Does Financialization Increase Inequality in Post-Industrial Democracies?

The last three decades have been a period of rising inequality in post-industrial democracies, particularly in Liberal Market Economies (LMEs)/Anglo-American countries.  It has also been a period in which “financialization,” however defined, was increasing rapidly in many of these economies, again particularly the LMEs, and many scholars linked the two phenomena (see e.g. Dunhaupt 2014, Godechot 2016, Flaherty 2015).  We review these contributions and then subject them to a re-test using data on income share of the top 1% of income earners from the World Wealth and Income Database and on the Gini index of market (pre-tax and transfer) income of working age households.

We begin by reviewing the definitions and more than 15 different measures of financialization in existing studies.  In our tests, we find that value added in financial intermediation as a percent of GDP, the most unambiguous and transparent measure of the size of the financial sector, is not related to top 1% income shares and only modestly related to the market income Gini.  Stock market capitalization as a percent of GDP is the only one of the many measures to have a robust and strong effect on the dependent variables.  However, it cannot be unambiguously interpreted as a measure of financialization.  In the Varieties of Capitalism literature (e.g. see Hall and Soskice 2001), it is employed as an indicator of corporate governance and corporate financing characteristic of LMEs.