Economic inequality is rising in these countries

Victor Lledo is a senior economist at the Ministry of Fiscal Affairs and the International Monetary Fund

In many developed economies, socio-economic inequalities between and within countries and regions are on the rise and are now at the forefront of policy debates, with certain people and places perceived to have been left behind. The growth of global trade and technological advances have profoundly changed the layout of jobs and industries on the map, but economic benefits have not been well redistributed within countries.

Some might think that people moving in search of better jobs and lives would be a solution. But what we find is that people struggle to move to booming cities with more jobs, like Washington, D.C., or San Francisco, or London, in part because they can't afford to live in those cities, or they don't have the skills required for high-paying jobs.

Our recent paper examined regional inequality in 20 advanced economies, including the United States, Canada, Italy and Germany. We find that income disparities between regions are large, persistent and growing over time.

There may be a need to rethink government tax and spending policies so that countries can better address regional inequalities. Policies can help people upgrade their skills for higher-paying jobs and help rebuild communities to create local jobs.

Income disparities between countries and regions persist and have been increasing over the past 15 years.

The facts and resistance of regional inequality

In many developed countries, income disparities between regions are large. One might argue that this is mainly due to regional price differences, with $100 buying more goods and services in Missouri, for example, than in New Jersey. But even when we control for price differences, regional disparities remain large. An uncomfortable fact is that low-income areas tend to have less access to health care, lower levels of education and higher unemployment.

More importantly, income disparities between regions also persist and have increased over the past 15 years, reinforcing regional inequality. Laggards (areas with high unemployment) have, on average, a 70% chance of staying behind. In some countries, such as Italy and Canada, the odds of lagging behind are even higher. The laggards of these countries did not catch up, growing only at a slower pace, with GDP rising by 1 percentage point over three years.

You might think the problem is simple, that people can move to higher-income areas in search of better jobs. But the study, based on micro-data from individual households, found that higher average incomes in wealthier areas were more than offset by higher living costs in the region. People are finding it harder to move because housing costs are high in developed areas and low-skilled workers struggle to find well-paid jobs. Our estimates show, for example, that in Spain and the United States the net gains from low-income households moving to higher-income areas have fallen by 25 to 35 percent over the past decade.

Look to fiscal policy for the answer

Fortunately, we have a variety of policy options to help address regional inequality. For example, policy makers can reinforce income redistribution through taxes and transfers. Growth-friendly policies that focus on improving education, health care, infrastructure and providing affordable housing can make it easier for low-income people with lower skill levels to find work elsewhere.

Our article presents different policy options for policy makers who will try to decide if, when, and why to pursue targeted, area-based policies to address regional inequality. These policies help individuals and businesses in specific regions through subsidies, donations or public investments, such as structural and investment funds in Europe or enterprise zones in the United States.

Location-specific policies can complement existing social transfer policies, such as unemployment insurance. If the transfer policy of the receiver highly concentrated in a country (such as Mexico and the United States) backward area, and if some countries find it hard to through economic survey nationwide selected policy of the receiver, so in this case, for the geographic location of the policy (for example, in the backward area to promote employment) may produce a greater impact, better supplement existing measures.

Who will be in charge?

Each country needs to determine the appropriate level of government (local, state, or federal) to implement these strategies. The degree of fiscal autonomy depends partly on whether the country is federal or unitary and more generally on the nature of intergovernmental financial arrangements.

For example, a high degree of devolution of revenue and spending powers may mean that local governments have greater control and ability to design and implement location-specific policies. In view of shared responsibilities, coordination among governments is key.

As a general principle, the central government will usually lead policy design, while local governments are more involved in policy implementation because they know local needs and preferences best. In federal or highly decentralized countries, such as the United States, local governments have greater autonomy to set income and property tax rates and education and health care spending. Other factors to consider include the existing system of government-to-government transfer payments and the technical capabilities of local governments.

When considering facts and policies about income inequality, regional size is the key element. In any country, region-specific policies can complement traditional social transfers to alleviate regional inequalities.