Inequality: Causes, policy response and market implications
- Over the last 40 years, wealth and income inequality has decreased on a global level but risen substantially in Advanced Economies (AEs). There, the tails of the distribution have increased, hollowing out the middle class.
- Labour market forces have been instrumental. Technical progress, globalisation and the weakening of labour institutions have affected low and medium-skilled workers. Changes in the tax regimes have also benefitted capital over labour.
- To reduce tensions, enhanced labour market flexibility needs to be complemented by new a societal consensus (Social Contract) and corporate responsibility.
- In the short-term, pro-growth policies will continue to benefit risky assets. Longer term, the relative pace of monetary and fiscal retrenchment will be key for markets. Social and political pressure to tackle inequality will create headwinds for the return on investment, and possibly break, or reverse, secular disinflationary trends.
- Finally, while global companies embrace ESG at a faster speed, the “S” component is set to grow..