effect.
Indicator of Human development
|Indicator of Human development||Group 1||Group 2||Group 3||Group 4|
The table reports annualised percentage changes in six indicators of human development for a large number of countries. Countries are partitioned in four groups depending on their economic growth rate and change in inequality;
- Group 1 includes countries where economic growth is positive and inequality is declining
- Group 2 includes countries where economic growth is positive and inequality is increasing
- Group 3 includes countries where economic growth is negative and inequality is declining
- Group 4 includes countries where economic growth is negative and inequality is increasing
The figure reported for each group is the average rate of change in the relevant human development indicators across all countries in the group. Thus, for instance, in countries where growth is positive and inequality declines (i.e. Group 1), life expectancy (measured in years) increases by 0.43% a year on average. Similarly, in countries where growth is positive but inequality increases (i.e. Group 2), life expectancy increases by “only” 0.16% a year on average.
It is worth noting that an improvement in well-being is denoted by positive changes in the first three indicators (life expectancy, immunisation, and female literacy) and negative changes in the last three indicators (malnutrition, child mortality, and poverty headcount).
The table shows a clear ranking:
- development outcomes are best for Group 1
- second best for Group 2
- third best for Group 3
- and worst for Group 4.
In fact, countries in Group 4, and to some extent those in Group 3, experience a systematic worsening in their level of human development.
The comparison between Group 1 and Group 2 is particularly interesting: countries where growth is combined with a decline in inequality outperform countries where growth is combined with an increase in inequality. That is, the extent to which human development improves in response to positive economic growth depends on whether inequality increases or decreases.
Therefore, as inequality increases, the amount of economic growth that is required to achieve a given improvement in well-being also increases. To put it slightly differently, when inequality increases, economic growth must accelerate just to maintain the same rate of improvement in human development achieved in the past. However, as we have discussed above, inequality hurts future growth, so that it is difficult to accelerate growth when inequality is increasing.
The conclusion is that if the inequality problem is not addressed, then the well-being of the next generation is not guaranteed.
What evidence of inequality do you see in your daily life? Share your thoughts in the comments section below.
International Labour Organisation. Retrieved from http://www.ilo.org/global/lang–en/index.htm
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