Income Inequality and the Great Recession: A Comparative Study

Income inequality came to the fore with the recent financial crisis, when many authors pointed at it as the main cause of the crisis. This paper aims to contribute to the understanding of the relationship between income inequality and the recent global financial crisis. It assesses whether inequality before the crisis is related to the severity of the crisis. Then, it analyzes the extent to which crisis severity affected the subsequent inequality dynamics. The analysis is conducted on a sample of 146 countries, being in that way the most comprehensive study on these issues. It puts a particular emphasis on the differences between advanced and developing economies. Results suggest that income inequality before the crisis potentially contributed to a severer output drops during the crisis of 2007-2008. The effect of the overall population inequality (Gini index) has been found severer than the one of the top 1% earners’ income share. The latter effect is found particularly stronger in developing economies. Then, crisis severity is found important only for the increase of the income share of top 1% earners in developing economies after the crisis. Moreover, those of them who went through a severer crisis, were followed with faster accumulation of the income in the top 1%.