Beyond market forces: a story of changing economic inequalities in rich countries Virginia Maestri Social Inequalities in Europe, Athens 20 June 2014
The views expressed in this presentation are solely those of the authors and do not necessarily reflect the views of the European Commission
Structure of presentation I. Introduction: Policy debate II. Facts on economic inequalities: 1. Income inequality a. Trends b. Drivers 2. Wealth inequality a. Trends b. Drivers III. Conclusion: Policy facts
Part I Introduction: Policy debate
After decades of increasing inequality the debate took-off since the crisis
Part II Facts on economic inequalities
Changing geography of income inequality trends in EU? Past trends (mid 80s or '90s late '00s) Red=increasing inequality Green=decreasing inequality Current trends (2008-2012) Red=increasing inequality Green=decreasing inequality
Changing geography of inequality trends in EU? More countries experienced an increase in inequality in the last decades than after the crisis The crisis changed the geography of income inequality trends: income inequality started increasing in some countries where it was not previously increasing (e.g. ES, EL) and decreased in some others which previously experienced increasing trends (e.g. FI, UK) But
Does it look better now? 1. The at-risk of poverty or social exclusion increased in most countries 2. And in some median income fell, resulting in a deterioration of living conditions 3. Optimistic estimates as these measures excludes consumption taxes and in-kind benefits
The geometry and timing of income inequality trends Gini coefficient 0.17 0.19 0.21 0.23 0.25 0.27 0.29 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 FIN SWE 0.2 0.22 0.24 0.26 0.28 0.3 0.32 0.34 0.36 0.38 0.4 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 EE LV 0.26 0.27 0.28 0.29 0.30 0.31 0.32 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 ITA KOR 0.24 0.26 0.28 0.30 0.32 0.34 0.36 0.38 0.40 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 UK USA
The geometry and timing of income inequality trends Ex communist: abrupt increase in EE, LT, more gradual in LV Anglo-Saxon (excl. IE): persistent, in UK concentrated in the '80s In Nordic (esp. SE, FI) continuously in the '90s and '00s as in KOR (U-shaped) and in IT episodic ('92), following crises
Why beyond market forces? Standard theories of inequality (e.g. SBTC) cannot fully explain why: The timing and patterns of inequality are different across (similar countries) Increases in inequality following recessions are persistent (FI, SE, IT, KOR) Wage inequality increased also in countries where the skill premium did not increase (e.g. CAN, IT, AT)
1. What s beyond market forces? Labourmarket stylezedfacts -Overview of GINI Country Reports
2. What s beyond market forces? Taxation and top incomes: the dual tax system in Sweden and Finland 10 9 8 top 1% share of total income 7 6 5 4 3 Introduction of dual tax system: 1991 SE, 1993 FI 2 Finland1 Finland2 Sweden Netherlands
Summary drivers of income inequality From the mid-90s increasing importance of capital income and reduced role of redistribution Proximate causes: Labour market Redistribution Capital income and self-employment Underlying causes: SBTC, globalization, structural imbalances Ideology
A particular form of capital income The redistributive effect of housing 0.38 0.36 0.34 0.32 Gini coefficient 0.3 0.28 0.26 0.24 0.22 0.2 ES UK MT LT IT PL GR EE SI SK LV HU BE AT IS NO FI SE LU PT RO FR CZ NL DE DK disposable income after imputed rent
From capitalincome to wealth and debt Increasing importance of wealth and debt Increasing wealth inequality and polarization Possible underestimated due to tax avoidance and pension reforms Changing patterns since the crisis
Changing geography of income inequality trends in EU? Past trends(80s-mid00s) Current trends (2010-2011) Red=increasing ineq. Green=decreasing Red=increasing ineq. Green=decreasing
What s beyond market forces? Taxation, debt and wealth paradoxes Cross-country differences do not explain national stories: finance, billionaires, debt and taxation versus institutional factors Wealth paradoxes: social spending relationship with income inequality Timing Cross-country Distribution
Equality of income, inequality of wealth? Income inequality (late 00s) Red=above median Green=below Wealth inequality (2010) Red=above median Green=below
Income poor are not necessarily wealth poor and viceversa 400 Wealth Income Wealth-by-income 350 300 National household average = 100 250 200 150 100 50 0-50 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 AUS FIN ITA NLD UK USA Quintiles by country
Part III Conclusions: Policy facts
Summary and progress Facts Policy debate Policy facts Late 2000s increasing income and wealth inequality;role of policy 2014 increasing income and wealth inequality with changing patterns new understanding of the mutual links between inequality and growth, acknowledgement of the role of policy and on the importance of wealth cutting of benefits and weakening regulation, shift to regressive taxes, more attention to (poorly designed) property than to other wealth taxes and tax avoidance
Next Use past lessons from crises and policy reactions Better address the causes of inequality than the effects of crises Shift the attention of policy to (a wise assessment of) wealth and top incomes
THANKS