Why is inequality rising? | CNBC Explains

The gap between the rich and the poor is rising in nearly every region of the world. CNBC’s Xin En Lee explores why inequality is growing.

-----

Subscribe to us on YouTube: http://cnb.cx/2wuoARM

Subscribe to CNBC Life on YouTube: http://cnb.cx/2wAkfMv

Like our Facebook page:
https://www.facebook.com/cnbcinternational

Follow us on Instagram:
https://www.instagram.com/cnbcinternational/

Follow us on Twitter:
https://twitter.com/CNBCi

Imagine the global population was made up of just
100 people, and this pie represents global income.

The richest 1% of people - or just one
person - gets one-fifth of this pie.

But for the poorest half of the population - or
50 people - they have to share just half of that.

That's what global inequality
looks like today.

And the difference between those
slices (of pie) is only getting bigger.

Global income has grown
over the past four decades,

but so has income inequality in
nearly every region of the world.

Huge growth in Asia,
particularly China and India,

has meant that the bottom 50 percent's
income gained 12% of that overall growth.

But that's nothing compared to the top 1%,
which captured 27% of income growth.

Those moves at the very top and bottom
have left the global middle class squeezed.

The poorest 90% of the U.S. and EU's
population falls within this bracket.

It's this rising inequality that exploded into
the global Occupy Wall Street movement.

And if you think the financial crisis would
have helped level the playing field, think again.

The one percent's share has
steadily increased since 2008.

And the source of wealth growth?

It's heavily tilted towards the United States
and the rise of financial assets.

That's partly because banks started taking
less risks after the financial crisis,

meaning they've become less willing
to lend to the poor and middle class.

But the gap between the rich and poor differs
depending on where you're looking.

In Europe, for example, the top 10%
captures less than 40% of income.

In the Middle East, they capture more
than 60%. So what's causing inequality?

An obvious contributor is China and
Russia's move away from communism,

but that's just a tiny portion
of the explanation.

Fast technological changes have led
to a greater demand for skilled labor,

while automation has
eliminated many jobs.

That has led to a growing earnings gap
between high and low-skilled workers.

Until recently, trade was seen as
a largely positive global force.

But now it's become the
bogeyman for rising inequality.

Some people in wealthier
countries say they're losing out

because good jobs are being outsourced
to workers in developing countries.

80% of Americans think sending jobs
overseas harms America's workers.

But it's not that simple.

There's evidence that free trade has increased
and decreased wages at the same time.

Take Apple for example.

It's created two million jobs in the U.S. but it's
also created more than twice that in China.

In 2014, inequality came to the
forefront of global discussion.

That's because of French
economist Thomas Piketty,

who published a book called
Capital in the Twenty-First Century.

Despite being 700 pages long, it
became an international bestseller.

Piketty drew a distinction
between wealth and income.

His argument was that wealth, essentially a
person's net worth, grows faster than income.

That means the rich get richer, because their
wealth grows faster from capital they own,

like stocks and houses.

This type of capital appreciates in value faster than
wage growth, which salaried workers depend on.

So what can we do about it?

The IMF, Thomas Piketty and 100 other researchers
have come up with some suggestions.

But you're not going
to like the first one.

Taxes.

The United States pays much less tax when
compared to Western European countries,

and it has an impact
on inequality.

The top one percent's share of income
in the U.S. has risen dramatically,

while that inequality is much more
moderate in Western Europe.

Economists say this is largely
because of taxes.

While it's commonly believed that taxes discourage
people from working and investing more,

good tax policies help governments to
redistribute wealth for a more equal society.

On top of that, the IMF also found that higher
income taxes for the rich do not hurt growth.

But that's if people
actually pay them.

At least 10% of global GDP
is being held in tax havens.

In six European countries alone, €350
billion is estimated to be hidden away.

Shareholders benefit most
from tax havens.

But governments and societies
suffer from the huge loss of revenue,

which could be invested in
public services and infrastructure.

That's bad news for another potential solution - better
access to quality education and job opportunities.

Finally, the IMF found that rich countries
with less unionisation are associated with

an increase in the share of
income of the top 10%.

In Denmark, domestic policies led to fast
food workers making $20 an hour,

that's twice of what they
make in the United States.

Despite having no minimum wage,
unions dominate in the small country.

That's guaranteed them a living wage and benefits
their American counterparts could only dream of.

Some say that inequality incentivises
innovation and productivity.

But inequality causes political and economic instability,
and the IMF says it hurts economic growth.

If we want to make this pie bigger overall, its
slices are going to have to get more equal first.

Hey everyone it's Xin En.
Thanks for watching.

If you want to check out more of our
CNBC videos, click here and here.

As always, feel free to leave any suggestions
for future videos in our comments section.

Don't forget to subscribe
and see you next time.