Financialization and Income Inequality in the United States, 1967–2010

Abstract

This article presents a historical overview of the late 20th‐century advent of financialization, that is, the unprecedented growth of the financial sector. We summarize its origins and consequences, particularly greater income inequality. An econometric model quantifies the relationship. We conclude that along with higher unemployment and an eroding minimum wage, the growth of the U.S. financial sector has contributed to the exacerbation of inequality in recent decades.

Determinant of income inequality in Indonesia

“…This results is corroborated by his later study where, using dividend and interest payments of non-financial corporations to represent financialization and employing a time-series cross-sectional dataset of 13 countries over the time period from 1986 until 2007, he found support for the existence of a relationship between increasing dividend and interest payments of nonfinancial corporations and the decline of the share of wages in national income Dünhaupt (2016). These results found support from similar studies (Hein, 2015;Stockhammer, 2012;Van Arnum & Naples, 2013). While Hein (2015) and Stockhammer (2012) employed the shift in the financial sector share in the economy and the increase in management salaries and rising profit claims of the rentiers to capture financialization, and Van Arnum & Naples (2013) made use of the relative share of financial sector in GDP, all of them found that financialization has contributed to the falling labor income share and income inequality since the early 1980s.…”

“…The finding suggests that the higher the university participation rate the higher the income inequality level. This goes with the common wisdom and supports Van Arnum & Naples (2013). The college participation rate in this study employs the data of the university participation rate of the population between the age of 18 and 24 years.…”

“…If this turns out to be the case the financiaization hypothesis gains support. While the effect of college participation rate on income inequality is expected to be positive, as suggested in Van Arnum & Naples (2013), the absolute poverty rate might have ambiguous effects on income inequality. The lower the absolute poverty rate the lower the income inequality tends to be.…”

“…Similarly, contradicting the globalization thesis, developing and emerging countries have been experiencing worse decline in the labor share of income since the 1990s than in advanced countries (International Institute for Labor, 2011). Owing to these drawbacks some scholars have turned to financialization to explain increased inequality that resulted from the decline in labour's share of income (Chen & Chen, 2012;Dünhaupt, 2012Dünhaupt, , 2016Hein, 2015;Lin & Tomaskovic-Devey, 2013;Stockhammer, 2009Stockhammer, , 2017Van Arnum & Naples, 2013). One important manifestation of financialization is that profits are increasingly accumulated by means of finance that include dividends, capital gains, and interests, rather than trade, producing commodities, or nonfinancial services.…”

“…While some scholars have attributed the increased levels of income inequality to economic restructuring processes, others have suggested that changing social conditions or the combination of the two were mainly responsible for the phenomenon (Albrecht & Albrecht, 2007). Other scholars have argued that technological changes (Blanchard, 1997), globalization (IMF, 2007;Kanbur, 2015), weakening of labor's bargaining position (Blanchard & Giavazzi, 2003), and financialization (Dünhaupt, 2012(Dünhaupt, , 2016Hein, 2015;Stockhammer, 2012;Van Arnum & Naples, 2013) were responsible for the increased inequality. Financialisation can be described as an increasing importance of financial sector in the economy that tends to have impact on the distribution between wages and profits, on the one hand, and retained earnings and financial income in the form of dividends and interests, on the other (Sawyer, 2014).…”