The determinants of income inequality-a measure of how unevenly income is distributed across individuals or households in a population-has for a long time been at the center of a lively debate in economic circles.
This is due to the social and economic costs that such inequality brings. Inequality may reflect lack of income mobility and opportunity, can lead to social instability and lower economic growth by discouraging investment in education and physical capital.
Globalization, technology, and financial development are widely considered as key drivers of economic growth, but because their benefits may not be spread uniformly, they have also often been associated with rising inequality.
Thus, policymakers may face a growth-inequality trade-off when it comes to policies related to, for instance, the removal of trade barriers, incentives for research and development, or financial liberalization. To understand why that is the case, one needs to consider the channels via which these factors affect both economic growth and income distribution.
A version of this article appears in the print on June 02, 2021, of The Himalayan Times.