Lin Deshan: The Roots and Impact of Inequality in Contemporary Capitalism
The issue of inequality is a problem that has accompanied the historical development of capitalism from its inception. Although inequality in post-war capitalism temporarily showed a tendency toward mitigation, the widening of inequality and increasingly severe polarization since the 1980s have become defining epochal characteristics of contemporary capitalism. At the turn of the 21st century, capitalist inequality had already sparked intense discussion in mainstream academia; in 2013, the French economist Thomas Piketty's Capital in the Twenty-First Century further heightened these debates. Increasingly severe inequality is the product of various processes in the socio-economic development of contemporary capitalism, and it is particularly inseparable from the policy orientations of various nations.
The Trend of Intensifying Inequality in Contemporary Capitalist Countries
According to the United Nations' definition, inequality refers to an unequal state regarding people's status, rights, and opportunities. It manifests specifically as "economic inequality," meaning "the distribution of economic variables among individuals within a collective, among groups of people, or between countries." In discussions regarding inequality, sociologists generally categorize numerous phenomena of inequality into two types, or emphasize two types of inequality: the first is inequality of outcomes across various material dimensions, such as levels of income and wealth, educational attainment, and health status; the second is inequality in individuals’ potential opportunities for choice, including inequality in employment or educational opportunities. While scholars in different fields have their respective focuses on inequality—for instance, political scientists tend to emphasize political rights, social inequality, and inequality of prestige and status, while economists often place greater emphasis on inequality of income, wealth, or consumption—inequality of income or wealth remains the primary indicator by which people measure inequality.
The trend of widening income and wealth inequality. In his analysis of social changes in the post-war United States, the American scholar Dennis Gilbert once referred to the quarter-century after the war as an era of "shared prosperity." This era came to an abrupt halt in the 1970s; consequently, he termed the period since the early 1970s the "age of growing inequality." This characteristic generally reflects the features of social change across developed capitalist countries as a whole, including Western European countries, although the degree of social polarization in the latter (Europe) is less than that of the United States due to its specific social development models. However, a vast array of facts demonstrates that since entering the 21st century, this situation of inequality and polarization in developed capitalist countries has been intensifying day by day.
People generally use the change in the ratio between high-income groups (such as the top 1% or 10% of earners) and low-income groups in income and wealth to represent the state of income inequality. Figure 1 (figure omitted) shows the changes in the share of national income held by the top 10% of the population in the United States, Europe, and Japan over the past century. While it confirms Gilbert’s aforementioned conclusion, it more prominently illustrates the overall trend of continuously widening inequality in developed capitalist countries since the 1970s. Figure 1 shows that around the 1980s, income inequality in the three major developed capitalist economies of the US, Europe, and Japan expanded significantly, reflected by a sharp rise in both high incomes and capital income. By 2016, the share of income held by the top 10% of the population had reached 37% in Europe and 47% in the United States. Meanwhile, relevant reports from the International Monetary Fund (IMF) show that in most developed economies, the intensification of income inequality is primarily driven by the constantly growing income share of the top 10%.
Compared to income inequality, the phenomenon of inequality in wealth (the sum of household savings, home equity, investments, and debt) in developed capitalist countries is even more severe. Changes in the wealth distribution structure between the top 1% and the bottom 90% of the population in European and American countries show that between 1980 and 2010, the wealth share of the top 1% in various countries grew to varying degrees, while the wealth share of the bottom 90% saw a corresponding decline across the board. According to relevant analysis reports from the OECD, as of July 2021, on average across OECD countries, the wealthiest 10% of households owned more than half of all household wealth; this proportion has grown in about two-thirds of these countries since 2010. On the other end of the spectrum, households in the bottom half of the wealth distribution own very little net wealth. In most OECD countries, households in the lower half of the distribution have almost no net wealth. Around 2018, across the entire OECD, the bottom 40% of households with the lowest net private wealth owned, on average, only 3% of total household wealth. In some countries, the net wealth of these households even shows as a negative value, meaning their debts exceed the total value of their assets. Around 2018, nearly one-tenth of low-income households were over-indebted. Conversely, wealth is highly concentrated at the top. More than half (52%) of the wealth "pie" is held by the wealthiest 10% of households. Around 2018, the wealthiest 10% of households in the United States owned close to 80% of total wealth. In Austria, Chile, Estonia, Denmark, Germany, and the Netherlands, the wealth share of the top 10% of households exceeded 55%. Furthermore, the growth in net wealth levels is extremely uneven. On average, the wealth level of the top 10% grew by 13% in real terms in the decade prior to 2021, while the wealth level of the 50% below them grew by 6%. However, during the same period, the average wealth of the bottom 40% shrank by more than 12%. This has led to a widening gap between the rich and the poor, with the wealth share of the wealthiest 10% of households increasing while the share of the remaining 90% decreases.
