IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Instability implications of increasing inequality: Evidence from North America

Increasing inequality cannot be a long-run steady state — i.e. a trend that can continue indefinitely. Because the bottom 99% and top 1% in the U.S. and Canada have had very different rates of growth of market income since the 1980s, consumption and savings flows have necessarily changed. If aggregate expenditure is to equal aggregate income, the added savings of the increasingly affluent must be loaned to balance total current expenditure — but increasing indebtedness implies financial fragility, periodic financial crises, greater volatility of aggregate income and, as governments respond to mass unemployment with counter-cyclical fiscal policies, a compounding instability of public finances. In Canada and the United States, increasing economic instability is thus an implication of increasing inequality. Either an acceleration of the income growth rate of the bottom 99%, or a decline in income growth of the top 1%, could equalize income growth rates, and thereby stabilize market income shares and macro-economic flows. However, there is no evidence that purely economic forces will produce either outcome anytime soon in Canada or the U.S. — any return to stability depends on political economy.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 35 (2013)
Issue (Month): C ()
Pages: 918-930

in new window

Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:918-930
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Heathcote, Jonathan & Perri, Fabrizio & Violante, Giovanni L, 2009. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006," CEPR Discussion Papers 7538, C.E.P.R. Discussion Papers.
  2. Burkhauser, Richard V. & Feng, Shuaizhang & Jenkins, Stephen P. & Larrimore, Jeff, 2009. "Recent Trends in Top Income Shares in the USA: Reconciling Estimates from March CPS and IRS Tax Return Data," IZA Discussion Papers 4426, Institute for the Study of Labor (IZA).
  3. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," CESifo Working Paper Series 3277, CESifo Group Munich.
  4. Marc Frenette & David A. Green & Kevin Milligan, 2007. "The tale of the tails: Canadian income inequality in the 1980s and 1990s," Canadian Journal of Economics, Canadian Economics Association, vol. 40(3), pages 734-764, August.
  5. Martin S. Feldstein, 2007. "Housing, Credit Markets and the Business Cycle," NBER Working Papers 13471, National Bureau of Economic Research, Inc.
  6. N. Lesca, 2011. "Introduction," Post-Print halshs-00640604, HAL.
  7. Veall, Michael R., 2012. "Top Income Shares in Canada: Recent Trends and Policy Implications," CLSSRN working papers clsrn_admin-2012-25, Vancouver School of Economics, revised 29 Oct 2012.
  8. Romain Ranciere & Michael Kumhof, 2011. "Inequality, Leverage and Crises," 2011 Meeting Papers 1374, Society for Economic Dynamics.
  9. J. B. Burbidge & L. Magee & A. Leslie Robb, 2002. "The Education Premium in Canada and the United States," Canadian Public Policy, University of Toronto Press, vol. 28(2), pages 203-217, June.
  10. Bordo, Michael D. & Meissner, Christopher M., 2012. "Does inequality lead to a financial crisis?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2147-2161.
  11. Boudarbat, Brahim & Lemieux, Thomas & Riddell, W. Craig, 2010. "The Evolution of the Returns to Human Capital in Canada, 1980-2005," CLSSRN working papers clsrn_admin-2010-2, Vancouver School of Economics, revised 30 Jan 2010.
  12. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2000. "Do the Rich Save More?," NBER Working Papers 7906, National Bureau of Economic Research, Inc.
  13. Paul Beaudry & David Green, 1997. "Cohort Patterns in Canadian Earnings: Assessing the Role of Skill Premia in Inequality Trends," NBER Working Papers 6132, National Bureau of Economic Research, Inc.
  14. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
  15. Paolo Brunori & Francisco H. G. Ferreira & Vito Peragine, 2013. "Inequality of Opportunity, Income Inequality and Economic Mobility: Some International Comparisons," Working Papers 284, ECINEQ, Society for the Study of Economic Inequality.
  16. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  17. Emmanuel Saez & Michael R. Veall, 2003. "The Evolution of High Incomes in Canada, 1920-2000," Social and Economic Dimensions of an Aging Population Research Papers 99, McMaster University.
  18. Jason DeBacker & Bradley Heim & Vasia Panousi & Shanthi Ramnath & Ivan Vidangos, 2013. "Rising Inequality: Transitory or Persistent? New Evidence from a Panel of U.S. Tax Returns," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 67-142.
  19. Dani Rodrik, 2011. "The future of economic convergence," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 13-52.
  20. Heisz, Andrew, 2007. "Income Inequality and Redistribution in Canada: 1976 to 2004," Analytical Studies Branch Research Paper Series 2007298e, Statistics Canada, Analytical Studies Branch.
  21. Yuqian Lu & René Morissette & Tammy Schirle, 2011. "The Growth Of Family Earnings Inequality In Canada, 1980–2005," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57(1), pages 23-39, 03.
  22. Hou, Feng & Myles, John, 2007. "The Changing Role of Education in the Marriage Market: Assortative Marriage in Canada and the United States Since the 1970s," Analytical Studies Branch Research Paper Series 2007299e, Statistics Canada, Analytical Studies Branch.
  23. Dew-Becker, Ian & Gordon, Robert J, 2008. "Controversies about the Rise in American Inequality: A Survey," CEPR Discussion Papers 6817, C.E.P.R. Discussion Papers.
  24. repec:oup:qjecon:v:118:y:2003:i:1:p:1-39 is not listed on IDEAS
  25. Romain Ranciere & Nathaniel A. Throckmorton & Michael Kumhof & Claire Lebarz & Alexander W. Richter, 2012. "Income Inequality and Current Account Imbalances," IMF Working Papers 12/8, International Monetary Fund.
  26. Orazio Attanasio & Erik Hurst & Luigi Pistaferri, 2012. "The Evolution of Income, Consumption, and Leisure Inequality in The US, 1980-2010," NBER Working Papers 17982, National Bureau of Economic Research, Inc.
  27. Edward E. Leamer, 2007. "Housing IS the Business Cycle," NBER Working Papers 13428, National Bureau of Economic Research, Inc.
  28. David Card & Thomas Lemieux & W. Craig Riddell, 2003. "Unionization and Wage Inequality: A Comparative Study of the U.S, the U.K., and Canada," NBER Working Papers 9473, National Bureau of Economic Research, Inc.
  29. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
  30. James B. Davies & Stanley L. Winer, 2011. "Closing the 49th Parallel: An Unexplored Episode in Canadian Economic and Political History," Canadian Public Policy, University of Toronto Press, vol. 37(3), pages 307-341, September.
  31. Robert H. Frank, 2005. "Positional Externalities Cause Large and Preventable Welfare Losses," American Economic Review, American Economic Association, vol. 95(2), pages 137-141, May.
  32. Galbraith, James K., 2012. "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis," OUP Catalogue, Oxford University Press, number 9780199855650, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:918-930. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.