Impact 1
While the relationship between inequality and economic growth is not clear-cut, recent research
shows that countries with high and rising inequalities generally experience slower growth than those
with lower inequality (Ostry, Berg and Tsangarides, 2014).
Inequality hurts the economy in different ways. First, greater inequality in income and wealth can
result in greater disparities in access to credit or productive assets, such as land, since poorer
households are unable to offer collateral or other guarantees against default. This makes it harder
for lower-income households to invest in businesses or education. Forgone demand, productivity
and innovation affect economic growth negatively. When those at the bottom of the income
distribution are at high risk of not living up to their potential, the economy pays a price–not only
through weaker demand today but also through lower growth in the future.
In contexts of high inequality, the rich may opt-out of publicly funded education and health and
choose private equivalents of better quality (Ferreira, 2001; van der Weide and Milanovic, 2018).
The choice of private services by the wealthy can affect political support and therefore the funding
of public services, making it even harder for lower-income households – who depend more on these
public services – to access good-quality education and health care, further squandering potential for
growth. Unequal access to education and health services has also been recognized as a barrier to
productivity growth and a key contributor to economic inequality, namely in Latin America (UNECLAC, 2018). Low human-capital accumulation among poorer households has similarly been
identified as a key factor in explaining the negative impact of inequality on economic growth (OECD,
2015a).
In addition to inhibiting economic growth, inequality can generate economic instability and market
volatility. Growth spells tend to be shorter when income inequality is high (Berg and Ostry, 2011).
This result holds also when other factors that affect economic stability, such as external shocks and
macroeconomic conditions, are taken into account. The global economic and financial crisis of 2008
provided some evidence of this effect. Its onset has been linked to a combination of rising inequality,
wage stagnation and financial deregulation.36
Most empirical evidence on the relationship between inequality and economic growth, including the
studies cited, focuses on growth in average incomes. Disaggregating the impact of inequality among
different percentiles of the income distribution, van der Weide and Milanovic (2018) find that, in the
United States, rising inequality in net incomes has been particularly detrimental to income growth
rates among the lower income percentiles, while proving beneficial to those in higher percentiles.
Thus, even if inequality were found to affect overall growth positively, it is probable that such
positive effects would accrue mainly to the wealthy. Indeed, across countries, high and growing
levels of inequality have been associated with slower poverty reduction at given levels of economic
growth (Besley and Burgess 2003; Ravallion, 2007a; Fosu, 2011).
Impact 2
People's aspirations and sense of well-being are defined by their socioeconomic status. Barriers to
upward mobility cause social tensions and threaten the social contract. Human capital is the engine
of economic growth in the Fourth Industrial Revolution, and frictions that inhibit optimal talent
allocation and capital accumulation may dramatically slow progress. Inequalities of opportunity and
limited social mobility fuel such frictions and stifle productivity drivers. Recent research implies that
low social mobility may function as a multiplier of the detrimental impact of income inequalities on
the rate of economic growth. Low social mobility exacerbates disparities and slows economic
progress.
A new impact study assesses the cost of poor social mobility on UK economic development. Low
social mobility will cost the UK economy £140 billion per year until 2050, or £1.3 trillion in lost GDP.
The same research suggests that moderate gains in social mobility may boost UK GDP by 2–4%
annually. In high-income nations, boosting social mobility might help resurrect stagnant productivity
and median income growth, as well as the ongoing technology and climatic changes (World Social
Report, 2020).
A recent study shows that unequal societies have lower intergenerational social mobility. With 75
countries in all regions, Ambar Narayan& Roy Van der Weide (2018) found that more inequality is
related to poorer relative intergenerational mobility. Their findings echoed Corak (2013) research on
the "Great Gatsby Curve" between lack of intergenerational economic mobility and inequality. In
more unequal societies, people's capacity to succeed is more dependent on their parents' wealth
and resources. Higher inequality correlates with poorer relative mobility, and lower mobility
correlates with lower outcomes and opportunities across generations.
Social mobility between generations has reduced in industrialised nations, according to current
OECD data(World Social Report, 2020). However, movement patterns differ greatly per country. high
inequality coexists and high relative mobility in recent fast-growing countries like Brazil, China,
Indonesia, and South Africa. More mobility at the top and bottom of the income distribution than
other countries in these middle-income nations (World Social Report, 2020). Even in situations of
severe inequality, fast economic growth, particularly in cities, increases the chances of migration.
These changes may dwindle if development slows while inequality increases.
Increasing economic inequality is linked to increasing geographical disparities, which can lead to
poverty concentration and reduced relative mobility. Narayan. A and Weide. R (2018) show that
nations with higher educational mobility have better spatial fairness in educational results. Poorer
neighbourhoods with greater crime rates have less access to and quality of public services, especially
schools, restricting mobility opportunities (World Social Report, 2020).
Inequality can also impede social mobility by preventing parents from passing on benefits to their
offspring. In highly unequal countries, privileged groups have more power to influence politicians,
therefore protecting their offspring from social mobility. Political parties grow more reliant on
affluent backing (World Social Report, 2020). The capture of upward mobility possibilities by the
privileged may cause a vicious cycle of stagnation and rising inequality.
