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Inequality and the economy

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Inequality and the economy

Inequality has been rising in most developed economies for decades, reaching levels not seen since the 1920s. Wages have stagnated for workers without college degrees while asset prices—stocks, real estate—have soared for those who owned them. This divergence is not accidental: it reflects changes in technology, globalization, education premiums, and fiscal policy that have systematically redistributed wealth upward. This chapter explores the sources of rising inequality, its consequences for growth and stability, and how economies adapt to distributional shocks.

Why this matters​

Rising inequality shapes political economy more than most economists acknowledge. When wage growth stagnates for the median worker while corporate profits and asset prices surge, inequality becomes politically explosive. It fuels populist movements, erodes faith in institutions, and shapes voting patterns across countries. Economically, high inequality can reduce aggregate demand (the wealthy save more than they spend), reduce social mobility, harm health and education outcomes, and create financial instability as inequality-driven polarization undermines policy consensus. Understanding inequality helps you anticipate political shifts, see which sectors will face pressure, and understand why middle-class anxiety persists even when unemployment is low.

What you'll learn​

You'll learn how inequality is measured: the Gini coefficient, income percentiles, wealth distribution, and what each metric reveals and obscures. You'll discover the sources of rising inequality: skill-biased technological change (automation rewards education and destroys routine jobs), globalization (competition from lower-wage countries), declining union membership (workers lost bargaining power), and rising returns to capital versus labor (owners of capital benefited while workers didn't). This chapter covers the divergence between wage growth and productivity growth: for decades, workers produced significantly more but didn't share proportionally in the gains. You'll see how asset inflation has driven inequality: stock and real estate ownership is highly concentrated among the wealthy, so when assets appreciate due to central bank policy, inequality widens. You'll learn about intergenerational mobility: whether children born poor can escape poverty depends on education, family background, and geography. You'll finish by understanding the macroeconomic effects: high inequality can reduce demand, increase financial instability, and create political instability.

How to read this chapter​

Start with measuring inequality and understanding the long-term trends across countries. Learn which countries have seen the most inequality increase and why. Understand the roles of technology and trade: do robots or factories moving to Mexico cause more inequality? Move to labor market effects: why have wages stagnated for non-college-educated workers while CEO pay has soared exponentially? Explore the asset inflation story: how central bank policy that drives up stock and housing prices affects inequality by rewarding asset owners. The final articles cover consequences: does inequality matter for growth, or only for distribution? How do political systems respond to inequality? What policies can address it?

Articles in this chapter​