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Changing Inequalities and Societal Impacts in Rich CountriesThirty Countries' Experiences$

Brian Nolan, Wiemer Salverda, Daniele Checchi, Ive Marx, Abigail McKnight, István György Tóth, and Herman G. van de Werfhorst

Print publication date: 2014

Print ISBN-13: 9780199687428

Published to Oxford Scholarship Online: April 2014

DOI: 10.1093/acprof:oso/9780199687428.001.0001

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Introduction

Introduction

Chapter:
(p.1) Chapter 1 Introduction
Source:
Changing Inequalities and Societal Impacts in Rich Countries
Author(s):

Brian Nolan

Wiemer Salverda

Daniele Checchi

Ive Marx

Abigail McKnight

István György Tóth

Herman van de Werfhorst

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199687428.003.0001

Abstract and Keywords

This chapter provides the introduction to a collection of 30 country studies (25 European, USA, Canada, Australia, Japan, Korea) of the evolution of inequalities of income, earnings and employment, wealth, and education, of their drivers as well as their social and political impacts in a wide range of fields, such as health, poverty, housing, social cohesion, trust, and political legitimacy. Policies of redistribution, job provision, and public services are also discussed. It discusses the context of scientific study and political debate of inequalities that make up the background of the thirty studies and presents the common approach that was chosen.

Keywords:   income inequality, drivers of inequality, education, wealth, developed countries, social impacts, health, poverty, political participation, political influence, redistribution, research format

THIS book is about economic inequality and its impacts on the richer countries of the world. This topic has come to the fore as a matter of pressing societal concern over the past few decades as inequality has deepened in some of the major economies, and the economic crisis from 2007/8 has served to sharpen that focus. The fact that anti-austerity demonstrators adapt slogans such as ‘We are the 99 per cent!’ serves to highlight the central role that issues of income inequality and perceived fairness are playing in responses to the crisis. Well before that crisis, the way the industrialized economies were evolving was seen to be putting their societies under increasing strain. A contrast was being drawn, especially, but not only, in the USA, between the lengthy period after the second World War when the benefits of sustained economic growth were widely shared in increasing living standards throughout the income distribution, versus the more recent decades when growth has been patchy but with an increasing proportion of it accruing to the top of the distribution and with little improvement for ordinary workers and families. The extent to which increasing inequalities of that kind risk exacerbating a variety of ills in society, potentially undermining political processes and social cohesion, is now a central issue for these societies.

To see whether these concerns are well-founded and, if so, what can be done about them, one needs a clear picture of what has actually been happening to economic inequality and what are the possible drivers of its evolution, an understanding of the complex causal channels through which it could potentially impact on social, political and cultural behaviours and outcomes, and evidence about whether such impacts are to be seen at this stage. This is central to the contribution that research can make and to the aim of this book, which examines the experiences of thirty countries within a common framework to amass and assess new evidence about inequality and its impacts. A large international research project, funded by the European Union’s Framework Programme for internationally cooperative scientific research, has enabled a set of countries to be (p.2) covered, comprising 25 European Union countries (all 27 except Cyprus and Malta) together with Australia, Canada, Japan, Korea,1 and the United States, the leader of the pack for the size of its economy as well as the level of its income inequality.2 As we shall see, this research design, where individual country experiences are examined by national experts familiar with the local context but applying a common analytical framework and approach, proves to be extremely fruitful.

The main endeavour of this book, in 27 out of its 30 chapters,3 is to present the stories of inequalities, impacts and policies for each of these countries. It purports to show the richness of, and variation in, national experiences, adopting a uniform template for telling the story, so that each individual chapter can offer food for thought. It is particularly the unique, comparable collection of country studies in large number that serves to provide valuable input for further research, as international comparison can often provide insights that tend to be overlooked at the national level. Such thoughts and research can be found especially in the companion volume Changing Inequalities in Rich Countries (Salverda et al., 2013) to the present book. That other volume proposes a transversal scrutiny of a) inequalities, which looks at income, labour earnings, wealth, and education separately; b) impacts, distinguishing between social and political/cultural impacts; and also c) policies, where it considers both enhancing and mitigating effects. That scrutiny builds on the country experiences that are reported here, and is combined with insights from research that has focused on these transversal issues. The cross-country contribution of the present book, in Chapter 2, is that it brings together from the country chapters the data on the evolution of income inequality and poverty and compares trends between countries. It also contrasts this new dataset to existing ones based on the work of the OECD and the Luxembourg Income Study (LIS). The concluding Chapter 30 highlights the distinctive contribution of the country studies, identifies some of the key findings when they are taken together as a set and discusses some key implications which are among the issues taken up in the companion volume.

