A sector balances-based inquiry into the effects of financialization on income inequality : evidence from selected EU countries during the period 1999-2016

Abstract

This paper investigates the relation between financialization and income inequality using novel financialization indicators inspired by the theory of the monetary circuit and constructed via sector balances data from Eurostat Quarterly National Accounts. The theoretical channels predict that as the financial sector’s activity increases, the creation of capital gains, dividends, and interest income increases wealth for a few asset holders. As a result, sector behaviors become more short-term, as evidenced by contemporary corporate strategy that emphasizes profit maximization for shareholders via financial investments. Long-term real investment suffers, employment becomes more flexible and real wages lag behind, increasing income inequality. The estimation results provide mixed evidence for a direct link between financialization and income disparities. This is attributed to the length of the dataset, the possibility of reverse causality, and the possibility that the studied relation holds in the long run.