Among developed capitalist countries, the phenomenon of income and wealth inequality in the United States is more severe. Figures 2 and 3 (figures omitted) show that between 1980 and 2017, although both Europe and the United States saw a trend where the income share of the top 1% grew while that of the bottom 50% declined, the degree of income inequality in the United States is far greater than in Europe. After entering the 21st century, more than one-fifth of income in the United States flowed to the top 1%. Moreover, this trend further intensified after the 2008 financial crisis. Since the U.S. economy resumed growth following the crisis, 95% of income growth has flowed to the top 1%. Among them, the income of the "ultra-high-income" top 0.1% accounted for about 11.3% of total income in 2012, three to four times what it was 30 years ago. When comparing the changes in domestic income and wealth distribution in the United States, the polarization of wealth is even more severe. The wealthiest 1% of the U.S. population owns one-third of the nation’s wealth; the income share of the top 5% exceeds 60%, and their share has grown steadily over the past few decades. If housing wealth is excluded, this proportion is even higher, and this trend is still rising further. The 2008 financial crisis exacerbated this inequality. If racial distinctions are taken into account, the problem of inequality in the United States is more serious still. From 2005 to 2009, the wealth of a large number of Americans decreased sharply. In 2009, the net worth of a typical white American household fell significantly to $113,149, a 16% decrease from 2005. During the same period, the typical African-American household lost 53% of its wealth—its assets were only 5% of the median for white Americans. The typical Hispanic household lost 66% of its wealth. In the economic recovery phase following the crisis, the unequal trend in U.S. wealth distribution became even more severe. During the years of "recovery," as stock market values rebounded, the wealthy regained most of the wealth they had lost; other groups, however, failed to do so. In 2009, the wealth of the wealthiest 1% of households was 225 times that of the average American, almost double the ratio from 30 or 50 years ago. For instance, the six heirs of the Walmart empire own $90 billion in wealth, equivalent to the total wealth of the bottom 42% of the American population. Conversely, the economic recession caused the wealth of the middle class (most of which consists of home equity) to shrink significantly. The gains of the economic recovery flowed almost entirely to the wealthiest Americans.
Polarization and the problem of poverty are becoming increasingly severe. Although the issue of inequality is not identical to the issue of poverty, the development of inequality is intrinsically linked to poverty. Relevant research from the International Monetary Fund points out that income inequality affects the pace at which growth promotes poverty reduction. In countries where initial inequality is high or where the pattern of growth distribution favors non-poor individuals, the efficiency of economic growth in reducing poverty is lower. Furthermore, because the economy is periodically hit by various factors that disrupt growth, higher inequality makes a larger proportion of the population vulnerable to falling into poverty. In the United States, while income is increasingly concentrated at the top, the poverty problem for more people at the bottom has become more severe. Approximately 22% of American children live below the federal poverty line. From 1969 to 2009, after adjusting for inflation, the median income of a male American worker with only a high school education fell by 47%. Meanwhile, the middle class, long regarded as the core social strength of developed capitalist countries, has been squeezed, and its income has stagnated. Around 2015, median American household income, adjusted for inflation, was lower than it was in 1989. The economic recession has made the plight of the bottom and middle classes even more severe.
The crisis caused by the 2020 global COVID-19 pandemic further exacerbated the trend of inequality in developed capitalist countries. At the start of the crisis, the insufficiency of net wealth among bottom-tier households left a large proportion of families unable to cope with the income shocks caused by the pandemic. Nearly half of low-income individuals lacked emergency savings; their liquid assets available in the event of a short-term income disruption were insufficient to sustain three weeks of household expenditures. Many households had almost no net wealth at all. Consequently, a large segment of the population had no capacity to deal with the labor market and income shocks triggered by the pandemic. This situation is directly related to the wealth composition of households in the bottom half of the wealth distribution. For these families, the largest portion of their household wealth is real estate. Among the bottom 40% of households, primary residences account for 61% of total assets, whereas for the top 10% of households, this proportion is only 34%. This means that households with lower wealth are unlikely to rely on financial wealth as a resource for resilience. OECD countries quickly took unprecedented measures to help households withstand the economic impact of the pandemic. Although this support helped millions of people through difficult times, it often arrived late or was insufficient to compensate for income losses; therefore, many households had to dip into their savings to maintain essential spending.
Economic and Socio-Political Drivers of Expanding Inequality
The aforementioned expansion of inequality and intensification of polarization are the result of the combined action of multiple factors. In his book Global Inequality: A New Approach for the Age of Globalization, the American economist Branko Milanović attributes the income inequality in industrial nations over the past few decades to several major coexisting facts: (1) the shift of labor from industry to the service sector, where employees are more difficult to organize; (2) the process of industrial automation, which is linked to the process of globalization; (3) the generation of monopoly rents in fields such as communications; (4) downward pressure on the wages of the lowest-skilled people following the surge in labor supply in the context of globalization; and (5) the reduction of marginal tax rates for high-income people and the reduction of capital taxes. We can summarize these different elements into the following three aspects: inequality accompanying the objective processes of socio-economic development; inequality promoted by national government policies (especially distribution policies); and inequality accompanying structural changes in labor relations.