In the remainder of this introductory chapter we first discuss, but only summarily given the companion book, why recent trends in economic inequality, in terms of income distribution and educational attainment and opportunities, have been the focus of such interest and concern. Next, we describe in more detail the approach behind this book and the framework within which the various elements of the country analyses are organized.

1. Economic Inequality and Its Impacts

Economic inequality has long been one of the major themes of socio-political debate, on which a very substantial body of research from a variety of disciplinary perspectives has been produced in recent years, building on the potential of improved data and focused on clarifying concepts and measures, capturing trends, and understanding the causal processes (p.3) at work. The recent upsurge in academic interest in inequality can be linked to both inequality trends themselves and the policy environment in which research is carried out. For some years, levels of inequality were sufficiently stable for one analyst to describe tracking them as about as exciting as ‘watching the grass grow’ (Aaron, 1978), but this changed as the post-World War II boom petered out. The 1980s saw a dramatic widening in the dispersion of wages and overall income inequality in both the UK and the USA, giving rise to a sustained and wide-ranging investigation into why this was happening and whether it was confined to those two countries or pervasive throughout the industrialized world. The title of recent studies by the OECD encapsulates current understandings and concerns: Growing Unequal (2008) and Divided We Stand: Why Inequality Keeps Rising (2011). Evidence has also been accumulating that the share of household income going to the very top of the distribution has increased markedly in many rich countries (e.g. Atkinson and Piketty, 2007). At the other end of the scale, poverty and social exclusion have remained stubbornly high even before the onset of the economic crisis. At the same time, and closely related to incomes and the labour market, aspects of the changing educational landscape may be giving rise to increasing inequalities in educational outcomes and opportunities, and intensifying stratifying effects.

A complex set of forces, including technological change and globalization, may be contributing to these trends in inequality, posing new challenges for Welfare States (including their educational systems). The distribution of income among households, which is at the core of economic inequality, is influenced most importantly by the earnings from work accruing to different household members. This reflects in turn the position of these individuals in the labour market, their skills and opportunities and the returns they receive, together with patterns of family formation and how earners cluster together with others in households. Labour market institutions, with employers and often also unions as key actors, and the State, in regulating minimum wages in particular, exert an important influence on the distribution of earnings. Another important component of household income is income derived as a return on capital—interest, dividends and rent, as well as capital gains and profits. Though less important in family income for most households than earnings, its effect in explaining the changes of inequality may be strong and also growing, due to its higher concentration. This is particularly the case for the top one per cent and, in many countries, seems to be fuelled by a growing distaste by governments for taxing capital and capital income, which may be another sign of the powerful elite influencing policy to their advantage. This relates to the distribution of wealth, and to the relationship between that distribution and other elements of household income. Another significant element in household income, the main or only source of income for many households, is social protection cash transfers received from the State. Private pensions, paid from occupational schemes or as a result of personal investment rather than from the social security system, are also important. The way income tax, often progressive, on the one hand, and social security contributions, in many cases regressive, on the other hand, are structured is also an important influence on the shape of the income distribution. The shift towards indirect taxation, clearly witnessed during the current economic crisis, exerts a regressive effect along the income distribution on the actual spending out of income. More broadly, institutional structures, and the political economy considerations they may reflect, are also a major force when considering the overall impact of the Welfare State on economic inequality.

(p.4) The picture with respect to educational institutions/policies and educational inequalities is equally complex. Educational institutions may be designed and operated in a fashion that favours inclusion (in the sense of bringing up the bottom of the educational distribution) or they may promote (meritocratic) selection (i.e. supporting high achievers to do more, raising the upper tail of the distribution). However, enhanced income inequality may also skew access by widening gaps in the resources available to parents for investment in their children’s education, especially if at the same time fees are raised and grants lowered, as they have been at tertiary level in a number of countries. Participation in secondary schooling has been successfully expanded in almost all countries, but with varying degrees of success in incorporating the tail, while major differences have emerged in strategies for expansion of tertiary education and access to it. As well as differences in the distribution of qualifications/attainment, substantial differences across countries are now evident in educational achievement assessed by standardized achievement tests. Educational systems differ significantly between countries and over time in various dimensions: notably the extent to which students are separated in clearly distinct educational curricula during secondary education (commonly known as ‘tracking’) and the age at which that occurs; in the extent to which education meets the same standards nationwide in terms of curricula, teacher quality, resources across schools, and exit examinations; and in the extent to which there is vocational orientation in the upper secondary school system with strong links to the labour market. When considering average student performance and its dispersion, a trade-off between equality and efficiency would emerge if higher performances coincided with larger dispersions. Braga, Checchi and Meschi (2013) bring out the way that institutional features like pre-primary education, age of compulsory schooling, and expansion of university admission may affect both the average level of attainment and skill acquisition and the dispersion around that average. This in turn can have fundamental implications for life chances and their distribution. Bol and Van de Werfhorst (2013) have shown that early tracking is associated with larger inequalities between children of different social classes, whereas tracking is unrelated to average performance. So, in that instance, in line with Hanushek and Wössmann (2005), there is no evidence for a trade-off between equality and efficiency in skill formation: the greater inequality associated with tracking does not achieve a higher average skill level.

