Varieties of Financialization and Increase in Inequalities

We study the impact of financialization on the rise in inequality in 18 OECD countries from 1970 to 2011, and measure the respective roles of various forms of financialization: the growth of the financial sector, the growth of one of its subcomponents, the financial markets, the financialization of non-financial firms, and that of households. We test these impacts through cross-country panel regressions in OECD countries. As dependent measures we use both Solt’s [2009] Gini index, the World Top Income Database, and the OECD’s inter-decile measures of inequality. We show firstly that the part played by the finance sector in GDP is a substantial driver of world inequality, explaining between 20 and 40 percent of its increase between 1980 and 2007. When we decompose this financial sector effect, we find that this change was mainly driven by the increase in the volume of transactions on national stock exchanges and by the volume of shares held as assets on banks’ balance sheets. On the contrary, the financialization of non-financial firms and of households plays no substantial role. Based on this inequality test, we therefore interpret financialization as chiefly a phenomenon of marketization, which we define as the growing amount of social energy devoted to the trade of financial instruments on financial markets.