On income inequality

the 2008 great recession and long-term growth

John McCombie

Marta Spreafico

pp. 41-63

in: Mauro Magatti (ed), The crisis conundrum, Basingstoke, Palgrave Macmillan, 2017

Abstract

Income inequality has been relatively neglected in mainstream macroeconomics until recently, when the work of Stiglitz and Piketty, inter alios, has given it a higher profile. The standard view is that markets generally work efficiently in allocating resources and there is little cause for concern. This chapter disputes these views and makes the argument that the increase in income inequality over the last 30 years has led to an unsustainable increase in household debt, which is a reason why the 2008 crisis was so severe. Furthermore, turning to the long run, there is accumulating evidence that higher inequality lowers economic growth. Finally, we conclude by looking at the evidence as to what are the major determinants of income inequality.