Inequality accompanying globalization and technological change. Among various explanations surrounding contemporary capitalist inequality, one tendency emphasizes the objective drivers of economic and social development—that is, it emphasizes the impact of changes in the existing objective economic environment, especially the development of globalization and technological changes, on the distribution of income and wealth. The expansion of capital’s power, industrial structures, and changes in the labor market during the globalization process have been important drivers of the expansion of inequality and the intensification of polarization in developed industrial countries over the past few decades.
The primary impact of the globalization process on the distribution trends of income and wealth in contemporary capitalist economies is reflected in the inequality caused by the expansion of capital's power. The ease of capital mobility provides owners of capital with greater room for maneuver. The proliferation of financial capital has further strengthened the power of capital rent-seeking, thereby allowing those at the very top of income and wealth to capture a larger share, thus exacerbating the trend of polarization in income and wealth. By analyzing today's major developed capitalist countries, Piketty...
Analysis of the wealth-to-income ratios of [selected nations] (including the United States, Britain, France, and Germany, as well as Japan, Canada, and Italy) reveals this universal trend. Thomas Piketty [4] introduced the concept of the wealth-to-income ratio—the value of all financial assets owned by citizens relative to the country’s gross domestic product—and compared the rate of return on capital (r) with the nominal rate of economic growth (g). If the rate of return on capital is greater than the nominal rate of economic growth, it means that the wealth of the rich is growing faster than the economy as a whole. He discovered that in all developed capitalist countries, the wealth-to-income ratio in the 20th century followed a distinct U-shape: it was very high in the late 19th and early 20th centuries, very low in the mid-20th century, and has risen strongly since 1980. Piketty’s research shows that the average rate of return on capital in developed capitalist countries across the entire period was 5%, significantly higher than the overall economic growth rate. The increase in the wealth-to-income ratio is a universal phenomenon in developed capitalist economies rather than something unique to Anglo-Saxon liberal market systems, although the levels in the latter are higher, with the wealth-to-income ratio in the United States reaching unprecedented levels. Under this trend, the gap between the income-earning capacity of those who possess massive assets and stocks and those who earn a living through labor will continue to widen.
Furthermore, structural changes in industry and the uneven development of income among laborers caused by technological change have also influenced the inequality of income distribution. This process has accompanied the transition from an industrial society to a post-industrial society, while the trend of globalization—especially the globalization of capital flows—has exacerbated the polarization between different groups of laborers in various industries. This is primarily manifested in the more disadvantaged position of laborers in traditional industrial sectors within the wealth and income structure. This has also become a universal problem brought by the globalization process to developed capitalist countries since entering the 21st century.
Regarding the income changes caused by the shifting composition of the workforce, further emphasis has been placed on the impact of technological change on inequality—the so-called "skill premium." The impact of skill bias on income is increasing, primarily manifested in low wage growth rates for low-skilled and part-time workers, and high income growth rates for high-skill occupations. In developed economies, the increase in the skill premium has exacerbated market income inequality, reflecting the fact that the high end of the income distribution disproportionately captures the benefits of educational opportunities. Technological change can eliminate many jobs through automation or raise the skill levels required to obtain or retain them, thereby making the demand for capital and skilled labor disproportionately higher than the demand for low-skilled and unskilled labor. Relevant reports from the International Monetary Fund (IMF) emphasize that the skill premium—especially in the communications services industry—and the added income value brought by higher education are related to the widening income gap in OECD countries. This research underscores that one-third of the widening gap between the 90th and 10th percentiles of the income distribution over the past 25 years can be attributed to this technological premium. Italian scholars Cristiano Antonelli and Agnieszka Gehringer have gone even further by borrowing Schumpeter’s theory of "creative destruction" to propose and verify that the increase in income inequality is determined by a decrease in the speed of technological change. Slow technological change helps consolidate barriers to market entry and limits the function of price competition, greatly delaying the time it takes to pass efficiency gains to the end-user. Asset owners can thus benefit from high levels of permanent monopoly rent.
However, the impact of the skill premium on income inequality is mainly restricted to the range of wage earners—the 90th and 10th percentiles of the income distribution structure emphasized in the aforementioned research reports fall within this category. Its impact on the widening income gap between the top tier of income and the bottom tier, which constitutes the absolute majority of the population, is limited, because the primary source of wealth for the true top tier of income is not wages. Yet the latter is precisely the key to the widening inequality in developed capitalist countries. As some analyses have emphasized, even within the former range [of wage earners], it is inappropriate to overemphasize the role of the technological premium. For instance, the famous American scholar and Nobel laureate in economics Joseph Stiglitz has highlighted the fact that the wages of skilled workers have also declined. In particular, the skill premium and equality of opportunity are related to equality of educational opportunity. Against the backdrop of ever-widening inequality, the equality of educational opportunity itself has come under challenge.