Inequality in incomes, education, and life chances more broadly is something about which many people feel strongly, simply as a matter of fairness: indeed, its extent can be seen as a defining characteristic of a society. However, there is also a manifest instrumental basis for concern about growing inequality in terms of its potential consequences for a variety of economic, social and political outcomes of central concern ranging from health status and life expectancy to crime and community breakdown, political alienation and the lack of trust, and increased inter-generational immobility and the transmission of poverty from one generation to the next. If inequality influences such outcomes, with the potential to generate negative feedback to inequality (for example increased concentration of wealth at the top skewing political decision-making in a way that reinforces that concentration) and to undermine economic growth and living standards, then understanding the linkages and their significance is clearly a core task for research.

Research has indeed looked at each of the very wide and diverse range of areas in which such impacts could potentially arise, including health, poverty and deprivation, crime, the family, political participation, social cohesion, and social capital. Wilkinson and Pickett’s (p.5) (2009a), The Spirit Level has been particularly effective in generating a wide-ranging debate about the over-arching issue of the potentially harmful impact of inequality. It argues that income inequality is harmful to society by virtue of its relationship to many different undesirable outcomes: societies with higher income inequality have lower levels of social cohesion, exemplified in outcomes such as more social problems, higher crime rates, higher mortality rates, worse health, higher dropout rates from schools, lower social trust, and lower political involvement. Socio-economic gradients in health have been intensively researched for many years (Acheson, 1998, Mackenbach, 2008 Marmot, 2005), but the scale and breadth of effects of income inequality per se on health outcomes and health inequalities have been a particular recent focus (Kondo et al., 2009, Pop et al., 2012, Erikson and Torssander, 2007, Torssander and Erikson, 2010, Wilkinson and Pickett, 2009b). The manner in which income inequalities may influence social outcomes, and the channels through which such impacts would operate, have also been hotly debated (see, for example, Leigh, Jencks and Smeeding, 2009). Wilkinson and Pickett place considerable emphasis on the ‘psychosocial’ implications of status differences in more unequal societies, with low social status and perceptions of inferiority understood to produce negative emotions such as shame which directly damage individual health through stress reactions (see also Siegrist and Marmot, 2004, Marmot and Wilkinson, 2006, 2009), as well as undermining supportive community and social relations. In contrast, the neo-materialist perspective emphasizes the role of different levels and distributions of resources available within societies related to differential levels of investment in social and institutional infrastructure (Davey Smith and Egger, 1996, Lynch et al., 1998, 2004). Increasingly, these perspectives are being seen as complementary rather than competing (Elgar and Aitken, 2011, Layte, 2012). Inequality can be seen as having a causal impact on such outcomes due to both differential resources and the psychosocial consequences.

In this context, Goldthorpe (2010) makes the important point that social stratification cannot be seen as one-dimensional, one cannot for example treat ‘class’ and ‘status’ as essentially synonymous (see also Chan and Goldthorpe, 2007), and the relationships between economic inequality and other forms of stratification are contingent. The processes mediating objective social inequalities and the manner in which they are subjectively experienced are also highly complex (see for example Merton et al., 1950, Runciman, 1966/1972, Jasso, 1999). This means that analyses focusing on the impact of income inequality have to take into account the complexities of its relationship with social status and social class in developing their understanding of the processes and mechanisms through which negative social outcomes may arise. Distinct dimensions of stratification relating to income, education, social class and status may operate rather differently, and indeed this may vary between men and women (Erikson and Torssander, 2008, Torssander and Erikson, 2010). Erikson and Torssander also highlight the way that, in the health domain, general risk factors associated with income or social class are likely to interact with specific ones, so that particular causes of death are related to distinct features such as consumption patterns, lifestyles and exposure to dangerous and hazardous conditions rather than simply location on a social gradient as such; this clearly has broader relevance for other domains as well as health.

