IMF Policy Paper

Income inequality has increased in both advanced and developing economies in recent decades.1 Increasing inequality has been attributed to a range of factors, including the globalization and liberalization of factor and product markets; skill-biased technological change; increases in labor force participation by low-skilled workers; declining top marginal income tax rates; increasing bargaining power of high earners; and the growing share of high-income couples and single-parent households (OECD, 2008; Alvaredo and others, 2013; Hoeller, Joumard, and Koske, 2014). Many of these developments have had beneficial effects on growth and poverty reduction both nationally and globally (Chen and Ravallion, 2010; Milanovic, 2012).  There is growing evidence that high-income inequality can be detrimental to achieving macroeconomic stability and growth. Recent empirical work finds that high levels of inequality are harmful for the pace and sustainability of growth (Ostry, Berg, and Tsangarides, forthcoming). Others have argued that rising inequality may have been an important contributing factor to the global financial crisis. Moreover, evidence from public surveys in various countries indicates that widening income inequality has been accompanied by growing public demand for income redistribution, especially in countries most strongly affected by the crisis. This comes at a time when high public debt ratios in the advanced economies, and emerging vulnerabilities in the developing economies, have made fiscal restraint an important priority, and point to the importance of sensitivity to distributional concerns in designing consolidation packages. In this light, income inequality can be of macroeconomic concern for country authorities, and the Fund should accordingly seek to understand the macroeconomic effects of inequality. In addition, in its policy advice, the Fund should be mindful of how macroeconomic policies (including fiscal policies) affect income distribution and their consistency with the distributional goals of country authorities.