National government policies have facilitated the problem of inequality. More research emphasizes that the expansion of inequality and the intensification of polarization in contemporary capitalism are the results of changes in the institutional frameworks and policies of various governments. Stiglitz emphasizes that inequality in developed capitalist countries, especially in the United States, is primarily a result of policy and politics. In his book The Price of Inequality, he points to three main reasons for the current predicament: the market is not operating in the way it should (it is neither efficient nor stable); the political system is unable to correct market failures; and the current economic and political systems are fundamentally unfair. In this regard, the expansion of inequality since the 1980s is clearly closely related to the prevalence of neoliberal policy approaches during this period; it is the bitter fruit of neoliberalism's approach of strengthening the market while weakening social protection. Specifically, the failure of traditional national economic control systems and policies, a series of state policy approaches that cater to the market while weakening traditional social protection mechanisms, and the accompanying weakening of labor organizations have all directly influenced the trends in income and wealth distribution and facilitated social polarization.
- National policies highlight the logic of markets and competition, but the "trickle-down effect" of growth is failing. The American historian Colin Gordon has called American inequality a "direct and tangible result of public policy that was intended to redistribute income and wealth upward." This could also be described as a summary of the trend-setting changes in public policy in developed capitalist countries after the 1980s. Guiding these policy changes was a neoliberal discourse. However, while neoliberal policy approaches strengthened the logic of markets and competition, they failed to simultaneously achieve the promised trickle-down effect on income distribution. Instead, they led to more severe inequality and polarization.
While the global economic crisis of the 1970s interrupted the sustained growth of developed capitalist economies in the post-war period, it also cast universal doubt on the Keynesian policy approach that had once served as the common consensus in developed capitalist countries. In this context, as the New Right—the conservative political forces holding high the banner of neoliberalism—rose politically, they increasingly strengthened neoliberal political discourse by reforming the old system and catering to globalization. The core of this discourse is the market logic of classical liberalism. Proponents and supporters of neoliberalism organically integrated their traditional market concepts into the explanation of market forces displayed by the globalization process and pushed forward a series of marketization processes. During this process, "market-friendly" policy approaches were universally embraced. According to these "market-friendly" principles, policies that attempted to regulate social production and redistribute income through government intervention—as well as the strength of labor unions and government intervention in corporate employment and other labor systems (such as strict environmental laws, minimum wages, etc.)—were all viewed as "unfriendly" to the market. Based on this "market-friendly" principle, the economic and social policies of various countries highlighted a "race to the bottom" policy logic. It maximized its accommodation of the market’s demands—or more accurately, the demands of capital. This policy approach spread from the Anglo-Saxon liberal systems of the UK and US to the European continent and other regions; even some governments that traditionally focused on using national policy tools for income redistribution had to submit to market forces. Some scholars have described this situation by saying that corporations "rule the world." The expansion of the power of capital is fully embodied here.
Against this backdrop, tilting toward the interests of capital has become a universal characteristic of public policy in developed capitalist countries. Trends in tax policy are an important manifestation of this. Taxation is originally one of the important means for a government to redistribute resources and thereby resolve the problem of inequality. However, since the 1970s, under a general policy trend of catering to capital through tax cuts, the top marginal tax rate has shown a universal downward trend. In the United States, the top marginal tax rate was 50% when Reagan took office in the early 1980s and dropped to 30% by 1988. It later rose back to 40% during the Clinton administration, but returned to 35% after the tax cuts of the George W. Bush administration. Additionally, the intensity of tax cuts on wealth-based income (such as capital gains and dividends) prompted some companies in the Reagan era to use stock options to compensate executives. Under these policies, the average tax rate for the 400 wealthiest American filers (whose average adjusted gross income was slightly over $200 million in 2009) dropped from 26% in 1992 to below 20% in 2009. That is to say, the wealthiest generation in the US enjoyed the largest tax cuts.
Consequently, the wealth of the top income tier has risen sharply, driving the increasing inequality in European and American societies. Even in Europe, which is relatively focused on social equity, the average income of the poorest 80% of Europeans has grown by 20% to 50% over the past 40 years. However, the income of the top 1% has grown by over 100%, and the income of the top 0.001% of European citizens has increased by 200%. Between 1980 and 2017, the top 1% of the population captured 17% of the total economic growth in Europe, while the bottom 50% captured only 15%.
