Theoretical and Empirical Analyses of the Rise of Income Inequality in Rich Countries

The objective of this chapter is to review, both theoretically and empirically, the main determinants behind the rise in income inequality that OECD countries have experienced over the last three decades. We will show evidences according to which the financialisation of economies along with globalisation generated the main mechanism, which allowed for income inequality increase. These processes have taken place at least since 1990, when labour flexibility intensified, labour market institutions weakened as trade unions lost power, and public social spending started to retrench and did not compensate for the many vulnerabilities created by the globalisation process. In this context, wage share declined and functional income distribution worsened with an increase of profits, rents and financial compensation. A favourable tax policy towards riches, payments of dividends and the structural change occurred in most advanced economies, i.e. a gradual abandonment of manufacturing in favour of services, also contributed to this result.