Impact 3
In principle, growing inequality should drive increased redistribution through progressive taxes and
more public services. Powerful people tend to capture political processes, especially in times of
rising inequality. Without strong checks and balances, major businesses and the affluent may use
their power and resources to advocate for their interests, fight progressive tax laws in court, or
conduct public awareness campaigns about redistribution.
A strong middle class may counteract wealthy interests by demanding improved public services,
infrastructure, and social protection. A tiny or declining middle class exerts little political pressure. A
growing sense of “social separatism” (Milanovic. B, 2016) might result from high-income families
opting out of public services. Middle- and lower-income populations may get politically discouraged
if they believe the system unjustly benefits the wealthy. People in highly unequal societies may grow
less sensitive to economic inequality and exert less pressure for redistribution, according to research
from Europe and the US (Roth & Wohlfart, 2018). Injustice can also cause political unrest. The antiausterity demonstrations in the EU following the 2008 crisis and the Occupy Wall Street rallies in the
US were all reactions to increasing inequality and the “elite capture” of politics.
Overall, growing wealth and income concentration reduce faith in politics and public institutions to
serve the majority needs (World Social Report, 2020). Lack of trust undermines political systems and
impedes democracy. It undermines prosperity by affecting investment and economic growth. It also
undermines the social fabric. To address social challenges and create and distribute public goods
collectively, confidence in institutions is required.
Rising inequality has been shown to reduce people's trust in others, maybe through affecting their
sense of their social status. It also explains about half of the observed drop in confidence in people
and government in the United States between 1980 and 2000. (Gould and Hijzen, 2016). Perceptions
of injustice can influence trust in institutions like property rights. Property rights and contract
enforcement, for example, are less committed in countries with more billionaires from rent-seeking
industries (World Bank, 2017).
Increasing inequality breeds unrest, political dysfunction, and violence. Group-based inequality and
violent conflict have a favourable connection. Inequality in access to economic resources, public
services, political processes, and power, as well as other areas of civic and cultural life, has long been
linked to deep grievances that have frequently been mobilised to fuel violent conflict and violence.
According to research, unequal income and wealth distribution can erode social cohesiveness by
inciting hate, jealousy, and a sense of injustice (Alesina, Michalopoulos and Papaioannou, 2016). The
current rise of populism in several nations has been linked to growing inequality.
Economists consider political unrest a major threat to economic growth. Political unrest may cause
governments to adopt suboptimal short-term macroeconomic strategies. It may also lead to more
frequent policy changes, causing volatility and harming macroeconomic performance. Several
economists are interested in the ubiquitous phenomena of political instability and its detrimental
impact on economic performance. As a result, the profession has produced extensive research on
the detrimental impacts of political instability on macroeconomic indicators such as GDP growth,
private investment, and inflation. Alesina (1996) show that GDP growth is considerably lower in
nations and time periods prone to government collapse. Jong-a-Pin. R (2009) finds that political
instability reduces economic growth. In terms of private investment, Alesina and Perotti (1996) show
that socio-political instability raises risks and reduces investment. Aisen and Veiga (2006) state that
political instability raises inflation . This is because political instability shortens government
perspectives, undermining long-term economic strategies favourable to higher economic success.
Impact 3
Everyone in OECD countries has access to quality education regardless of money. However,
education systems may both promote social mobility and perpetuate and strengthen a society's
current wealth distribution pattern. In most nations, children from middle- and upper-class
households do better in school, attend university, and earn more as adults.
Richer households can afford more schooling. Additionally, because property taxes mostly support
public education, growing income disparity leads to increased economic segregation of
neighbourhoods (through sorting in the housing market) and school districts. Affluent children are
more likely to be sheltered from the burden of student loans and financial constraints.
Pfeffer, F. T. (2018) provided two sets of results from the Panel Study of Income Dynamics (PSID).
First, the results support the prediction that higher household wealth correlates with better
educational achievements, with higher wealth quintile kids outperforming lower wealth quintile
youngsters. Also, money and wealth seem to influence schooling outcomes independently. Second,
while high school graduation and college enrollment rates have risen throughout the income
spectrum, college persistence and completion rates have risen faster for children at the top of the
wealth spectrum compared to the educational outcomes of children born in the 1970s to those born
in the 1980s.
There have two ways growing income inequality leads to increased gaps in college achievement
(Pfeffer. F, 2018). First, the richest 20% have risen above the remainder of the wealth distribution.
The wealthiest quintile amassing more money would lead to increased college achievement among
children who grew up in wealthy homes. A greater link between family wealth and college
attainment has also emerged, reinforcing the initial impact and widening the wealth disparity in
college attainment. Education inequality rises not just due to the rising income gap but also due to
the increasing relevance of money.
Findings highlight the impact of home income on educational achievements (Pfeffer. F, 2018).
However, despite the large connections in his research, only a tiny fraction of the growth in
education wealth disparity is due to the increase in wealth inequality. The fact that income matters
more in college results necessitates governmental measures to promote equal college access.
Education is a vital component in growth. Unsustainable economic progress requires considerable
human capital investment. Education broadens people's outlook on life. It improves their lives and
helps both people and society. Education boosts productivity, creativity, entrepreneurship, and
technological advancement. It also ensures economic and social growth while increasing income
distribution. The World Bank's “Education For All” (EFA) study (Lanzi, 2007) believes education
impacts many nations' economic growth. According to Vinod & Kaushik (2007), a country's economy
grows as the quantity and quality of human capital increases.