Learning from Diversity About Increasing Inequality, Its Impacts and Responses?
Abstract and Keywords
This chapter summarizes key features of 30 country case studies of the evolution of income inequality, of outcomes in the social, cultural, and political realms that might potentially be affected, and of the effectiveness of policies in mitigating or exacerbating background inequalities. The volume documented trends in inequality and relative poverty over a period of time that spans major developments across all 30 countries, politico-economic transition in some, expansive commodification, and financialization in others, deep cultural and demographic change in most. No strong evidence has been found that increasing income inequality is associated with such negative social outcomes as more crime, more family breakdown, less trust, and greater social immobility, at least in the relatively short term. It is has been repeatedly demonstrated across the country studies that inequality in income is strongly associated with inequalities in other dimensions, including health, and these deep-seated social gradients are in themselves highly undesirable.
IN this final chapter of the volume, we look back across the country case studies and bring out some key features of their findings when seen in the round. As highlighted in the introductory chapter, the point of departure for these country studies was a common template, used by country experts to produce in-depth country reports for 30 countries, covering a period of 30 years, on which the chapters in this book have been based. We encourage the reader seeking further detail and explanation to consult these at <http://www.gini-research.org>. The collection of countries is distinctive in including OECD countries from Europe, North America and Asia, and the thirty years, euphemistically labelled years of ‘great moderation’ in the richest countries until the outbreak of the financial crisis, witnessed growing inequalities in many places.
This common approach applied across very different settings provides a unique opportunity to assess how inequalities, social and political outcomes, and policies have evolved in these countries over this time period, casting new light on a number of central research questions. The common template allows for comparison between countries but also gave country experts the scope to use data sources that they felt were most reliable in capturing domestic trends, allowing for discontinuities and breaks in series, and to draw on (p.719) national studies that are not always easily available for international comparison. In addition, country experts have provided their interpretations of what these series reveal and have drawn on available evidence about the factors that appear to underpin the observed trends, not least relating to the national context in terms of the macro-economy and of institutions and policies. This provided the basis for individual country chapters to map the evolution of income and educational inequalities, describe trends in a range of indicators in the social, political and cultural spheres against that background, and highlight what they regarded as key features of welfare state policies affecting inequality and its evolution.
In mapping the evolution of inequality over the period from 1980, a number of dimensions were examined, namely, income, earnings, wealth and education. Particular attention was paid to obtaining good quality series for inequality in household disposable equivalized income, central to other inequalities in society. The other domains—education, labour market and wealth—both contribute to differences in household income and also represent important aspects of inequality in themselves. Key drivers of trends in each country were also teased out. The potential impact of inequality on political, social, and cultural outcomes is at the core of the book’s concerns, and the individual chapters used available data to describe levels and trends in key indicators which theory and previous research suggested might be affected by inequality. In the social domain these covered material deprivation, social cohesion, housing, health, life satisfaction, intergenerational mobility, and crime; and in the political and cultural domain they included voter turnout, political values, political and civic participation, trust, attitudes to migration, inequality and redistribution. In finally evaluating the role of policies, particular attention was paid to social spending, taxation, wage bargaining, and the minimum wage.
In this concluding chapter, the first and central point to be emphasized is the richness of the country case studies themselves. Anyone reading even a selection will be struck by just how varied country experiences have been, and convinced of the importance of understanding the national context in trying to explain them. All too often, the quest to identify over-arching trends and fundamental driving forces serves to shift the focus away from this variety, and runs the risk of both mis-characterizing and misunderstanding what is actually happening. So the first message of this concluding chapter is that it is no substitute for reading the individual country studies. Nonetheless, it is worth standing back and looking across the 30 countries covered, and in what follows we draw out some striking features, beginning with trends in inequality and then turning to its impacts and the role of policies, ending with some final reflections. A deeper comparative analysis that draws on the studies of this volume, their underlying reports, the relevant literature and a large number of comparatively-oriented project discussion papers is the focus of Changing Inequalities in Rich Countries (Salverda et al., 2013), companion to this volume. It covers much the same ground, ranging from drivers of inequality to social impacts, political impacts and policies, studying in more depth certain issues such as the distribution of wealth and debt and educational inequalities, but adopts a more directly comparative mode of analysis. In this volume, by contrast, as stressed in the Introduction, the country studies are the core contribution, accompanied only by a transversal examination of the data on inequality and poverty in Chapter 2.
