Wealth inequality is much more severe than income inequality
There are many reasons why high and increasing economic inequality is a worrying phenomenon. It can be a problem in itself, because widely shared views of a fair society are hard to reconcile with it. Inequality can also be a problem owing to its consequences, some of which may only materialise in the distant future.
Most studies look at the impact of economic inequality on the economy and society through the lens of income inequalities. For example, research by the OECD shows that “when income inequality rises, economic growth falls. One reason is that poorer members of society are less able to invest in education.” And the OECD conclude that “tackling inequality can make our societies fairer and can make our economies stronger”.
However, in virtually all countries including Cyprus wealth inequality is much more severe than income inequality. Indeed, in many nations a tiny portion of the population own most of the country’s wealth. Data in the World Inequality Report 2022 show that in Spain one per cent of households held nearly 25 per cent of wealth in the form of real estate and financial assets in 2021. And this report reveals that the wealthiest 10 per cent of Spanish and Italian households owned 48 per cent and 58 per cent of total net household wealth, respectively, in 2021. In contrast the top 10 per cent of income earners in Spain and Italy, captured lower shares of total household income of 32 per cent and 35 per cent, respectively.
While similar wealth data are not available for Cyprus, its inequality in wealth distribution is much worse than that for income distribution with the Gini coefficient – the former being estimated at 80.7 in 2021 by Credit Suisse compared with a Gini coefficient of 29.4 for household income.
(The Gini coefficient shows the distribution of income within a country. A coefficient of 0 expresses perfect equality where everyone has the same income, while a coefficient of 100 expresses full inequality where only one person has all the income.)
Furthermore, statistics reveal that inequality in wealth distribution for Cyprus was worse than that for Spain and Italy in 2021 and that wealth in Cyprus is more highly concentrated among a small portion of the population than in the former two countries.
Between 2013 and 2021 it is estimated that the net wealth per adult in Cyprus increased by 13 per cent to approximately US$150,000 (approximately €139,000) and that inequality in household wealth distribution rose considerably over these eight years. These estimates indicating an increasing concentration of wealth in the hands of the richest adults are consistent with national accounts data showing that GDP growth over the last decade has been associated with a distribution of income increasingly toward profits and owners of capital. In fact, the net operating surplus or profits of businesses as a share of GDP rose from 18.1 per cent in 2012 to 27.6 per cent in 2022, while the share for the compensation of mostly less-rich employees fell from 48.3 per cent to 42.2 per cent between these years. Furthermore, these developments are in accord with the argument of Thomas Piketty in his ground-breaking book on Capital in the Twenty First Century that over time returns to capital (on bonds, stocks and other forms of property) are greater than the rate of growth incomes, resulting in accumulated wealth becoming more concentrated among those whose earnings are based on owning capital rather than labour power.
Consequences of increasing economic inequality
Many studies for advanced countries have analysed how wealth inequalities studies have been transmitted across generations. Apart from the transfer of wealth through inheritances and gifts, there is emphasis on the key role played by family background in the accumulation of human capital in limiting intergenerational mobility, in the sense that the children of a wealthy family are more likely to receive a better education and well-paid and privileged jobs than children of a poor family. In Cyprus and many small states there is the acute problem of family and political nepotism. This in turn results in the well-connected securing the best jobs.
But what is happening with respect to intergenerational inequalities in most countries since the Second World War is very worrying and is having profound consequences. In Western Europe the “baby boomers” or persons of working age in the 1960s, 1970s and early 1980s were well placed to buy property, accumulate assets and pass on property and capital gains in the form of inheritances. And increases in housing prices have considerably exceeded rises in incomes of labour over the last 40 years, with this divergence being particularly large since the global financial crisis of 2007/08. Indeed, the ECB response to the crisis in reducing interest rates and keeping them at ultra-low levels just fuelled a property boom at a time when labour market conditions were weak, especially for the employment and incomes of the younger generation. The gap between incomes of the younger generation and housing prices and rents increasingly widened resulting in many persons without inheritances and little or no financial support from their parents being unable to get on the property ladder.
These intergenerational inequalities reflected in large differences in home ownership and wealth accumulation are having important social, political and demographic effects. Gregory Fuller of the University of Groningen has stated that “Europe has become increasingly dominated by housing capital and the value of land on which it sits. Those who own this wealth are increasingly old voters who have benefited from massive property price increases since the 1990s. It pits them against younger voters – who are increasingly locked out of the housing market – against older voters and their inheritors. It is this conflict which will shape future political battles in Western Europe”.
In countries of southern Europe such as Greece and Cyprus, investments in property and existing housing are being more directed toward catering for and attracting foreign tourists and investors, reducing the supply of affordable housing for younger persons in the process. Increasingly property owners in Cyprus and Greece are renting out their houses and apartment units to Airbnb customers and even depriving students of affordable accommodation in cities such as Thessaloniki in Greece and Limassol in Cyprus.
Owing to low incomes and job security as well as high housing and childcare costs many young couples in Europe other countries can’t afford to raise a family. As a consequence, the rate of population growth in most European countries is falling. In fact, in Cyprus the population of Cypriots is on the decline and Cypriot children now constitute a minority in some primary schools.
And more recently with the surge in prices of goods and services eroding real incomes and housing prices and rents continuing to rise to increasingly unaffordable levels, wealth and intergenerational inequalities have been exacerbated in most European countries. In addition, many less-wealthy persons, who during past years have sought to bridge the gap between their meagre incomes and high housing prices by taking on housing loans are now being hit by steep increases in interest rates. And with these borrowers having their net wealth substantially reduced, many have become vulnerable to having their properties repossessed.
Finally, some recent studies have argued that wealth inequalities and concentration of capital tend to stifle entrepreneurial and innovative activity with the rich becoming more risk averse as they accumulate wealth. Rather than investing in risky projects in the real economy they seek limited risk returns in the non-productive financial sector with higher outlays on bonds and financial derivatives, while large corporations increasingly engage in share buy-backs.
Leslie G Manison is an economist and financial analyst. He is a former senior economist at the International Monetary Fund and an ex-advisor in the Cyprus finance ministry and at the Central Bank of Cyprus