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Inequality and policy.................................................................................................................................................3PART I: Diagnosis...................................................................................................................................................4
Why do we care about inequality?...................................................................................................................4
But what do we mean by inequality?................................................................................................................4
Inequality of what?........................................................................................................................................5
Conceptual and policy issues....................................................................................................................5
Inequality among who?.................................................................................................................................6
Inequality under which time frame?.............................................................................................................6
Taking account of the household context: equivalence scales.................................................................6
Measures of inequality..........................................................................................................................................7
Representing income distribution with one number: summary measures of inequality.................................7
Principles and properties of inequalities indicators..........................................................................................9
Available data sources: characteristics, promises and pitfalss.............................................................................9
taking data seriously..........................................................................................................................................9
Standardised micro data sets........................................................................................................................9
Secondary data sets....................................................................................................................................10
Synthetic data compilations........................................................................................................................11
Underlying data sources: household surveys vs. administrative records.......................................................11
How unequal are our societies?..........................................................................................................................12
Relative income distributions..........................................................................................................................12
Absolute income levels at different point points of the income distribution................................................13
What was the long-term development of income inequality in the OECD area?..........................................13
PART II: Driving forces and causes of inequality in the OECD area.........................................................................15
Theories of inequality change.............................................................................................................................15
Structural change (Kuznets)............................................................................................................................15
Trade-induced change (Heckscher-Ohlin-Samuelson)....................................................................................16
The race between education and technology (Tinbergen).............................................................................16
The demand for redistribution (Meltzer-Richard)..........................................................................................17
Wealth accumulation and divergence with growth (Piketty).........................................................................17
What does the literature tell us? ‘Smoking guns’ and usual suspects for increased inequality:.......................18
Direct and indirect factors and driving forces of income distribution – a concise review of the literature. .18
Economic globalisation................................................................................................................................19
Skill-biased technological change................................................................................................................19
Trade integration (goods and services mobility).....................................................................................19
Financial integration (capital mobility)...................................................................................................19
Production relocation/ offshoring (firm mobility)..................................................................................19
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, International migration (peoples’ mobility)............................................................................................20
Technology transfers (information mobility)..........................................................................................20
Changes in regulations & institutions.........................................................................................................20
The role of political processes.....................................................................................................................21
Redistribution by the welfare state............................................................................................................21
Socio-demographic mega trends................................................................................................................22
A qualitative summary: „proximate” drivers of inequality, based on a review of the literature...................23
Cross-country empirical analysis of direct drivers: labour market developments and changes in welfare state
redistribution policies..........................................................................................................................................24
First step: effects of globalisation and institutions on earnings inequality (the dark blue boxes).................25
Second step: how to take into account non-workers and estimate “total” earnings inequality (the light blue
boxes)..............................................................................................................................................................25
Detailed results I: GLOB, TECH, INST and wage inequality.............................................................................26
Third step: looking into the effects of changes in employment patterns in detail (the light blue and early
grey boxes)......................................................................................................................................................27
“Non-standard”/”atypical” work: a fuzzy concept......................................................................................27
Fourth step: decomposing the effects of labour market versus demographic changes on household
earnings (the earlier grey boxes)....................................................................................................................30
Fifth step: from household earnings to market income distribution (the middle grey boxes)......................31
Sixth step: from market to disposable income inequality (grey to green boxes): the impact of transfers and
taxes................................................................................................................................................................31
A final step: to which extent did socio-demographic mega trends impact inequality trends more recently?