At the same time, taxes on wage earners have been increasing. Changes in the structure of US federal revenue sources show that since the post-war period, personal income tax has accounted for 40% to 50% of federal revenue. Meanwhile, the proportion of corporate income tax in federal revenue dropped from 40% in 1943 to 9.9% in 2013. Conversely, payroll taxes during the same period grew from 13% to 40%, becoming the second-largest source of federal revenue. Correspondingly, corporate profits and the share of income held by the top 1% of the population rose gradually after the 1980s. That is to say, the tax burden has not only fundamentally shifted away from corporations and higher income tax brackets, but most of the tax shortfall has been compensated for through regressive payroll taxes. Given the eligibility requirements for welfare programs provided by the government to some low-income families and their impact on income, in fact, those families near the bottom of the income distribution face the highest effective marginal tax rates.
However, defenders of neoliberal policy argue that low tax levels encourage investment by high earners, whereas high tax levels restrict their willingness to invest. Therefore, lowering corporate taxes will encourage investment and create new jobs, which in the long run will produce a cumulative effect of reducing inequality—namely, the "trickle-down effect" of growth. The famous explanatory framework of the Kuznets curve is often...
This served as an important theoretical pillar for the "trickle-down effect" theory. However, as critics have pointed out, Kuznets’ theoretical hypothesis regarding the inverted U-shaped relationship between stages of development and inequality has received only partial support. While there is substantial evidence proving the positive impact of economic growth on reducing income inequality in developing countries, the opposite has occurred in developed countries—particularly during the period of rapid economic growth in the late 20th and early 21st centuries, during which income inequality actually intensified. Consequently, some scholars emphasize that the body of research indicates a consensus: in the long run, economic growth reduces income inequality, but this outcome depends heavily on the functioning of balancing conditions. Thus, the closer product and factor markets (including labor and financial markets) are to a state of perfect competitive equilibrium, the lower the income inequality. When economic growth is linked to market imperfections, income asymmetry actually increases. An idealized explanation is that in a developed industrial economy, more intense competition in product and factor markets makes it possible to minimize monopoly profits. The standard mechanism of economic growth reduces inequality by lowering interest rates, decreasing monopoly profits, and raising wages. Yet, as mentioned above, this is precisely not what has been witnessed in developed capitalist economies since the 1980s. On the contrary, reliable statistical studies measuring income distribution show that over the past 40 years, the income gap between the rich and the poor has widened in nearly all countries.
Numerous scholars and institutions have pointed out the problems within the logic of this neoliberal discourse. Colin Gordon notes that proponents of "supply-side" market policies overestimated the elasticity of available tax revenues and took for granted that low tax levels would encourage investment by high-income earners; they were thus overly optimistic that such tax cuts for enterprises (and effectively for high-income earners) would produce a trickle-down effect to reduce inequality. In fact, corporations and individuals often use various means to rationally exploit tax policies—such as tax avoidance and income shielding—rather than making truly durable economic decisions in response to changes in tax rates. As some studies indicate, this is why a generation of tax cuts did little to stimulate economic growth (measured by savings, investment, or productivity growth rates) but clearly exacerbated income inequality over the same period. Similarly, even regarding reinvestment, one cannot expect tax-exempt income to be invested domestically rather than overseas; the acceleration of overseas investment harms the income of domestic workers, making it difficult to achieve the "trickle-down" effect. Indeed, as high incomes have become increasingly concentrated in "rent-seeking" finance, there is no reason to believe that capital released by low taxes will manifested as improved employment or productivity. Both Piketty’s Capital in the Twenty-First Century and Stiglitz’s theoretical analyses emphasize that the Kuznets curve theory—which posits that the inequality that intensifies during the initial process of development will gradually decrease—is likely incorrect.
2. State distribution policies have weakened social protection and regulatory mechanisms.
The "Golden Age" of postwar capitalism was characterized by a virtuous cycle of high growth, high accumulation, and high welfare. Under this system, the active role of national governments in regulating economic and social affairs was universally recognized. However, after the 1980s, while economic growth declined significantly, the proactive role of the state in regulating distribution also fell sharply. Corresponding to the aforementioned trend of public policies catering to capital, states generally weakened their traditional functions of social protection and policy regulation of income and wealth. Instead, the suppression of welfare systems, the shrinking of public wealth, and the squeezing of the middle class further reinforced the trend of polarization in income and wealth distribution.
