Inequality in Scotland

Inequality in Scotland

David Bell and David Eiser15 October 2014

Changing Understanding of Inequality

• The neo-liberal view– Kuznets Curve - as an economy develops, a natural cycle of inequality

occurs, driven by market forces. These initially increase inequality, and then decrease it.

– “Trickle down” economics – those at the bottom of the income distribution benefit from gains made at the top (Okun’s “leaky bucket”)

• Growing opposition … – The Spirit Level: Wilkinson and Pickett

• More equal societies have better economic, social and health outcomes

– Capital in the 21st Century: Picketty• increasing inequality of income and wealth since 1970s, particularly • returns from capital are likely to grow faster than the economy itself, and faster than the

owners of that wealth are likely to be able to spend it

– Some industries (e.g. financial services) able to capture rents, increasing top-end incomes

Changing Views of Inequality

• There is now widespread acceptance that current levels of inequality are excessive (IMF/World Bank/ILO)

• Instrumental arguments in favour of containing/reducing it– health inequalities, equality of opportunity,

• e.g. Ostry, Berg and Tsangarides (2014) - IMF– “it is an empirical question whether redistribution in practice is pro- or

anti-growth”– “more unequal societies tend to redistribute more”– “lower net inequality is robustly correlated with faster and more

durable growth, for a given level of redistribution”– “redistribution appears generally benign in terms of its impact on

growth; only in extreme cases is there some evidence that it may have direct negative effects on growth”

Changing Policy Environment

• IMF (2013): ‘higher inequality seems to lower growth’

• OECD (2011): ‘inequality can stifle social mobility, making it harder for talented and hard-working people to get the rewards they deserve’.

• Scottish Government (2013): ‘Scotland is currently part of a UK economic model and society which is one of the most unequal in the OECD. Such patterns of inequality will continue to have a negative impact on growth and prosperity over the long-term.’

Thinking about the determinants of inequality

• Economic forces– Globalisation– Technological change

• Intended redistributive policy actions– Tax and benefits

• Unintended consequences of policy– Regulation – Prices

• Forthcoming paper - Inequality in Scotland: New Perspectives by David Bell, David Eiser and Mike McGoldrick - published at www.davidhumeinstitute.com on Monday 20 October

Measuring Inequality in Scotland

• Wealth or Income?– Before taxes and benefits (gross)– After taxes and benefits (net)

• Individual or Household?– Affected by housing market/household formation

• Time period?– Hourly/Weekly/Annual/Lifetime

Ratio measures of inequality: Scotland, 2012/13

Another approach – Lorenz Curve/Gini Coefficient

Top2% account for12% of earnings

Bottom 34% account for12% of earnings

Gini Coefficient proportional to area under 45 degree lineGini (earned income Scot = 0.4)

Earnings inequality in Scotland: rapid increase during 1980s, slower since then

Rise of the top 1-2%

Earnings inequality: drivers

• 1980s and early 1990s:– Deindustrialisation and technological change: ‘hollowing out’ of labour

market– Financial deregulation– Labour market deregulation and TU decline, particularly in private sector– Reduction in top tax rates

• Late 1990s and since:– Continuing technological change and globalisation– Introduction of minimum wage – moderating rise– Increase in PT and temporary working, zero-hours contracts,

underemployment– Increase in self-employment – Relatively poor performance of young in labour markets

Big rise in household inequality occurred in 1980s; inequality in Scotland similar to rest of GB outside London…

International comparisons: inequality of household net income high in UK….

UK 29th out of 34 OECD Countries by Gini Coefficient of Equivalised Household Disposable IncomeSource: OECD 23/7/2014

Slove

nia

Iceland

Czech

Republic

Slova

k Republic

Sweden

Netherlands

Switz

erland

Germany

PolandRGB

Canada

Scotla

nd

New Zealand

Greece

Portugal

United Kingdom

United St

ates

Turkey

Chile0

0.1

0.2

0.3

0.4

0.5

0.6

Gin

i Coe

ffici

ent

International comparisons: gross income inequality in UK very high, but tax-benefit system fairly redistributive

KOR USCAN

NLD ICEPOL

ESPNOR

DEN UKGRE

LUX

GERAUT FIN

0

10

20

30

40

50

60

70

Net GINIRedistribution

Gin

i coe

ffici

ent

Another perspective on redistribution in the UK…

The great Gatsby curve…

Inequality: policy responses

• Personal taxation and benefits– Income tax, property tax, capital gains, IHT, etc.– Benefits: low-income, out-of-work benefits, pensions, etc.

• Labour market regulation– E.g. min/living wage, TUs and collective bargaining,

‘flexibility’ e.g. zero-hours contracts, etc.• Increased ‘in-kind’ spending

– Education: Attainment gap and inter-generational inequality

– Health: close link between income and health inequalities

How effective might fiscal policy be in influencing net income inequality in an independent Scotland?

Change GINI Total govt. revenue implication (£m)

1p on basic rate -0.15% 2391p on higher rate -0.07% 41p on SRIT (basic, higher, additional) -0.24% 232Additional rate threshold reduced to £100,000 -0.12% -26Increase rates of IS/ JSA by 10% -0.15% -50Council tax revaluation -0.02% 5Council tax rise of 10% 0.03% 137

Increase basic and 30-hour elements of WTC 10% -0.07% -61

How would a living wage effect inequality?

Distributional effects of living wage across households

Conclusions (1)• Inequality skews opportunity and limits intergenerational

mobility• Rapid increase in earnings inequality in 80s: tech. change,

industrial decline, labour market deregulation• Slower increase during late 90s and 2000s, mainly driven by

changes in distribution of hours worked…• …but continued pulling away of highest earners• Overall household net income inequality largely unchanged

since mid-1990s – tax/benefit system has mitigated small increase in earnings inequality

• Inequality in Scotland very similar to rGB/rUK excluding London

Conclusions (2)• Inequality in UK remains high, but other countries ‘caught-up’ slightly in

the 1990s and early 2000s• Inequality is higher in Scotland than in Nordic countries not because the

UK’s tax and benefit system is much less redistributive than the Nordics, but because the inequality of market (pre tax and transfer) incomes is higher in Scotland

• Fiscal policy levers can help address inequality, but unlikely in themselves to be a panacea

• Achieving Nordic levels of inequality would require a shift not only in the tax and benefit system, but also in the distribution of market incomes

• Inequality outlook uncertain:– Welfare reform– Computerisation and demand for skills

Thanks for your attention• Further material:

– Bell, D.N.F. and Eiser, D. (2013) ‘Inequality in Scotland: trends, drivers, and implications for the independence debate’

– Eiser, D. and Comerford, D. (2013) ‘Constitutional change and inequality in Scotland ‘

– Eiser, D. ‘Inequality’ in ‘The Economic Consequences of Scottish Independence’ Beckmann, K., Bell, D.N.F. and Eiser, D. (eds), Helmut-SchmidtUniversität / Universität der Bundeswehr , Hamburg