John Stephens UNC-CH 20140912

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


• Increase in children in single mother households

• Increases in unemployment

• Countervailing factor: increase in employment

Anglo-American countries


• 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


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


Redistribution

Poverty

Poverty

Child poverty

Single mother poverty


a. Pre 1986

-1.5 -1 -0.5 0 0.5 1 1.5 2

Social spending

Daycare spending


Education spending

Parental leave replacement rate

Standard pension replacement rates



Poverty


b. Post 1985

Social democratic government Christian democratic government