Living Wage Daily

Policies that cause global economic decline turn the case – they increase poverty and inequality elsewhere

Gerorgeiva, IMF, 7-23, 24, Kristalina Georgieva currently serves as Managing Director of the International Monetary Fund, a position she was selected for on September 25, 2019 and has served as since October 1, 2019, A Low-Growth World Is an Unequal, Unstable World , https://www.imf.org/en/Blogs/Articles/2024/07/23/a-low-growth-world-is-an-unequal-unstable-world

The global economy is stuck in low gear, which could deal a major blow to the fight against poverty and inequality. Group of Twenty finance ministers and central-bank governors gathering this week in Rio de Janeiro face a sobering outlook. As the IMF’s latest World Economic Outlook update shows, global growth is expected to reach 3.2 percent this year and 3.3 percent in 2025, well below the 3.8 percent average from the turn of the century until the pandemic. Meanwhile, our medium-term growth projections continue to languish at their lowest in decades. To be sure, the global economy has shown encouraging resilience to a succession of shocks. The world didn’t slip into recession, as some predicted when central banks around the world raised interest rates to contain inflation. Yet, as we move beyond the crisis years of the pandemic, we need to prevent the world from falling into a prolonged period of anemic growth that entrenches poverty and inequality. The pandemic already set back the fight. Extreme poverty increased after decades of decline, while global hunger surged and the long-term decline in inequality across countries stalled. New IMF analysis suggests periods of stagnation lasting four years or more tend to push up income inequality within countries by almost 20 percent—considerably higher than the increase due to outright recession. During periods of stagnation, sluggish job creation and wage growth increase structural unemployment and reduce the share of a country’s income flowing to workers. Together with limited fiscal space, these forces tend to widen the gap between those at the top and bottom of the income ladder. chart1-update In other words, the longer we’re stuck in a world of low growth, the more unequal that world would become. That in itself would be a setback to the progress we’ve made in recent decades. And as we have seen, rising inequality can foster discontent with economic integration and technological advancements. It is therefore timely that Brazil has made fighting inequality, poverty and hunger a priority of its G20 presidency. With the right policies, we can still escape a low-growth, rising-inequality trap, while working to reduce poverty and hunger. Let me highlight three priority policy areas. Gearing Up Inclusive Growth First, we need to address the underlying problem of slow growth. Most of the decline in growth in recent decades has been driven by a slump in productivity. A big reason for the slump is that labor and capital aren’t flowing to the most dynamic firms. But a smart mix of reforms could jumpstart medium-term growth. Measures to promote competition and improve access to finance could get resources flowing more efficiently, boosting productivity. Meanwhile, bringing more people into the labor force, such as women, could counter the drag on growth from aging populations. We must also not forget the role that open trade has played as an engine of growth and jobs. In the last 40 years, real income per capita has doubled globally, while more than a billion emerged from extreme poverty. Over that same period, trade as a share of gross domestic product increased by half. It’s true that not everyone benefited from trade, which is why we must do more to ensure the gains are shared fairly. But to close off our economies would be a mistake. Making Fiscal Policies People-Focused Second, we must do more to ensure that fiscal policies support the most vulnerable members of society. The challenge is that many economies are facing severe fiscal pressures. In developing countries, debt-servicing costs are taking up a bigger share of tax revenue at a time when they are tackling a growing list of spending demands, from investments in infrastructure to the cost of adapting to climate change. A gradual and people-focused fiscal effort can alleviate fiscal risks while limiting any negative impact on growth and inequality, including by raising revenue, improving governance, and protecting social programs. There is much scope for developing countries to raise more revenue through tax reforms—as much as 9 percent of GDP, according to our research. Yet it is crucial to take a progressive approach, which means making sure those who can afford to pay more taxes contribute their fair share. Taxing capital income and property, for example, offer a relatively progressive way to raise more tax revenue.

Current pay gap largely determined by one’s original class

Raj Chetty, Will Dobbie, Benny Goldman, Sonya Porter, and Crystal Yang, US Census, 7-25, 24, While Low-Income Black-White Earnings Gap Narrowed, Gap Between Low- and High-Income White Young Adults Widened, https://www.census.gov/library/stories/2024/07/race-and-class-gap.html