This is first reflected in the reform policies generally pursued by governments to suppress the traditional welfare state. The establishment and development of the welfare state system was an important institutional manifestation of the active social distribution function performed by developed capitalist states after the war. It effectively mitigated social inequality. But after the 1980s, under the deduction that the traditional welfare state was unsustainable, suppressing it became a universal reform trend. Restricting welfare eligibility and protection levels has been a common feature of welfare reforms across countries. The intended purpose of such reforms was to encourage people to reduce their dependence on welfare and escape poverty by integrating into the labor market, thereby reducing the state’s welfare costs. In the reality of politics, however, these policies are often characterized by unilaterally reducing protection for those at the lower end of distribution. Under the aforementioned pro-market principles, the market side failed to truly establish the "balancing conditions" people spoke of. Therefore, although the state used various policy means to urge people to reduce their "dependence" on welfare, the problem of poverty was not truly alleviated as a result. The existence of a large number of "working poor" demonstrates that pushing labor into the market is not sufficient in itself to change people's fates. Conversely, as evidenced by the tax-cut policies mentioned above, the high end of wealth and income distribution received greater protection. Social polarization was thus further intensified.
Parallel to the economic and social policies mentioned above, the public wealth of developed capitalist countries has continued to shrink, further limiting the state's capacity to achieve redistribution through active public policy. Figure 4 (figure omitted) shows the trend of changes in the ratio of private wealth to public wealth in major Western countries. Since 1980, although the economies and total national wealth of Western countries have grown, the public wealth owned by each state has continued to decline due to the adoption of neoliberal policy approaches; the current status of public wealth in wealthy Western countries is either negative or nearly zero. Meanwhile, private wealth has risen significantly. In 2015, US public wealth was negative (-17% of national income), while private wealth was 500% of national income. In 1970, US public wealth was 36% of national income and private wealth was 326%. The atrophy of public wealth has greatly limited the government's ability to deal with the problem of inequality.
Furthermore, the middle class—an important social component for tempering income gaps—has been under continuous squeeze, becoming one of the primary drivers of expanding inequality in developed capitalist countries. In the postwar development of capitalism, the expansion of the middle class and the improvement of its relative income level were key to mitigating overall social inequality and maintaining social mobility. But since the 1980s, the middle class in developed capitalist countries has faced a sustained squeeze. This is directly related to the aforementioned distributive policy orientation of the state. As shown by the changes in the sources of US federal government tax revenue, on the one hand, the state is reducing the burden on major wealth owners through continuous tax cuts; on the other hand, payroll taxes from the working class have increasingly become the primary tax source to fill government fiscal deficits. This group is predominantly composed of the middle class. The squeezing of the middle class has become one of the major factors in the intensification of contemporary capitalist inequality and polarization. This can be illustrated by two facts. First, the income gap between the middle class and the top tier is widening daily. In the 1970s and 1980s, the wage gap at both ends of the income spectrum was widening: the growth rate of the gap between the poorest 10% of workers and median-wage workers was roughly the same as that between median-wage workers and the richest 10%. Since then, however, this gap has become more pronounced among the high-income population: the gap between the poorest and the median population has tended to level off, while the gap between the richest and the median population continues to widen. Second, the impoverishment of the middle class has increasingly become a salient feature of the inequality problem in contemporary developed capitalist countries. In the EU and the US, they account for 90% of the poorest income groups. This further illustrates the failure of the overall distribution policies of various countries.
Of course, there are also marked differences in government policies between different countries and regions, which also affects the current state of inequality. As mentioned above, the share of wealth held by the top 1% in European countries is significantly lower than in the US. Although the income gap has continued to widen since 1980 due to the rapid growth of top-tier incomes, Europe remains the region with the lowest levels of inequality among developed capitalist countries. This is mainly due to a more equal distribution of income both before and after taxes and transfer payments. This, in turn, proves that whether a government takes proactive action is an important factor affecting inequality. However, as some studies point out, most European countries respond to competition by universally lowering corporate tax rates, which may have an important impact on pre-tax and post-tax distribution and limit the ability of European nations to finance their social models in an equitable manner.
3. The decline of collective workers' organizations.
The relative balance of labor relations was an important empirical factor in the relative mitigation of inequality in postwar capitalism. This was based on a series of institutional arrangements in labor-capital relations, including the development of workers' organizations, the institutionalization of collective bargaining, and the proactive role of national governments in balancing labor and capital. As some scholars emphasize, common prosperity depends on policies and institutions that maintain workers' bargaining power (collective bargaining, a decent minimum wage, strong labor standards, etc.). Since the 1980s, against the backdrop of neoliberalism increasingly dominating politics in Europe and America, governments have generally exhibited policy trends that are pro-market and weak on social protection. The postwar series of institutional arrangements conducive to balanced labor relations, as well as the traditionally active policies of governments, have been eroded to varying degrees. Suppressing trade unions and squeezing the institutional space for collective bargaining was the primary political goal of the New Right [5] politics that flew the banner of neoliberalism. In the UK during the Thatcher era and the US under the Reagan administration, trade unions and labor-capital negotiation mechanisms were suppressed. During the subsequent periods when left-wing parties held power, this situation was maintained. Even in some countries with corporatist traditions, certain institutional arrangements reflecting their traditions have suffered significant shocks, such as the breakdown of the "Solidarity Wage Policy" [6] which was a vital component of the Swedish model. In Germany, which has a corporatist tradition, the "Hartz Reforms" [7] introduced in 2002 during the Social Democratic-led Red-Green coalition government not only highlighted a stance of catering to capital but also dealt a severe blow to the bargaining power of trade unions in labor relations, leading in turn to the fragmentation of traditional working-class strength. All of this was carried out under the banner of catering to competition in the era of globalization. It all seems to confirm what the famous liberal Ralf Dahrendorf emphasized when analyzing the political consequences of globalization: "Globalization means writing the word 'competition' in large letters and the words 'solidarity and mutual aid' in very small letters."
