Issue 2017-2 (June 2017) – Inequality Matters

Keeping Inequality on a Short Leash: Whose Task?1

by István György Tóth, Tarki Social Research Institute, Budapest

In 1997, Anthony Atkinson, a supremely authoritative scholar of inequality, published an article entitled “Bringing Income Distribution in from the Cold” (Atkinson 1997). He intended to warn that the dispersion of incomes and the dimensions of inequality should be at the forefront of economic and social research, assuming that the ambition is to have a more thorough understanding of macroeconomic and societal dynamics. Since then, inequality has in fact resumed a central place also in academic research (Atkinson and Bourguignon, 2015), not only in political debates.

However, all too often, the term “inequality” is routinely qualified with epithets such as “large” and “growing”. While few would debate the negative impact of inequality on social and economic outcomes, channels and mechanisms of causality are rarely explored in their entirety. How is the growth of inequality being tackled and whose responsibility is it to handle its consequences?

The GINI project

The EU-sponsored GINI project (the title is a play on words; it reduces the full name – Growing Inequalities’ Impacts – to an acronym that recalls the Gini coefficient, probably the most widely used inequality index). The project amassed long-term data (spanning three decades between 1980 and 2010) on a sizeable number of countries (30 detailed case studies were presented at the end), in order to identify manifest and latent trends and to inform a number of analytical papers on the relationships between various inequality-related variables. The core research team (led by Professor Wiemer Salverda of Amsterdam University) has produced two thick volumes published by Oxford University Press, summarising the causes, characteristics, trends and potential consequences of changing inequalities in the country groupings under scrutiny (Salverda et al. 2014; Nolan et al. 2014).

Inequality Spells

Using long-term time series, one can identify fluctuations (such as the much-debated Kuznets curve, an inverted U-shaped figure that describes the assumed relationship between development and inequality and that is named after Simon Kuznets), long-term trends (Piketty recently detected a global rise in inequality since the Second World War), jumps (such as the dramatic increase in inequality in post-communist countries after the systemic change), stagnation or no change (some continental welfare states, for example, do not seem to have witnessed any major changes in traditional inequality measures in the 2000s). There are, therefore, spells of inequality growth and inequality decline as well, and there is considerable variation across countries.

And this has been shown by GINI (see Table 1). While the basic trend in inequality was upwards across the countries included in the analysis – the whole range of Gini coefficients was higher at the end of the period (from 0.228 to 0.373) than at the start (from 0.20 to 0.33) – this growth in inequality was far from uniform. In certain countries (such as Austria, Belgium, France, Italy, Ireland and Slovenia), the level of inequality remained largely unchanged or else fluctuated around the same level; whereas in others, a substantial increase took place. The most dramatic widening of the dispersion was experienced in some transition countries (Bulgaria, Estonia, Lithuania, Latvia, Romania and Hungary) and, to a lesser but still significant extent, in the Nordic countries (most notably Sweden and Finland). In some of these countries, the increase was sudden and large (e.g. in the Baltic States, Bulgaria and Romania); in others it built up gradually over time (the Nordic group and the Netherlands). The pattern of change in inequality sometimes even pointed downwards. Shorter or longer spells of decline were observed in, for example, Estonia, Bulgaria and Hungary, following sometimes quite sharp increases.

Regime Shifts

An important message of GINI is that, in the longer run, countries can move between inequality regimes. The stealthy increase in inequality in Finland and Sweden during the 1990s and the 2000s casts doubt on one of the key identity elements of the Scandinavian welfare states, previously branded as the most equal in the developed world. Also, some transition countries – such as the Baltic States, Romania or Bulgaria – witnessed very large changes that moved their inequality levels between different ranges during the sample time frame.

Multiple Causes of Inequality

We should not be fatalistic, and simplistic interpretations must be replaced by thorough analysis: careful separation of drivers, dimensions, causes, consequences, proxy phenomena and underlying trends is essential. First and foremost, an analysis of trends and episodes highlights the multifaceted nature of inequality, as well as the underlying multi-causality. Actually, the notion of “causality” is in itself elusive. A growing body of social science literature identifies the negative effects that inequality has on social cohesion, political order and economic efficiency as well. Meanwhile, other literature emphasises that innovation and creativity are vital in the interests of greater economic prosperity; in this respect, inequality-inducing rewards are essential for pioneers operating on the technological front line. Causality between inequality and economic growth, therefore, may go in either direction. Furthermore, as Angus Deaton, winner of the 2015 Nobel Prize for economics, has shown in the case of health and mortality data, disequalising trends may naturally be followed by equalisation, as technological innovations filter down from the top to the middle and then to the bottom of society.

GINI found that rising inequality may be attributed to rising earnings dispersion in the first half of the observation period, and in the second half to reduced state redistribution and a shift from labour to capital. In addition to the broad narratives offered in the literature (about the inequality-increasing role of international trade and technological progress), the GINI conclusions also emphasise the role of structural imbalances related to international relations and the global distribution of capital, as well as of ideological changes that shape policy orientations. While earnings inequality largely correlates with educational differences, the apparent decline in educational inequality in many countries has not been accompanied by a decline in earnings differentials. Part of the explanation for this may lie in the rising importance of on-the-job learned skills in defining incomes and in the functioning of lifelong learning institutions.

