Issue, No.24 (December 2022)

3rd (LIS)2ER Workshop on Policies to Fight Inequality – Inflation, Energy Prices and Tax Policy: Effects on Consumption and Welfare

by Daniele Checchi (University of Milan), Petra Sauer (Luxemburg Institute of Socio-economic Research (LISER) / LIS / Research Institute Economics of Inequality (INEQ), Vienna University of Economics and Business), and Philippe Van Kerm (Luxemburg Institute of Socio-economic Research (LISER) / University of Luxembourg)

During the recovery from the Covid crisis and subsequently magnified by the Ukraine war, inflation has recently reached levels that have not been seen in many industrialized countries for decades. Spikes in energy prices, notably, raised concern about the livelihoods of families living on a tight budget. Memories of the ‘yellow vest’ movement which grew out of frustration with earlier rises in fuel prices testify of the potential social and political upheavals related to the evolution of the costs of living. While the current surge in inflation may or may not be short-lived, addressing climate change is likely to impact energy prices in the long run and the distributive impacts of price variations and green taxation will determine the social acceptability and success of the transition. Against this backdrop, the 2022 (LIS)2ER workshop on policies to fight inequality – organized annually by the LIS Cross-national Data Center and LISER – aimed to offer a forum to discuss novel research and the policy implications of differential consumption patterns across the income distribution and the distributive impacts of differential exposure to price variations and environmental taxation.

On day one, Davide Villani (EC Joint Research Centre, Seville) kicked off by providing extensive insights into “The uneven impact of inflation across European households”. In his presentation “Pro-rich inflation, redistribution and CO2 emissions”, Eren Gürer (Middle East Technical University) integrated the two workshop themes. Thereafter, four presentations by Peter Levell (Institute for Fiscal Studies, London), Jules Linden (LISER), Gerlinde Verbist (University of Antwerp) and Claudia Kettner-Marx (WIFO, Vienna) tackled the income- and wealth-dependent distribution of household greenhouse gas emissions and the inequality implications of carbon pricing and ecological tax reform. Day two turned the focus back to inflation in Europe. Denisa Sologon (LISER) demonstrated the “Welfare and distributional impact of soaring prices in Europe” while Nicola Curci (Bank of Italy), Sylvérie Herbert (Banque de France) and Clodomiro Ferreira (Bank of Spain) provided country-specific evidence for Italy, France and Spain respectively.

Among the take-home messages from the workshop, here are some of the most salient ones.

First, different households have clearly been exposed to different inflation rates, depending on their position in the income distribution. Since food, housing and energy are among the consumption categories experiencing the highest price increases since 2021, poorer households suffered more from inflation than richer ones. Current inflation thus exhibits a regressive nature in almost all European countries, but few Nordic countries, where the energy price has been contained by a reduction in excises and where expenditure patterns vary less by income. As a consequence, inflation has had a real disequalising effect, an effect partly attenuated by (temporary) fiscal policies.

However, these fiscal policies appear to partially contradict the goal of reducing CO2 emissions. The energy footprint is unevenly distributed in the population as well, with the rich consuming more energy for transport and recreation, but at the same time adopting more energy saving technologies. The overall impact in terms of national consumption and dependency from non-renewable sources is thus ambiguous. If carbon taxes are likely to be regressive for reasons mentioned above, policy makers are to consider rebating tax revenues in a progressive way in order to make the green transition fairer from a socio-economic point of view. Being able to target the neediest groups in the population seemed urgent to many participants in the workshop.

A second methodological contribution emerging from the papers presented at the workshop is the value of using microsimulation models for policy analysis of price and tax system changes. Various speakers made use of consumption surveys linked to either income or wealth surveys. While this obviously relies on strong assumptions, still it is suggestive of potential developments to statistical offices and researchers alike.

A third point underlying the discussion and still remaining in the background is that inflation can become a cumulative process in a spiral of wage and profit increases, as experienced during the 70s and the 80s. The contributions to the conference took the price increase as an unexpected shock, analysed through static models. However, had the price rise to continue, then indexation is likely to show up in the future policy agenda of many countries (Belgium and Luxemburg being notable exceptions, since automatic wage indexation is still in place). Yet, the increased labour market flexibilization adopted by various European countries (like Germany and Italy) has weakened the unions’ ability to protect the purchasing power of workers. Hence, while it may be difficult for monetary policy to address distributive concerns and fiscal policy could be of help in the short run, the strengthening of labour market institutions could be an important policy tool so as to prevent the revival of strikes and protests against inflation in the long run and to secure a peaceful socio-ecological transition.

While the third (LIS)2ER workshop has provided fresh views on the spurt of inflation that recently hit OECD countries, and linked these with insights from research on the unequal impact of environmental policy, issues which still have to be tackled have been revealed. While the differential consumption patterns and, relatedly, the unequal inflation exposure of households along the income distribution were well established, only one presentation by Clodomiro Ferreira showed that surging prices have to be considered from the perspective of household balance sheets as well. Moreover, the distribution between capital and labour has been touched upon only parenthetically. Still, enterprises – and particularly companies with market power – had until now more room to adapt, and were able to raise prices beyond energy costs. We hope that the fruitful discussions throughout the (LIS)2ER workshop will spur further research which provides pointers for policy considering the various dimensions of inequality.