Financialization, Varieties of Capitalism, and Income 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 drawn from OECD and LIS inequality databases.

We begin by reviewing the definitions and more than 15 different measures of financialization in existing studies. In our tests, we find that stock market capitalization, financial corporations’ equity assets, profitability of the financial intermediation sector, net distributed income in non-financial corporations, and credit to non-financial corporations by financial institutions are related to the income inequality measures. We also find that these effects are stronger in LMEs than CMEs.