.........................................................................................................................................................................32
6 take-home lessons from PART II......................................................................................................................33
PART III: How does inequality impact our impact our lives? Consequences of growing inequality in the OECD
area..........................................................................................................................................................................34
The impact of inequality on economic growth...................................................................................................34
Inequality and growth: a review of the evidence...........................................................................................34
Inequality and growth: Baseline findings, I.....................................................................................................36
Inequality harms growth: what is the dominant mechanism for that?..........................................................37
Inequality, human capital accumulation and social mobility..........................................................................38
Inequality of opportunity as a result of inequality of outcomes: how mobile are our societies?......................39
What do we mean by “social mobility”? It can be defined under different angles........................................41
Under growing pressure: inequality and the middle class..................................................................................44
Who is middle class?.......................................................................................................................................44
Unfairness....................................................................................................................................................45
Affordability.................................................................................................................................................46
Uncertainty..................................................................................................................................................47
How do inequalities relate to public perceptions and policy preferences.........................................................48
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, Policy implication................................................................................................................................................49
8 take-home lessons of part III............................................................................................................................49
PART IV: Policies to reduce inequalities..................................................................................................................51
Tony Atkinson's 15 proposals for action to reduce inequality............................................................................51
Guiding principles............................................................................................................................................51
#1 Technological change and innovation polivy.........................................................................................51
#2 Technological change and countervailing power...................................................................................52
#3 Employment...........................................................................................................................................52
#4 eMPLOYMENT AND PAY.........................................................................................................................53
#5-6 cAPITAL AND wEALTH.........................................................................................................................54
#7 cAPITAL AND WEALTH/ NATIONAL WEALTH.........................................................................................56
# 8-9 TAXATION OF INCOME.......................................................................................................................56
#10-11 TAXATION OF WEALTH....................................................................................................................57
#12-14 sOCIALE SECURITY FOR ALL.............................................................................................................58
# 15 Global responsibilities.........................................................................................................................61
Examples of OECD recommendations in selected areas.....................................................................................61
I. Policies to reduce income inequality...........................................................................................................62
II. Policies to reduce wealth inequality...........................................................................................................62
III. Policies to increase social mobility and equality of opportunity...............................................................64
IV. Policies to strengthen the middle class.....................................................................................................64
V. Policies to mitigate the inequality impact of socio-demographic megatrends..........................................64
INEQUALITY AND POLICY
3
, PART I: DIAGNOSIS
WHY DO WE CARE ABOUT INEQUALITY?
(1) individual concerns
a. The spirit level (book): measuring health across the world with different
instruments/variables/starting points
b. Higher reported subjective well-being when own (upward) mobility is higher but also
when the society is believed to be more equal and mobile
c. High levels of inequality negatively affect physical and mental health but also
violence (e.g. Wilkinson and Pickett, 2010)
(2) Social concerns
a. High inequality today are linked with low mobility tomorrow
b. Utilitarian view: excessive inequality reduces the sum of total utility (lower marginal
utility of an extra € for well-off) –
c. Higher inequality of outcomes today is related to lower social mobility perspectives
of next generations
d. Lower rates of class movement are thought to raise economic discontent and class
struggle, even among those who are mobile themselves (e.g. Clark and Lipset, 1991)
(3) Political concerns
a. Link between inequality and trust/participation/wealth
b. Perceptions impact on preferences on redistribution
c. The tolerance of higher inequality level has increased
d. A significant linkage between rising inequality and lower trust in others, as well as
lower solidarity
e. Higher inequality is associated with lower civic participation and lower voting turnout
among the poor
f. High top income and wealth concentration can enhance political influence of the rich
g. Perceptions of inequality affect preferences towards redistribution
(4) Economic concerns
a. Recent empirical evidence that long-term increase in income inequality has
negatively affected economic growth
b. Narrowing the educational gap between children from low and high parental
education background can result in substantial economic gains
c. High inequality prevents talented children from low-income families into the R&D
sector with negative effects on aggregate innovation rates
(5) Ethical concerns
a. Considerations of social justice and fairness (e.g. Atkinson, 2015)
b. Underlying discrimination (gender, race inequality)
c. inequality is morally wrong when it prevents people from satisfying their basic
needs, both biological and psychological.
After the great depressions there were great concerns about the rising inequality.
BUT WHAT DO WE MEAN BY INEQUALITY?
4
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