In addition to the attitudes and roles of governments, changes in the status of trade unions are a key factor in institutional arrangements regarding labor relations. In the above context, worker organizations—particularly trade unions, as the primary representatives of traditional social solidarity forces—have shown a marked decline, further weakening the bargaining power of laborers within the existing distribution system. Trade unions are the primary representatives of labor in the collective bargaining systems of traditional labor relations. Since the 1980s, on the one hand, trade unions have faced organized suppression by New Right political forces; on the other hand, with the shrinking of the traditional working class and the relative fragmentation of the non-homogeneous "new middle class" (who find it difficult to organize as effectively as traditional industrial workers), union density has continued to fall. Figure 5 (figure omitted) shows the state of union density in major capitalist countries in 2019. Except for Nordic countries, which still maintain relatively high density, union density in other regions and countries is at an extremely low level.
Empirical research on the relationship between labor market institutions and income distribution shows that the degree of union organization affects wage distribution and redistribution. Regarding wage distribution, union organization and the minimum wage are generally considered conducive to achieving wage equality, thereby reducing inequality. Additionally, the degree of union organization affects a state's redistribution policies: strong unions can prompt policymakers to engage in more redistribution by mobilizing workers to vote for parties that promise to redistribute income. Historically, unions played an important role in introducing basic social and labor rights. Conversely, the weakening of unions may lead to reduced redistribution and higher net income inequality.
This results in an intensification of net income inequality (i.e., income after taxes and transfer payments). Furthermore, while some traditional views hold that changes in trade union density or the minimum wage primarily affect low- and middle-income workers and are unlikely to have a direct impact on high earners, some research indicates strong evidence that between 1980 and 2010, lower unionization was associated with an increase in the top income share in advanced economies. The weakening of unions has reduced the bargaining power of workers relative to capital owners, increasing the share of capital income—which is more concentrated at the top than wages and salaries. Moreover, weaker unions can reduce worker influence over corporate decisions that favor high earners, such as the scale and structure of executive compensation. Research into the relationship between inequality indicators and labor market institutions confirms that the decline in union density is closely linked to the rise in the top income share. To a considerable extent, the growth of top incomes and the increase in the net income Gini coefficient have been driven by de-unionization.
Other factors affecting inequality. In addition to the factors mentioned above, several other elements have influenced inequality and polarization in capitalist countries to varying degrees over the past few decades.
Inequality of opportunity is both a significant component of modern social inequality and a direct influence on income and wealth inequality. This is primarily reflected in education. Differences in occupational structure are an increasingly important factor affecting the income distribution gap within the workforce, and the most important factor leading to these occupational differences is education. Consequently, education is regarded as a vital path toward equality of opportunity. However, de facto inequality in educational opportunities is a major driver of capitalist inequality. In the United States, children from the bottom 10% of the income distribution have only a 20% to 30% probability of attending university, while children from the top 10% have a 90% probability. Furthermore, gender inequality and racial discrimination also affect income inequality; persistent discrimination in areas such as education, job opportunities, and wages contributes to the overall gap.
In addition, the structure of wealth affects inequality, especially under conditions of economic volatility. Both the 2008 financial crisis and the COVID-19 pandemic since 2020 have exacerbated inequality in European and American countries, a phenomenon directly related to the differing wealth structures of households at the top and bottom of the income spectrum. As noted previously, the wealth of low- and middle-income families consists mainly of real estate, often purchased through debt. Therefore, these families are more vulnerable to the shocks of economic crises. Conversely, a larger proportion of the wealth of top-tier families consists of financial assets, which are generally more liquid. Financial assets account for 40% of the total assets of the wealthiest 10% of households, compared to only 18% for the bottom 40%. Simultaneously, the composition of financial assets can be distinguished between low-risk financial assets (bank deposits and bonds) and high-risk but high-return financial assets (such as stocks and investment funds). The proportions of these two categories differ significantly between the bottom and top of the wealth distribution: low-risk financial assets account for over 60% of the financial assets of the bottom 40% of households, while high-risk financial assets account for as much as 80% of the financial assets of the top 10%. According to 2021 OECD data, since 2009, stock prices in OECD countries have grown faster than house prices: stocks have soared 86% since their 2009 low, while house prices grew 45% over the same period. This means the wealthiest families have benefitted more from higher rates of return on capital and dividends. In most countries where wealth inequality has intensified, the share of the wealth pie held as financial assets by the top 10% is larger than it was in 2010. For example, in Norway, the share of financial assets owned by the wealthiest 10% of households accounted for one-third of total net wealth in 2018, up from one-fourth in 2012. Regarding debt ratios, the debt of bottom-tier households mainly consists of real estate debt and consumer debt (such as credit card debt and installment loans), making them more susceptible to the impact of financial crises.
