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Income Inequality and
Redistribution: Demographic,
Economic, and Political
Determinants
Evelyne Huber and John D. Stephens
University of North Carolina at Chapel Hill
The problem • For roughly half a century beginning in the late 1920s, income
inequality declined in most of the industrial countries (Western
Europe, North America, Australia, New Zealand, and Japan).
• In the thirty years after WWII, the Golden Age of high
economic growth, this trend was reinforced by the rapid
expansion of the welfare state which redistributed income to
low income groups, to different degrees in different countries.
• Since the mid seventies, inequality has grown in all of these
countries to different degrees.
• In the extreme case of the US, the incomes of families in the
lower half of the income distribution have stagnated. All of
the benefits of economic growth have been reaped by high
income households, especially the very rich.
LIS data
• Gold standard for data on income inequality, harmonized
• Micro data available, making it possible to isolate groups,
multi-level analysis, etc.
• Most post industrial democracies, adding countries in Latin
America and Asia
• 18 Post industrial democracies
• Unbalanced, varying number of time observations per case (3-
11)
• Many gaps Random effects rather than Prais Winsten
regressions.
Welfare State Regimes
• Nordic/ Social democratic
– Generous; redistributive; universal; service-heavy
• Continental/ Christian democratic
– Generous/ less redistributive; few services
• Anglo-Saxon/ Liberal
– Residual/ targeted; few services/ but NHS
• Mediterranean/ Conservative and late
– Corporatist/ catch-up with universal elements
Table 1: Trends in inequality by regime
Estimated Average change
Pre tax and transfer inequality 1985 Level per decade N
Nordic 30.9 2.2 24
Continental Europe 33.9 1.3 33
Southern Europe 35.4 2.0 18
Anglo-American countries 37.6 3.4 41
Redistribution
Nordic 33% 2.4 24
Continental Europe 24% 1.0 34
Southern Europe 13% 2.2 18
Anglo-American countries 21% 1.9 41
Post tax and transfer inequality
Nordic 20.5 .7 24
Continental Europe 25.6 .6 33
Southern Europe 31.2 .7 18
Anglo-American countries 29.6 2.0 41
Determinants of pre tax and transfer houshold
income inequality • Wage dispersion
– Union density
– Bargaining centralization
– Left government
– Nickell – skill dispersion
• Household change, single mother households
• De-industrialization
• Employment levels
• Race between education and technology – education
spending
Household Change
• Increasing rates of divorce of single-mother
households
• Low participation in labor market high risk
of poverty
• Significant differences between countries
because of differences in availability of child
care labor market participation of single
mothers, and generosity of transfers poverty
levels
Deindustrialization
• In all advanced industrial societies and even
the more advanced developing countries, the
proportion of the labor force in industry has
declined (technological progress and
globalization).
• Result: disappearance of relatively well-paid
jobs for low-skilled workers, as low-skilled
jobs in the service sector tend to have lower
productivity and pay less
Race between Technology and
Education
• Transition to the knowledge society requires
an ever more skilled labor force
• To have an ample supply, you would need
growing investment in high quality education
• In some countries (specifically the US),
investment in public education has not kept
pace with need, and the imbalance between
supply and demand for skilled labor drives up
pay for skilled labor
Determinants of Market Income Distributions (before taxes
and transfers)
-5 -4 -3 -2 -1 0 1 2 3 4 5 6
Unemployment
Union density
% of children living in single mother households
Industrial employment
Education Spending
Employment as a % of the working age population
Determinants of Market Income Distribution
Inequality=42.5 -.103 test score, R2=.64
Causes of increases in market income inequality
Nordic countries
• Deindustrialization
• Slightly declining employment from very high level
• Unemployment increase highest (from lowest initial level)
• Increase in children in single mother households
• Countervailing factor: education spending, starts at the highest level and strongest
increase at 0.3% per decade
Continental Europe
• Deindustrialization
• Increase in children in single mother households
• Increases in unemployment
• Countervailing factor: increase in employment
Anglo-American countries
• Deindustrialization
• Largest increase in children in single mother households from highest initial level
• Decreasing education spending, losing “race between education and technology”
Hypotheses on Causes of
Redistribution
• Size of transfers: it IS true that you can solve
some problems by throwing money at them;
e.g. generous unemployment benefits and child
allowances or minimum income schemes
• Structure of transfers determined by left/ right
and Christian democratic politics
• Problem pressure: at any given level of
entitlements, larger problems will result in
larger redistribution
-4 -3 -2 -1 0 1 2 3 4 5 6
Left cabinet
Unemployment replacement rates
Unemployment
% of children living in single mother households
Employment as a % of the working age population
Redistribution
Table 6: Trends in "policy" redistribution by regime
Estimated Average change
1985 Level per decade N
All countries 15% -.2 117
Nordic 24% .2 24
Continental Europe 16% -.5 34
Southern Europe 1% 3.6 18
Anglo-American countries 10% .4 41
Thanks for your attention!
-1.5 -1 -0.5 0 0.5 1 1.5 2
Nonaged spending
Nonaged spending
Social spending
Social spending
ALMP spending
Daycare spending
Health care spending
Health care spending
Education spending
Parental leave replacement rate
Unemployment replacement rate
Unemployment replacement rate
Sickpay replacement rate
Sickpay replacement rate
Minimum pension replacement rates
Standard pension replacement rates
Government service employment
Government service employment
Redistribution
Poverty
Poverty
Child poverty
Single mother poverty
Single mother poverty
a. Pre 1986
-1.5 -1 -0.5 0 0.5 1 1.5 2
Social spending
Daycare spending
Health care spending
Education spending
Parental leave replacement rate
Standard pension replacement rates
Government service employment
Government service employment
Poverty
Single mother poverty
b. Post 1985
Social democratic government Christian democratic government