A New Old Macroeconomics of Social Cohesion: Rising Prosperity Still Trumps Rising Inequality, at Least for Many

Abstract

The paper takes up concerns about socially corrosive effects of rising economic inequality in Western societies. In view of conflicting evidence from prior research relying on either cross sectional or longitudinal data, we compile a harmonized database of cross-nationally comparable survey data from 32 countries and spanning a four-decade observation window to provide new evidence on the relationship between inequality and social trust. Based on our own estimates, we contribute the following key observations: first, rising economic inequality has led to lower levels of trust, but properly isolating this effect requires to account for the role of simultaneous increases in prosperity. Rising prosperity increases social trust, and tends to empirically outweigh the adverse effects of rising inequality in the aggregate. However, there is evidence of a tunnel effect, so that inclusive growth and public redistribution become increasingly important for sustaining social cohesion in more affluent societies. We also find that the positive effects of rising prosperity to a significant extent accrue as private trust gains among successful citizens, so that the contextual effects of a changing income distribution appear decidedly more negative than their total effects. As contextual effects furthermore vary by level of education, we find rising prosperity (but not rising inequality) to create an increasing trust wedge between privileged and less fortunate members of society.