The Socio-Political Impact of Widening Inequality and Intensifying Polarization
The increasingly serious problem of inequality has become the most significant socio-political issue affecting the development of contemporary capitalist countries, to the point that some research institutions and scholars emphasize that the study of the dynamics of polarization and inequality has become the core of the most pressing issues in contemporary economics and politics. The impact of inequality is broad and far-reaching. Specifically, a consensus has emerged regarding the following impacts.
First, inequality directly assaults mainstream Western values. Regarding the understanding of (in)equality, various and even conflicting interpretations exist among different ideological and political forces in Western society, particularly in the understanding of equality of outcome versus equality of opportunity. However, at the very least, adhering to equality of opportunity can be seen as a fundamental consensus of mainstream Western values. Yet, the increasingly severe inequality in contemporary capitalist countries is endangering this value system. As Joseph Stiglitz [8] has emphasized, perhaps the most unsettling impact of inequality is its effect on equality of opportunity. In the United States, equality of opportunity—the "American Dream"—has always been a cherished ideal. But current data suggests that the U.S. has not only become the developed country with the highest degree of inequality but also one of the countries with the lowest level of equality of opportunity. Compared to other developed nations, the life prospects of young Americans are more dependent on their parents’ income and education. Millions of people at the bottom are unable to realize their potential. Many studies point to the link between inequality of outcome and inequality of opportunity. When there is vast inequality in income, those at the top can purchase privileges for their children that others cannot obtain, and they often begin to believe that doing so is their right. In this way, class petrification [9] will form, which is precisely what mainstream Western societies—which often label themselves "open societies"—are most reluctant to accept. For this reason, in December 2013, then-U.S. President Obama stated bluntly that "dangerous and growing inequality and lack of upward mobility" has become "the defining challenge of our time."
Second, the development of inequality has a negative impact on socio-economic development. Numerous studies emphasize that high levels of inequality directly affect economic growth itself. International Monetary Fund (IMF) research has found that income inequality, as measured by the Gini coefficient, has a negative impact on growth and its sustainability. A higher net Gini coefficient is associated with lower medium-term output growth. The income share of the rich (the top 20%) is inversely related to economic growth. If the income share of the top 20% increases by one percentage point, the GDP growth rate actually falls by 0.08 percentage points over the following five years. Conversely, a one percentage point increase in the income share of the bottom 20% (the poor) leads to 0.38% GDP growth. This positive relationship between disposable income share and higher growth continues among middle-income earners. Furthermore, high inequality affects total social consumption because it directly impacts the income of the lower and middle classes, and it easily triggers economic crises. The aforementioned IMF research also emphasizes that long-standing higher inequality in advanced economies is linked to the global financial crisis.
Finally, increasing inequality erodes the existing democratic order, particularly by fueling political polarization. Norwegian scholar Gudrun Østby has pointed out that numerous specialized studies and cross-disciplinary analyses strongly indicate that "social polarization and social inequality within the same social stratum are positively correlated with the outbreak of conflict." Extreme inequality may damage trust and social cohesion, creating a risk of conflict. Moreover, extreme inequality exacerbates grievances among certain groups, thereby pushing political polarization. The increasingly serious social and political polarization in Europe and America in the 21st century, especially after the 2008 financial crisis, is precisely the political reflection of intensified social inequality. Therefore, Stiglitz emphasizes that increasing inequality "is dividing our society and undermining our democracy."
Conclusion
Inequality is a problem that has accompanied the development of capitalism throughout its history, but its manifestations and characteristics differ across different historical periods. Since the 1980s, the increasingly severe inequality in developed capitalist countries has been accompanied by various economic and socio-political development processes. However, it is evident that this process has been influenced to a greater extent by the neoliberal political agenda of the same period, which spread and penetrated the developed capitalist world under the banner of catering to globalization. Consequently, while the problem of inequality forces people to face its challenges, it also triggers a new understanding of the essential characteristics of capitalism.
(Notes omitted) (Author’s affiliation: School of Political Science and Public Administration, China University of Political Science and Law) Web Editor: Zhang Jian Source: People's Tribune · Frontiers (Academic edition), Issue 9, 2022