The complexities of the channels through which inequality may impact on social, political and cultural outcomes are matched by the methodological difficulties in establishing with any degree of certainty the scale of such impacts and the causal relationships involved. For example, given indicators of various social outcomes for different countries, one can (p.6) look at whether variation in these outcomes appears to bear any relationship to variation in a summary measure of income inequality such as the Gini coefficient. Wilkinson and Pickett (2009a) have plotted a variety of such bivariate relationships, and a good deal of (at times acrimonious) debate in the research community and among the wider public has focused on questions such as the impact on observed associations of the range of countries included in the analysis, the particular outcomes on which the analysis focuses and the extent to which what is involved is average effects across societies or effects observed at variable levels of social stratification (Saunders 2010, Snowdon, 2010, Wilkinson and Pickett, 2010). However, irrespective of such issues, the causal interpretation of such a relationship (when observed robustly) presents formidable difficulties. More sophisticated statistical techniques such as the use of multi-level models can assist in controlling for a range of societal characteristics that may be correlated with income inequality but, as Van de Werfhorst and Salverda (2012) emphasize, causal interpretation of the consequences of inequality also requires deductive theory building and hypothesis formulation and testing. This constitutes what Goldthorpe (2001) has labelled ‘causation as a generative process’, aiming to explain empirical regularities by specifying hypotheses that are derived from a ‘causal narrative’ at the level of individual actions, which can then be put to empirical test. For an association between inequality and outcomes to be interesting from a scientific perspective there needs to be good theoretical arguments about why inequality could be related to such outcomes, and, naturally, these arguments have to be substantiated with empirical evidence.

While strict causality is obviously impossible to establish, a variety of methodological approaches can usefully be applied in seeking to enhance our understanding of inequality and its impacts, and these are best seen as complementary with one another. Economists, sociologists and political scientists study income inequality from a purely theoretical perspective, intensively investigate patterns in the empirical data, and seek to estimate theory-driven models at macro- and micro-levels, and a similar range is seen when it comes to assessing and understanding impacts. We go on in the next section to describe the particular approach adopted in this book and where it seeks to make its contribution.

2. The Contribution, Approach and Structure of this Book

The point of departure for this book, as outlined above, is the very active debate in both the research literature and, more broadly, among policy-makers, the politically-engaged and concerned citizens more generally, about increasing inequalities and their potential social, political and cultural impacts. The book aims to contribute to the research literature, and to this broader debate, by examining in depth the experiences of thirty countries in a common broad analytical framework. This allows us to collect and scrutinize an extensive range of new evidence about inequality and its impacts, which focuses primarily on research from the disciplinary perspectives of economics, sociology, political science and (social) policy analysis.

Looking at a wide range of countries both increases the number of observations on which analysis can rest and provides a way of avoiding the risk that patterns and relationships (p.7) observed in a given country or small set of countries arise for idiosyncratic reasons specific to those countries. International comparison can also help detect factors and effects that may go unnoticed at the national level. Comparative analysis of such topics is commonly carried out by amassing datasets of variables measured in an as-much-harmonized-as-possible fashion and applying more or less sophisticated statistical methods to explore patterns of association, either in a purely cross-sectional context or pooling multiple observations for a set of countries over time. This type of methodological approach is extremely valuable, and plays a major role in the companion study (Salverda et al., 2013). One of the significant challenges for such comparative analyses, though, is not to lose sight of the contextual factors and specific experiences of each country, which can only be properly understood by in-depth analysis and may be crucial in understanding the patterns observed.

The distinctive approach adopted here is that the individual experiences of the 30 countries are examined by expert teams who are familiar with the local context, institutions, data and research, but applying a common framework and approach to addressing the same set of topics and questions from one country to the next. The framework is aimed primarily at ascertaining comparable coverage of fields of analysis and periods of time. The broad fields concerned are, first, the drivers of inequality, and, second, the social impacts and the political/cultural impacts of inequality already mentioned, but, third, also policies and institutions mitigating or compensating inequality but possibly also enhancing it. The approach is squarely based on interdisciplinary cooperation, especially between economists, sociologists and political scientists, and it views the collection of data as deserving significant attention in itself. It retains analytical flexibility and does not impose a singular analytical approach, however, for different reasons. First, analyses of inequality itself abound but that is much less the case for impacts in relation to inequality, and imposing a specific approach would have been arbitrary and premature. Second, possible impacts span a broad range of fields and can be usefully studied from different disciplinary perspectives. Third, the analytical flexibility allows also for possible vital variation in country experiences as well as disciplinary views. Fourth, full-fledged comparative research for so many countries using microdata seems beyond the possibilities of available data (presence, comparability, quality, and timing) and beyond the efforts allowed by the available funding. To this can be added, finally, that the fields where the impacts of inequality are sought may be subject to important other societal changes apart from shifts in income or educational inequality. These five considerations provide important caveats for the results that are presented here. However, the approach combines with an improved understanding of inequality beyond what a single measure such as the Gini coefficient can offer, by distinguishing more distributive detail (e.g. bottom/middle/top, and very top) and, particularly, by looking also at gradients of income, social class and also education across individuals in relation to impacts. As a result the prime aim is to compare developments in different areas, inequalities, impacts, and policies; and look at their timing and possible interactions. The methodological aspects of this are further elaborated in the companion volume to this book.

