Income inequality can lead to several of the seven deadly sins. Greed is a natural in a society where some people have much and many have little. Unequal societies are also susceptible to Envy. A particularly equal society can bring about Sloth, the assumption that nothing is really worth striving for. Today, I would like to examine two assumptions about income inequality:
1) That unequal societies are more efficient since they provide incentives to cure hopelessness and sloth; and
2) That unequal societies have higher crime rates as a result of envy of the rich and disregard for the rules that maintain inequality.
A favourite measure of efficiency in an economy is labor productivity – the average amount of wealth produced in an hour of work. It is meant to be a measure of working smarter, not necessarily working harder. Value-added professions, like technical design and marketing, tend to increase the total wealth with less effort than physical labor. Unfortunately, there is less information about this measure than some of the other measures of international performance. Using a smaller data
set than in my last blog,we can see an actual decline in labor productivity with increasing inequality. This is not a strong trend and is dependent on the values for Mexico and Chile (two of the few developing countries in this data base) and Norway (the most productive Scandinavian country). Still, it does not support the idea that inequality will set you free from inefficiency. Scandinavia and Western Europe are productive, while Eastern Europe is not.
Given my comments above on working smarter, it is not surprising that the economies with the most value-added workforces (the developed countries) tend to score well for productivity, no matter how generous their social programs are. The focus on efficiency in the economic literature is on the growth of labor productivity, putting in question whether efficient countries can maintain both their wealth and relative equality. The increase in inequality under the Conservative rule of Margaret Thatcher and John Major in the UK did lead to a strong period of growth in labor productivity (see the U.S. Bureau of Labor Statistics data), especially during the 1990’s. However, the rate of increase was not as strong as that for Ireland and the Scandinavian countries during the same period. On the whole, it is not clear that income inequality is strongly related to productivity or its deadly opposite, sloth.
A stronger case can be made for the danger that inequality poses as a result of envy. The murder rate (per 100,000 people) rises rapidly with an increasing Gini coefficient. The relationship explains 39% of the variability in murder rates. Eastern european countries tend to have more murders than predicted by inequality while western Europe tends to have fewer. The infamous murder rate in the United States, which I must say, seems quite modest in this context,
is predicted quite closely by the country’s Gini coefficient. Its seems extreme to suggest that we , as human beings, start thinking murderous thoughts when we realize that wealth is concentrated in the hands of a few. A more direct connection with wealth envy would be expected in the rate of burglaries. However, there is no correlation between inequality and the rate of reported break-ins. People will help themselves to others’ possessions even in the most equal of societies. Perhaps, the increase in murder in unequal economies comes from a general sense of desperation rather than a simple desire for what other people have.
In any case, we must recognize that income inequality, whatever its virtues for a society, comes at a cost – a cost that, in some cases, can be quite deadly.