A working paper about income inequality published today by the IMF shows it undermines trust among low-income groups.
“The results suggest that inequality at the bottom of the distribution lowers an individual’s sense of trust in others – in the United States and in Europe,” the paper says. “A causal interpretation of this finding is bolstered by the robustness of the effect to the inclusion and exclusion of several control variables – which supports the identifying assumption that the results would not be sensitive to omitted factors from the full-specification. In addition, these findings are robust to the inclusion of various other measures of inequality in the same specification – which controls for a myriad of other unobserved factors which may be driving the increasing inequality trends in many developed countries over recent decades.”
The paper says that the impact of inequality on trust in Europe is more general than in the US.
“There is also some evidence that inequality from all over the spectrum is causing Europeans to desire more government action to reduce income gaps,” the paper says. “In the United States, there is little evidence that this is case. For both the United States and Europe, the results do not provide any support for the idea that increases in inequality at the very top of the distribution, such as the top 1 percent or top 5 percent shares, have led to a decline in overall trust levels. The significant negative effect of inequality on trust is apparently not driven by inequalities at these extreme ends of the 22 distribution. This finding may be due to the idea that very few people are directly affected by those forms of inequality.”
The paper says that the increasing income inequality trends in recent decades for many advanced countries may have negatively affected overall trust levels, and thereby, increased social gaps in society in the wake of widening income gaps.
“Given that trust has been found to be an important determinant of the macro-economic performance of the many countries, these findings suggest an important, albeit indirect, way that increasing inequality may be adversely affecting a country’s growth and development over time.”