This research design produces individual country studies with a striking degree of specificity, national ‘stories’ that are of very significant interest in themselves, going well beyond the local. Crucially, bringing these together then provides a unique set of insights into what has actually been happening to economic inequality across most of the richer countries and evidence about whether the negative social, political and cultural impacts that have been debated are to be seen at this stage. Such a broad-ranging approach cannot hope to assess (p.8) causal relationships in a rigorous manner, in the way that a strongly focused investigation of a specific hypothesized relationship—between income inequality and crime, for example—might hope to do. It can, however, present and examine trends in inequality and in social, political and cultural outcomes in each country, assess the extent to which inequalities have actually increased, examine which amongst various outcomes deteriorated over time as, or after, inequality increased, consider the contributions made by policies and institutions, and draw on the findings of national research about these trends and relationships. Note that the chapters in this book draw on comprehensive country reports, which provide more detail including discussion of data limitations or problems of method.4

We now begin, in Chapter 2, with an overview of the trends in inequality revealed by the country studies brought together, and then proceed to the individual country chapters. Each country chapter sets the scene in terms of key features of the local context, and then looks at what has been happening to inequalities in income and education over the last three decades or so, depending strongly on data availability. The factors underpinning these trends, as brought to light in the available research, are also discussed. The evolution of key indicators of social, political and cultural outcomes are then described and placed in the context of inequality trends. Central features of social expenditure, taxation and related policies, which frame and influence trends in inequality and its impacts, are then discussed, and the conclusions brought together. Each chapter seeks to bring out the distinctive national ‘story’ which the national teams identify and describe. The final chapter of the book then brings together the key findings taking an overview across the country studies.

Inequality and its impacts are a core concern for society as a whole, and the style of presentation employed in this book is designed to be non-technical, aiming at dissemination of the analysis and findings to the widest possible audience. The complexities of the underlying relationships and the research seeking to tease them out should not stand in the way of an informed and wide-ranging debate about some of the most important features of the way many of the rich countries are evolving and how to respond to them.

References

Bibliography references:

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Acheson, D. (1998), Independent Inquiry into Inequalities in Health, London: Department of Health.

Atkinson, A.B. and Piketty, T. (2007), Top Incomes Over the Twentieth Century, A Contrast Between Continental European and English-Speaking Countries, Oxford: Oxford University Press.

Bol, T. and van de Werfhorst, H. G. (2013), ‘Educational Systems and the Trade-off Between Labor Market Allocation and Equality of Educational Opportunity’, Comparative Education Review (forthcoming).

Braga, M., Checchi D. and Meschi, E. (2013), ‘On Institutional Reforms and Educational Attainment in Europe: A Long Run Perspective’, Economic Policy (forthcoming). (p.9)

Chan, T.-W. and Goldthorpe, J.H. (2007), ‘Class and Status: the Conceptual Distinction and its Empirical Relevance’, American Sociological Review, 72, 512–532.

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Elgar, F. and Aitken, N. (2011), ‘Income Inequality, Trust and Homicide in 33 Countries’, European Journal of Public Health, 21 (2): 241–246.

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Notes:

(1) FP7 Contract No 244592 (2010–2013). The Korean team joined the international project with the help of National Research Foundation of Korea Grant NFR-2011-330-B00052.

(2) Except four Eastern European Union countries—Bulgaria, Latvia, Lithuania, and Romania—all are also members of the OECD.

(3) The three Baltic countries are covered in one chapter and so are the Czech Republic and Slovakia.

(4) The Country Reports can be found at <http://www.gini-research.org/cr>. The website also provides more detail about the research project as a whole and the many (often cross-country) Discussion Papers treating specific aspects of inequality, impacts, or policy.