While still large, the income “race gap” between low-income Black and White Americans narrowed but the “class gap” or the difference in earnings between young adults born to low- and high-income parents widened, according to U.S. Census Bureau and Harvard University research. The new study focuses on how income mobility evolved between two generations 15 years apart. While Black-White race gaps shrunk and White class gaps expanded in nearly every part of the country, the magnitude of these changes varied substantially across regions. It begins with children born in 1978 and ends with those born in 1992. It uses children’s earnings at age 27 as the primary indicator of economic mobility, measured in 2005 for those born in 1978 and in 2019 for those born in 1992. Shrinking Race and Growing Class Gaps Consistent with prior research, the 1978 birth cohort shows marked disparities between Black and White children born to both low-income parents (the 25th percentile of the income distribution or an annual household income of about $26,000) and high-income parents (the 75th percentile of the income distribution or an annual household income of about $95,000). Figure 1. Income of Parents and of Their Adult Children in Black and White Households On average, Black children born to low-income parents in the 1978 birth cohort went on to earn $12,994 less per year than their White counterparts. But for the 1992 birth cohort, the earnings gap, while still substantial, had shrunk by nearly a third to $9,521. Figure 2. Change in Race and Class Gaps Between 1978 and 1992 Birth Cohorts This shrinking race gap was due to both improvements in mobility for low-income Black children and declines in earnings for low-income White children. At a national level, the research found little change in earnings outcomes for other race and ethnicity groups (Asian, American Indian or Alaska Native and Hispanic) across this time period. In contrast, White children born to high-income parents in the 1978 cohort went on to earn $10,383 more than their low-income White counterparts. But for the 1992 cohort, the White “class gap” had increased by nearly a third to $13,202. This growing class gap was due to both declining mobility for White children from low-income households and improvements in mobility of White children from high-income households. There was little change in the class gap for Black children during this time because Black children born to high- and low-income parents experienced comparable improvements in earnings. In addition to earnings, similar patterns of growing class gaps and shrinking race gaps were found across a broad range of outcomes, such as educational attainment, standardized test scores, marriage rates, and mortality which are described further in the new research. Likelihood of Remaining Low-Income The likelihood of growing up in a low-income household (defined here as the bottom fifth of the income distribution) and remaining low-income as an adult narrowed by nearly 75% between Black and White children born in 1978 and 1992, declining from an initial gap of 14.7 percentage points in 1978 to 4.1 percentage points by 1992. This narrowing gap is attributable to both a 6-percentage point decrease in poverty persistence among Black children and a 5-percentage point increase in poverty persistence among White children. Figure 3. Probability Children of Parents in Bottom Fifth of Income Distribution Will Remain at That Level as Adults Chances of Reaching the Top Income Tier The likelihood of a Black or White child born to a low-income family reaching the top of the income distribution as a young adult remained the same between 1978 and 1992. However, White children born in 1992 were still 8.9 percentage points more likely to reach that level than their Black counterparts. Figure 4. Probability Children of Parents in Bottom Fifth of Income Distribution Reach Top Fifth as Adults Regional and County Patterns in Mobility To better understand these changes nationally, this study also looks at trends by county. While Black-White race gaps shrunk and White class gaps expanded in nearly every part of the country, the magnitude of these changes varied substantially across regions. Figure 5. Changes in Opportunity for Black and White Children From Low-Income Families For White children from low-income families, economic mobility declined most in U.S. areas like the Great Plains and parts of the coasts that previously enjoyed relatively high mobility. Outcomes for White children from low-income families remained stable in parts of the country like the Southeast and industrial Midwest where mobility was already relatively low. For Black children from low-income families, mobility increased sharply in the Southeast and the industrial Midwest, with modest changes on the coasts. Although mobility improved for Black children, significant earnings disparities between Black and White Americans persisted. This is because of the substantial initial gap between Black and White Americans in the 1978 birth cohort. The maps, which employ distinct and nonoverlapping color scales, demonstrate variations in mobility outcomes between these two groups. Conditions in Prior Generations are Key Predictors The research shows that children’s outcomes are closely related to changes impacting the parents in their neighborhood and particularly parents of the same race and class. The research refers to these changes as shifts in “community conditions.” For example, the research found pronounced drops in mobility for low-income White individuals in communities where parental employment rates declined among low-income White parents. Conversely, mobility improved for low-income Black individuals where employment rates for low-income Black parents increased. While prior sociological research has highlighted employment as a powerful proxy for community conditions, we find similar patterns among other community conditions like marriage rates. Ninety percent of income mobility gaps by race and class can be explained by changes in community conditions. Figure 6. Change in Children’s Earnings as Adults vs. Change in Parent Employment Rates by County, Race, and Class between the 1978 and 1992 Birth Cohorts Childhood Environment and Influence of Social Communities This research finds that the relationship between mobility and parent employment rates is a result of changes in childhood environment. Social interactions, as opposed to changes in economic resources, have a greater impact on children’s outcomes. The research also demonstrates how children are most sensitive to changes in community conditions related to the parents of the kids they are most likely to be friends with based on age, race and class.