(p.720) 2. The Context of Inequality Trends
Over the last 30 years, many underlying trends potentially impacting on income inequality may be observed. The shift from industrial and/or manufacturing economies to service-based economies has been widespread, and with some exceptions (notably in the recent economic crisis), average living standards have been increasing. Educational attainment has continued to increase, at least at secondary school level, reducing dispersion in educational attainment, but not always keeping pace with the increase in the demand for skills. In some cases, policies aimed at increasing educational attainment have been biased towards improvement at the top rather than raising the bottom. Demographic and labour market shifts can be seen as drivers with both inequality enhancing and inequality dampening effects. These include increasing life expectancy and significantly more single-person or lone-parent households, increases in women’s participation in the labour market and the demise of the male breadwinner model, and an increase in part-time employment. What were initially regarded as non-typical forms of employment—part-time working, temporary contracts and flexible forms of working—have now become part of the mainstream, at least in Europe, partly due to policy. Earnings dispersion has been affected by deep forces of globalization and skill-biased technological change, as well as policies with respect to, for example, regulation, wage bargaining, and minimum wages, which are often associated with a drive towards liberalization and privatization. Welfare state institutions have evolved at different paces and in different ways, with the 30 countries covered displaying a wide array of starting-points and evolutions. One significant tendency has been to lower tax rates on capital and top incomes in exchange for higher social security contributions and, especially in some Eastern European countries, for higher indirect taxes. The end of communism was followed by an increase of inequality in many of the countries affected in Eastern Europe, though their paths subsequently diverged quite markedly.
The over-arching analysis presented in Chapter 2 found that inequality in household (equivalized) disposable income increased over the period as a whole in many countries, but it was clear from that analysis and reinforced in the individual country chapters that, even where this was the case, the extent and timing of that increase varied a great deal, that some countries saw stable or declining inequality, and that each country has its own tale to tell. The extent to which countries have sought to temper the pressures they faced, or deal with their consequences, have varied quite widely. We see evidence that strong institutions can stave off upward pressures on wage inequality through widespread collective wage setting agreements (with Belgium being an example), and strong welfare states can successfully redistribute through taxation and cash transfers, although this has weakened in some of the usual exemplars, the Nordic countries. Some countries managed to keep inequality down but with poor fiscal discipline and expenditure levels that were not sustainable, as has come to light in the current crisis (an example being Greece). The scale and timing of increases in inequality have also reflected macro-economic fluctuations and shocks, political change (particularly, but by no means only, in Eastern Europe), and demographic factors. The recent economic crisis could well give rise to a further upward shift in inequality, witnessed on previous occasions in many of the cases, although this may not be immediately visible, as a result of the varying macro-economic impacts of recession, differences in the (p.721) nature and intensity of ‘austerity’ measures, and uncertain medium-term prospects for both the macro-economy and for retrenchment strategies.
3. The Social Realm
Much has been written about the potentially harmful links between inequality levels and a range of outcomes, as exemplified in Wilkinson and Pickett’s (2009) argument that societies with higher income inequality have lower levels of social cohesion, manifested in outcomes such as more social problems, higher crime rates, higher mortality rates, worse health, more educational inequalities, lower social trust, and lower political involvement. They highlight inequality’s ‘psychosocial’ implications, relating to the effects of pronounced status differences in more unequal societies. Another possible causal channel, from a neo-materialist perspective, is that inequality is related to negative outcomes as a consequence of different levels and distributions of resources available to populations, both at the level of households and the nation (Lynch et al., 2000). These two perspectives on the social impacts of inequality can be seen as complementary rather than competing (see also Elgar and Aitken, 2011). Due to both differential resources and the psychosocial consequences of them, income inequality may have a causal impact on the outcomes under study, even though empirically causality may be hard to assess.
Much of the empirical evidence that has been put forward in support of these hypothesized inequality effects involves cross-country cross-tabulations of an inequality measure on one axis (usually the Gini coefficient) and average outcomes for specific social outcomes on the other. One of the problems with this approach is that it concentrates on average outcomes, and information on averages can conceals a wide array of distributional outcomes. The evidence assembled here allows for such cross-country comparisons at a point in time, but also provides evidence on how relevant social indicators have changed over time as inequality changes, or after inequality has changed (since any effects may take some time to come through). This is not a conclusive basis for testing or assessing causal mechanisms, but seeing whether social outcomes have changed in a way that appears consistent with the thesis that increasing inequality leads to worsening outcomes is still a significant contribution, providing a useful inventory that may serve as a starting point for further analyses, especially where international comparison can make a highly valuable contribution.
Another important contribution from the country case studies is that where possible they have looked beyond average outcomes to examine social gradients in available indicators. While increases in inequality might affect average outcomes, for example where diminishing returns exists (that is where the returns to an incremental increase in income are lower for those on high incomes compared to those on low incomes), it is also possible that an increase in inequality might leave overall average outcomes unchanged but widen the differences between income groups or other socio-economic gradients. In that case average outcomes conceal significant information, and the evidence from the country case studies and elsewhere suggests that over the period covered these have been predominately affected by societal change, technological developments, and changes in real income, which dominate any perceptible effect of inequality. However, social gradients may widen as inequality increases, with inequalities in one domain accompanying or even producing inequalities (p.722) in another. In addition, while some inequalities increase, others, e.g., female educational attainment or labour market success, may be diminishing.