Social Impacts

As regards to the social impact of inequality change, a number of apparently trivial assumptions were not totally confirmed by the various analytical papers devoted to specific problems. While income inequality (partially by definition) correlates with relative poverty, little or no association was found between inequality and deprivation. Similarly, while inequality certainly does figure in a range of factors behind a shift in crime rates, the overall decline in violent crime during an era of rising inequality requires further explanation. Subverting popular belief about the damaging effect of inequality on social trust, carefully designed multivariate analyses have failed to show any strong relationship between the two factors. Further studies are also needed to show how, and via what causal chains, inequality affects personal health and happiness in society (Deaton 2013).

Without going any further into the successful and unsuccessful research attempts to link inequality to various other social ills, the general conclusion is that much depends on the functioning of social institutions. Up to a point, inequality is inevitable and is a natural corollary of development. However, beyond that point – and depending on the relative weight of actually operating inequality drivers (supply of and demand for skilled labour; the balance between competition and monopoly for economic actors; openness and social closure in societal relations; transparency and corruption in public expenditure; flexibility and security in labour markets; tendencies towards inclusion and exclusion in education, health, housing, etc.) – inequality may represent inadequate allocation or waste of human potential; fragmented, diverging societies; and, in a broader sense, worse overall living conditions.

This also calls for reconsideration of what we think of as “causes” and “consequences” in relation to inequality and its impact. The actual functioning of institutions that generate and modify earnings distribution (labour market institutions, both active and passive), that facilitate the reproduction of human capital (access to and efficiency of the education and health systems) and that promote the transmission of inequality (wealth inheritance was shown to play a major role in how parents’ financial position influences children’s future lives) depends on the actual social structure and reproduction (and vice versa).

Institutions Matter

The question, therefore, is: do we have the proper institutions and mechanisms to correct for the potentially harmful, socially and economically inefficient negative effects of “excessive” inequality? One might think of the conflict-absorbing and reconciliation capacity of democracies, but research also shows that inequality – especially of the type that undermines the legitimacy of collective decision-making mechanisms – may lead to selective under-representation in the democratic processes, leading, in turn, to less potential for the corrective capacities of the political systems.

And this brings us to the final (policy) question: on whom should we rely in terms of policies to tackle inequality? Some suggest the taxman: if (they argue) we want a lower level of inequality, we need higher and more progressive taxes. Piketty (2014) even suggests global arrangements to prevent international mobility of tax avoidance by the super-rich. Atkinson, among the 15 points contained in his new book on inequality (Atkinson 2015), calls for a broader range of actions: from deliberate attempts by the polity to understand and influence the effects of technological change to making better use of competition policies, trade unionism and interest reconciliation between industrial partners. Also, the development and extension of various tax/transfer policies is suggested as a major part of a complex strategy. In order to build more inclusive societies, there is therefore a need for cooperation across a broad range of professions: as well as the taxman, the competition officer should be involved, together with stakeholders in inclusive education and health policies. And there is a clear role for social researchers, who seek both to understand how inequality is generated and maintained in a modern society and to translate their findings into feasible policy proposals.

1 © EBR Media Ltd, 2016. The definitive, and edited version of this article is published in The World Financial Review November/December, 2016 www.worldfinancialreview.com.

References
Atkinson, A.B. (2015), Inequality: What can be done?, Harvard University Press, Cambridge, MA
Atkinson, A.B. (1997), ‘Bringing Income Distribution in from the Cold’, Economic Journal, 107 (441), pp. 297–321.
Atkinson, A.B. and Bourguignon, F. (2015), Handbook of Income Distribution (2 Volumes), Elsevier B.V., North Holland.
Nolan B.; Salverda, W.; Checchi, D.; Marx, I.; McKnight, A.; Tóth, I.Gy.; van de Werfhorst, H.G. (2014), Changing Inequalities and Societal Impacts in Rich Countries: Thirty countries’ experiences, Oxford University Press, Oxford.
Piketty, T. (2014), Capital in the Twenty-First Century, Harvard University Press, Cambridge, MA.
Salverda, W.; Nolan B.; Checchi, D.; Marx, I.; McKnight, A.; Tóth, I.Gy.; van de Werfhorst, H.G. (2014), Changing Inequalities and Societal Impacts in Rich Countries: Analytical and comparative perspectives, Oxford University Press, Oxford.
Tóth, I.Gy. (2014), ‘Revisiting Grand Narratives of Growing Income Inequalities: Lessons from 30 country studies’, in B. Nolan et al. (2014), Changing Inequalities and Societal Impacts in Rich Countries: Thirty countries’ experiences, Oxford University Press, Oxford, pp. 11–47.
Deaton, A. (2013), The Great Escape: Health, wealth and the origins of inequality, Princeton University Press, Princeton, NJ.