Battling Inequality

Increasing Competition to Improve Wages

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The gap between rich and poor is widening at a slower pace. But when can it start to close? Source: dpa Picture-Alliance / Eventpress / Schraps [M]

Capitalism inevitably widens the gap between rich and poor. More and more people in Germany believe this is true and question the legitimacy of our liberal economic order. But alarmism is ill-advised – inequality is not an automatic conclusion in a market economy. Instead, after a period of rising income inequality, strong economic forces will sink income disparity as long as the government ensures sufficient competition.

This fluctuation in inequality goes hand-in-hand with the emergence and spread of technological progress, the most important source of prosperity. At first, it is a small number of companies and their well-trained employees that develop and deploy innovations. These innovators take great risks and make a lot of money when they are successful – causing income inequality to increase. High profits and wages attract competitors. More and more companies use the new technologies, and workers gradually acquire the knowledge and skills to work in these companies and make good money there. As a result, inequality sinks again. 

This pattern also applies to Germany. The industrial revolution led to rising inequality and it declined again in the ensuing decades. In the formative post-war years of the Federal Republic of Germany, with its high degree of social mobility, educational expansion and scarcity of workers, something emerged that sociologist Helmut Schelsky called a “leveled middle-class society.” But income disparities have risen again since the beginning of the 1980s and the trend accelerated in the 1990s. This is can be attributed to the so-called second industrial revolution or the advance of information technology.

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