Public policy and European society

University of Castellanza Session 3(a)

Inequalityin Europe and the USA

March 28 2014

Outline

Inequality» Measuring» Causes

How and why is the USA so different? Recent changes in Europe

Income distributions

Proportion of Population in Income Bands

0% 20% 40% 60% 80% 100%

France

Germany

Italy

Sw eden

UK

USA

Population (adult equivalent)

>200

150 to 200

>120 to <150

>80 to <120

>50 to <80

<50%

Income distributions are more or less equal and have different shapes

Growing inequality

Defining income

Different definitions of income» Market income» Disposable income

– Less taxes, plus transfers

» Imputed income– Example: ‘cost’ of state education

Unit: Individual or household» Equivalised household income – income adjusted

for household size Sources: surveys, tax returns

Income distributions

Gini coefficients» 0=complete equality, 1 = complete inequality

Percentages of people » What is the income of (e.g.) the poorest 10%?» S90/S10 decile share: gap between average

income of richest 10% and of poorest 10% Percentages of income

» What percentage of people have (e.g.) less than 50% of the average (mean or median) income?

Income inequality within EU: Gini coefficients mid 2000s

0.05.0

10.015.020.025.030.035.040.0

The Gini coefficient is the simplest measure of inequality of any distribution: 0 means total equality (everybody is equal) and 1 total inequality (1 person has everything).

Are rich countries more equal?

Growing inequality in USA

Source: Ryscavage, p59.

The table is based on percentages of units: (households)

It shows the share of all income (‘Percentage of Income’) received

by each 20% (‘Quintile’) of the population

Growing inequality in USA…

For the last 40 years: the very rich have got richer; the poor have

stayed the same

Gender equality and social inequality….

Source: Ryscavage. P.98.

Chart shows during the 1960s and 1970s growing equality amongst women (the period when women began to enter the workforce), but then from the late 1970s inequality amongst women increases. By contrast inequality amongst men has been rising since the early 1970s.And what does this say about inequality between households?

Rich get richer: especially in USA

Share of pre-tax income going to top 1%; Source: OECD

Why is USA more unequal than Europe?

Overall government spending» Higher in Europe (EU15) than USA, especially on social programmes transferring to

households; US military spending far higher State programmes

» Income support» Health care» Sickness and injury» Disability» Pensions

Impact of» Taxation» Labour market regulation» Goods market regulation» But charity?

US inequality because of both extremes: (a) ‘The American poor are really poor’ (b) American rich are really rich

Source: Alesina and Glaser, chapter 2

In general bigger government means more equality (but Italy!)

Growing inequality: some possible causes

Globalisation– Falling demand for unskilled labour– Competition for unskilled jobs through outsourcing and/or mass immigration

Sectoral and structural change– Fewer well-paid male manual jobs (see ‘Full Monty’ film)– Service sector more polarised than manufacturing industry– Mass unemployment– New impact of women’s labour force participation

Earnings inequality within sectors– Privatisation & marketisation– Lower demand for unskilled– Winner takes all job market’ – Managers able to demand higher ‘remuneration’ especially in financial services

Political» Tax cuts and changes benefit rich» Reduced income support and welfare» Decline of trade unions

The big difference between the USA

and Europe seems to be political

UK: more equal

Germany: more unequal

European convergence

Equal societies (e.g. Sweden,

Germany) have been getting more unequal; but some unequal societies (e.g UK) have got

more equal

Impact of crisis

Solid bar: Disposable income inequality.Diamond: Market inequalitySource: OECD, Society at a Glance 2013

Crisis increases market income inequalityTransfers reduce this increase

Does it matter?

A moral issue?Extremes of rich and poor are wrong

An efficiency issue?» Too much equality reduces growth?

Or

Inequality reduces growth?

A universal issue» Inequality is bad for everyone, including the rich» Wilkinson & Pickett (2009), The Spirit Level: Why more equal

societies almost always do better