Finance and Income Inequality

What is it about?

This paper examines how the growth of finance (or financialization) increased income inequality and redistribution in 18 affluent nations between 1981 to 2011. We use three measures of financialization: finance, insurance, and real estate (FIRE) employment, credit expansion, and financial crises. We find that all three measures of financialization increased income inequality. We go beyond previous research to show that financialization primarily increases inequality through creating more variation in market incomes; however, credit expansion also increases income inequality by limiting redistribution. Financial crises, on the other hand, increase market income inequality, but the impacts of crises are buffered by welfare state policies like unemployment insurance and other social programs.

Featured Image

Why is it important?

Overall, this paper shows that financialization is an important factor shaping income inequality by not only creating more unequal market incomes but by also affecting redistribution and welfare state capacity.