Why does unequal matter? The economic externalities of inequality

Todd A. Knoop

Chapter 3 in Understanding Economic Inequality, 2025, pp 47-94 from Edward Elgar Publishing

Abstract: Why exactly should we be worried about economic inequality? Inequality matters because the relationships between people matter, whether they take place within markets or outside of markets. Here, we examine why there may not be a tradeoff between equity and efficiency but, in fact, a virtuous/vicious circle between the two. This chapter will focus on the social nature of productivity and wage determination, including a discussion of the theory of efficiency wages. It will examine Utilitarianism and its arguments regarding the role that inequality plays in reducing social welfare. This chapter will describe how inequality can lead to financial fragility and macroeconomic instability. Also examined is the role that inequality plays in degrading trust and promoting conflict, which can lead to increasing political polarization, poorer public health and educational outcomes, and more discrimination. Finally, this chapter examines recent research on the ways that our perceptions of fairness and our relative positions in social hierarchies impact efficiency and social cohesion and work to diminish social and intergenerational mobility.

Keywords: Utilitarianism; Efficiency wages; Intergenerational mobility; Discrimination; Trust and conflict; Political polarization (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035360116
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