A/HRC/31/60 2. Inflation, unemployment and labour share 42. In addition to this slowdown in economic activity, there are several other channels through which financial crises affect income and wealth distribution. Currency crises exert their influence by leading to relative price changes, fiscal retrenchment and changes in assets.66 Devaluation leads to the aforementioned fall in earnings of those employed in the non-tradable sector, while it increases the demand for exports and therefore may benefit employment and earnings in this sector. The poor may also be affected by the price increase of imported goods, especially food prices. Fiscal retrenchment and public spending cuts may affect social assistance outlays, amplifying the consequences of the crisis on the poor. Lastly, changes in the value of assets have an impact on income distribution because variations in interest rates, assets and real estate prices are more likely to affect the wealth of the better off. 43. In the aftermath of banking crises, the associated unemployment rate rises on average by about 7 percentage points, with a duration of over four years.67 Currency crises also affect the labour share of income. 68 The labour share is a key indicator for the distribution of income in a country: it shows how much of national income is distributed to labour and how much to capital. Currency crises are associated with a strong fall of the labour share, which is only partially compensated in the following years. Even the longterm trend of declining labour share that has been observed for decades may at least partly be explained by financial crises. This implies consistently growing income inequality, as a falling labour share means that an ever larger share of the benefits of growth accrues to owners of capital. This development may be even more significant in developing countries, where a large share of the capital is held by foreigners. 69 3. Growth in poverty 44. In total, currency crises have a magnifying impact on both the spread of poverty and inequality. Based on the Gini coefficient, one particular study found inequality to increase by 0.63 per cent relative to the pre-crisis year. Moreover, the association between crises and income distribution/poverty was stronger when crises were followed by average income losses. This fall of income accounted for 15-30 per cent of the variations in the poverty and inequality indicators. The study also found a more-than-proportional fall in the income share of the lowest income quintiles and an increase in the income share of the highest quintile.70 Another study concluded that on the average inequality rises by 16.2 per cent in the two-year period immediately following a currency crisis as opposed to 3.2 per cent in years without crises.71 The Great Recession, best described as a systemic banking crisis, which has been followed by a debt crisis, especially in the European Union, has led to 66 67 68 69 70 71 14 See E. Baldacci, L. de Mello and G. Inchauste, “Financial crises, poverty and income distribution”, IMF working paper No. 02/4 (2002). See C.M. Reinhart and K.S. Rogoff, “The aftermath of financial crises”, American Economic Review, vol. 99 No. 2 (2009), pp. 466-72. See R. Bazillier and B. Najman, “Labour and Financial Crises: Is Labour paying the price of the crisis?”, mimeo (2012). See I. Diwan, “Debt as sweat: labor, financial crises, and the globalization of capital”, mimeo (Washington, D.C., World Bank, 2001); and P. Maarek and E. Orgiazzi, “Currency crises and the labor share”, Economica vol. 80, No. 319 (2013), pp. 566-588. See Baldacci et al, “Financial crises, poverty and income distribution”, (footnote 66). See J.K. Galbraith and L. Jiaquing, “Inequality and financial crises: some early findings”, working paper No. 9 (University of Texas, 1999), using the Theil Index, another inequality indicator.