ABSTRACT
At the end of the 1990s, the subject of inequality was more or less a marginal subfield within the discipline of economics. Since then, thanks largely to the efforts of Thomas Piketty, Tony Atkinson, Emmanuel Saez, and Edward Wolff, the topic has risen to prominence and now occupies center stage within the discipline. A key aspect of this resurgence has been the development of a U-curve narrative regarding the historical pattern of changes in inequality. According to this narrative, inequality was high in the 19th and early 20th centuries, fell progressively during a golden age that spanned until the 1970s, and then started increasing again. This chapter questions this broad narrative. It analyzes the empirical foundations of the U-curve narrative more closely. Based on this investigation, it argues that some of the rise of inequality in recent decades is overestimated. It also takes a closer look at some of the underlying causes that explain the U-curve. According to the most popular explanations, falling inequality is said to be the result of more regulation, and vice versa. This chapter challenges this view in two ways. First, it argues that the relationship between government intervention and the level of inequality has, in fact, often been exactly the reverse: numerous regulations and interventions have led to rising and not falling inequality. Second, it claims that the reductions in inequality have often been the result of the operation of market forces. Finally, the chapter argues that some of the recent increases in inequality have been the result of factors that are welfare and/or growth enhancing. Such “good” inequality, it argues, is not problematic and need not be addressed through policy measures.
