Economists have long known that a more equitable distribution of income has the potential to lower inequality, and that’s the subject of a new paper.
The authors argue that a new economic paradigm that treats the income distribution as a function of the wealth distribution and not a simple function of aggregate market prices could lead to more equitable distributions of wealth.
The paper, by the MIT and Princeton economists Michael J. Sohn and Andrew Lees, comes after years of research by the team, which is based at the MIT Sloan School of Management.
“Our study shows that, with an increasing number of people in the US, inequality is decreasing,” said Sohn, a professor of economics and law.
“That is not surprising.
But the idea that it’s actually increasing and that the inequality is actually increasing has not been widely appreciated.”
A more equitable world would mean a more prosperous economy, with less poverty and inequality.
That’s because economic activity tends to be concentrated in the richest 10 per cent of households, while the other 99 per cent have less income.
The economists’ model, which takes account of different kinds of income, assumes that the distribution of economic activity between rich and poor is more equal now than in previous decades.
The researchers estimate that this inequality is the reason why the incomes of the richest 1 per cent and the poorest 10 per % of Americans are growing at about the same rate, while those of the bottom 10 per 10% have stagnated or decreased.
The new paper, which they call the Wealth Inequality Index, aims to capture this inequality by looking at how the distribution changes in real time, using data from the US Census Bureau.
They find that as the share of income in the top one per cent rises, the gap between the bottom 50 per cent in the economy shrinks.
In other words, the share in the bottom 40 per cent shrinks in real terms as the gap widens between the top and bottom 50%.
“This is a very useful tool for tracking inequality,” said Jens Meyer, an economist at the University of California, Berkeley and a co-author of the paper.
“We think it’s very important that we understand the inequality distribution because we are going to have to change it to address it.”
The paper also includes a more detailed analysis of the economic inequality index, which measures inequality as the percentage of income that goes to the top 10 per 100 earners in the country, and the index’s overall growth rate.
They found that the top 1 per 100 earnings have grown at about 3.5 per cent a year on average since 2008.
In the period between 2001 and 2011, the top earnings rose by 1.3 per cent.
For the next 10 years, the index grew at about 1.4 per cent, with the overall growth at 1.9 per cent between 2011 and 2020.
That means inequality has grown much more quickly than the economic growth in the middle classes.
“The top 1 percent has been doing quite well over the past 10 years,” said Meyer.
“But that’s not the way the economy should work.
The middle class has been in the worst shape in decades, and we’ve got to get them out of there.”
Sohn said that his team was surprised by how much inequality the economy has become since the 2008 financial crisis.
“This paper is really about how much of a problem inequality is and how it is getting worse,” he said.
“How do we get to a point where people in our society don’t have to live in poverty?
How do we do it in a way that is equitable and not in a place where inequality is increasing and getting worse?”
The paper’s lead author, Sohn told Business Insider he was interested in the paper because of its size and because of the importance of inequality.
“I thought it would be interesting to take a closer look at what we’ve known for some time about inequality and how the world is changing,” he explained.
The economic inequality model is not a new concept, but Meyer noted that it was a relatively recent idea.
“It’s very much a result of the financial crisis, but I think it was more of a response to it,” he added.
“When I think about this, it’s interesting that the idea is coming out of the economics department at a really high level.”
The researchers also looked at how inequality has changed in the last 30 years.
They compared how the top income share in America changed between 1960 and 2010, and compared that to the share that rose between 2000 and 2010.
“A lot of the changes we see are not as dramatic as the rise in the share, but there are some trends,” said Martin Wolf, an economics professor at the New School and co-director of the Global Inequality Project.
“For example, since 1980, the bottom 20 per cent has actually seen a decline in the amount of inequality they are experiencing.
And we also see an increase in inequality in the other half of the income spectrum.”
He added that the rise of the top decile