Stylized stock market chart transforming into a balanced scale.

Stock Market Growth: Is It Helping or Hurting Income Distribution?

Nico Varela in Business & Economy August 2025 • 4 min read.

"Uncover how financial markets impact income inequality in both developed and emerging economies, and what it means for your financial future."

Income inequality is a growing concern across the globe, casting a shadow on economic growth and employment rates. As governments worldwide grapple with development strategies, understanding the determinants of income inequality is crucial to fostering effective policies. While trade and financial globalization, along with technological advancements, have been identified as key drivers, their inflexibility in addressing income disparities calls for innovative solutions.

Enter financial development, a versatile tool that can potentially level the playing field. Access to financial services is a cornerstone of individual productivity and welfare, making it essential to explore the impact of financial development on income inequality. Traditionally, this has been measured by banking sector activity. However, the financial system comprises both banking and stock markets, each playing a distinct role. Stock markets enable firms to access capital, fueling investment and influencing employment and income distribution.

While many studies have focused on the role of banking development, the impressive growth of stock markets in recent decades warrants attention. This article seeks to investigate and compare the effects of financial development, encompassing both stock market and banking development, on income inequality in developed and emerging economies. Furthermore, it examines the role of foreign direct investment (FDI) inflows in mitigating unemployment and promoting a more equitable income distribution.

Stock Markets and Income Inequality: A Tale of Two Economies

Stylized stock market chart transforming into a balanced scale.

In wealthy nations, stock markets are typically large, stable, and liquid, often dominated by industrialized companies producing technology-intensive products. This environment tends to favor skilled workers, potentially widening the income gap. Conversely, stock markets in developing countries, though less liquid and capitalized, provide a platform for firms to raise capital and diversify their operations. Many of these firms rely on low-cost, unskilled labor, which may narrow the income gap.

A recent study measured stock market development using three key indicators: market capitalization, turnover ratio, and total value traded. Banking development was assessed through domestic credit to the private sector. Analyzing data from 20 developed and 18 emerging economies from 1981 to 2014, the study employed advanced econometric techniques to understand the dynamics at play.

Developed Economies: The study found that growth in stock market indicators significantly increases income inequality, while banking credit has the opposite effect, reducing inequality.
Emerging Economies: Conversely, growth in stock markets and banking credit both contribute to decreasing income inequality.
Short-Run Effects: Stock market indicators in developed economies Granger-cause income inequalities, while emerging economies exhibit a feedback relationship between stock market indicators and income inequalities.

These findings highlight the critical role of stock markets in shaping income distribution, acting as a reducer of income inequalities in emerging economies but contributing to higher inequalities in developed economies. Understanding these dynamics is crucial for policymakers aiming to create a more equitable financial landscape.

Implications for Policymakers

The insights from this research provide valuable guidance for policymakers in both developed and emerging economies. Emerging economies should continue to foster the growth of their stock markets and banking sectors to further reduce income inequality. Developed economies, however, may need to focus on expanding their banking industries while addressing the factors that cause stock markets to exacerbate income disparities. By implementing targeted policies, governments can harness the power of financial development to create more inclusive and equitable societies.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1002/ijfe.1683, Alternate LINK

Title: Does Financial Market Growth Improve Income Distribution? A Comparison Of Developed And Emerging Market Economies Of The Global Sample

Subject: Economics and Econometrics

Journal: International Journal of Finance & Economics

Publisher: Wiley

Authors: Sudharshan Reddy Paramati, Thanh Pham Thien Nguyen

Published: 2018-10-24

Everything You Need To Know

How does growth in the stock market typically affect income inequality in developed economies versus emerging economies?

In developed economies, growth in stock market indicators generally increases income inequality. This is often because these markets are dominated by industrialized companies producing technology-intensive products, which tend to favor skilled workers. Conversely, in emerging economies, growth in stock markets can help reduce income inequality by providing a platform for firms that rely on low-cost, unskilled labor to raise capital and diversify their operations. However, it's important to note that the study also found that banking credit reduces inequality in developed economies, while both banking credit and stock markets contribute to decreasing income inequality in emerging economies. Foreign direct investment (FDI) can also play a role in mitigating unemployment and promoting a more equitable income distribution.

What are the key indicators used to measure stock market development, and how do they relate to income inequality?

Stock market development is typically measured using indicators like market capitalization, turnover ratio, and total value traded. Market capitalization reflects the overall size of the stock market, while the turnover ratio indicates its liquidity and trading activity. Total value traded represents the total value of shares exchanged during a specific period. These indicators are crucial because they influence firms' access to capital, investment, and, ultimately, employment and income distribution. The study found that growth in these stock market indicators significantly increases income inequality in developed economies, while contributing to decreasing income inequality in emerging economies.

What role does banking development play in influencing income inequality, and how does it compare to the stock market's impact?

Banking development, typically assessed through domestic credit to the private sector, plays a significant role in influencing income inequality. The study indicates that in developed economies, increased banking credit tends to reduce income inequality, acting as a counterbalance to the inequality-increasing effects of stock market growth. In emerging economies, both banking credit and stock market growth contribute to decreasing income inequality. This suggests that a balanced financial system, encompassing both robust banking and stock market sectors, is crucial for promoting a more equitable income distribution. It is also worth exploring the effects of foreign direct investment (FDI).

What are the implications of these findings for policymakers in developed versus emerging economies seeking to reduce income inequality?

For emerging economies, the findings suggest that fostering the growth of both stock markets and banking sectors can further reduce income inequality. Policies that promote financial inclusion and access to capital for firms relying on unskilled labor can be particularly effective. Developed economies, however, may need to focus on expanding their banking industries while addressing the factors that cause stock markets to exacerbate income disparities. This could involve policies that promote broader participation in the stock market or that support the development of industries that employ a wider range of skill levels. Furthermore, examining the effects of foreign direct investment (FDI) is also relevant.

The research mentions a 'feedback relationship' between stock markets and income inequalities in emerging economies. Can you elaborate on what this means and why it's significant?

The term 'feedback relationship' (Granger-causality) indicates that stock market indicators and income inequalities influence each other bidirectionally in emerging economies. This means that changes in stock market performance can lead to changes in income inequality, and conversely, changes in income inequality can affect stock market performance. This is significant because it suggests a more complex and dynamic interaction between financial development and income distribution in emerging economies compared to developed economies, where stock market indicators primarily 'Granger-cause' income inequalities. This bidirectional relationship implies that policymakers in emerging economies need to consider the potential feedback loops when designing policies to address income inequality and promote financial development, in order to avoid unintended consequences. Considering foreign direct investment (FDI) impact is also important for inclusive growth.