Focusing on a number of social indicators, we can draw on the findings across the 30 countries and over the 30-year period to assess whether there appears to be an association between trends in inequality and trends in these outcomes, both at the average level and for social gradients where available.
Family Formation, Breakdown and Fertility
The hypothesized relationship between inequality and family formation and breakdown posits that where rising income inequality reduces income growth for households in the middle or lower parts of the distribution, this can lead to greater financial strain, acting as a source of pressure for falling fertility and marriage and increased divorce and lone parenthood. The 30 countries covered in this volume display major societal shifts in family formation and breakdown, with an increasing array of family structures, though the starting points and speed of change vary, and cultural differences are likely to continue to influence cross-country differences in this domain. Common trends across countries are falling marriage rates, increasing divorce rates, increases in cohabitation and extra marital births (except Greece), a growth in single-headed households and, in particular, single parent families, women starting families later and having fewer children. Most countries have seen a fall in fertility rates with evidence of a recovery towards the end of the period. These changes have to be assessed against the backdrop of increasing gender equality, female labour force participation, increased availability of contraception and, in Spain and Ireland, the legalization of divorce.
Rather than inequality being the main driver behind these social and demographic trends, the country case studies repeatedly draw out the relationship between economic hardship and family breakdown and divorce. For example, the Korean case study notes that unemployment of male household heads was found to significantly contribute to increasing crude divorce rates and, more generally, the Asian financial crisis in 1997 can be linked to increases in divorce rates and family breakdown. In addition, the Netherlands case study notes that divorce rates seem to be more sensitive to economic development than income inequality, and the Bulgarian case study observes that falling fertility is more closely related to changes in prosperity than changes in economic inequality. In Finland, the authors conclude that there is no clear trend in fertility and no clear connection to inequality, but there is greater sensitivity to changes in GDP growth rates, with fertility increasing during downturns and declining during booms. By contrast, falls in GDP across Eastern European countries following transition seem to be linked to falling fertility. It is frequently noted in the country case studies that the timing of changes in the family domain do not fit inequality trends. For example, the fall in fertility and increase in divorce rates in the USA started well before the increase in inequality in the 1980s, and the main increase in lone parenthood there occurred in the 1960s and in fact slowed from the 1980s.
In many countries, the growth of single-headed households and particularly single parent families explains part of the compositional changes at the bottom of the income distribution and increasingly also higher up the distribution, and therewith some of the increase in household income inequality. In fact, it seems likely from the evidence in the country (p.723) case studies that these family changes have primarily acted as demographic drivers behind inequality change rather than being driven by it. As the Finnish chapter states, ‘Rather than reflecting changes in inequality, these general developments are reflections of loosening of traditional family values, more individualistic values, establishment of a dual earner model in the labour market, and strong gender equality’. Belgium is another interesting case: over this thirty-year period, marriage rates fell and divorce rates increased, cohabitation and extra-marital births increased along with single parent families, there was a fall in average household size and an increase in single person households, all in a country where inequality remained stable. As the Ireland country chapter notes, patterns of household formation and composition are clearly relevant to poverty and inequality but the causal impact of trends in inequality on fertility and family structures has not been established.
Crime and Imprisonment
Rising inequality has been suggested as a factor increasing levels of crime, by increasing perceived deprivation, hopelessness or envy. Rising inequality may be associated with increasing imprisonment rates, even if crime itself is unaffected: as outlined in the US country chapter, the well-off with greater political influence could increase their political lobbying for an increase in imprisonment and harsher sentencing. There are problems with obtaining consistent series on crime rates, particularly where data relate to police-recorded crime as reporting and recording practices have a tendency to change over time. Overall this tends to mean that police-recorded crime understates the level of crime reported in victimization surveys (see for example Ireland and the UK). While there is a common trend towards greater imprisonment and increasing prison populations,1 the picture for crime trends is more diverse. While policing policy, improvements in vehicle and property security, CCTV, even the deterrent effects of higher levels of detection and imprisonment are clearly likely to account for at least part of any trend in crime rates, there does appear to be some evidence in some countries that changes in crime rates have accompanied changes in inequality. For example, crime rates increased over the 1980s in the UK as inequality soared, and the evidence for Korea is that the high crime rates since the 1990s financial crisis are correlated with rising inequality. For Japan, total crime rates increased during the serious recession of the early 1990s, and studies find a positive relationship between increases in inequality and crime rates after controlling for time trends and changes in unobserved heterogeneity.
In the USA, violent crime rates increased in the 1980s as inequality increased, but declined in the 1990s and 2000s when inequality increased still further. In addition, violent crime rates also increased in the 1960s and 1970s, before inequality started to rise. Property crime rates also fell in the four decades from the 1970s to the 2000s. Imprisonment rates increased over the three decades of increasing inequality 1980s–2000s, broadly consistent with income inequality trends but they started to increase in the 1970s, predating the increase in inequality. In the UK, while the increase in crime rates over the 1980s is (p.724) consistent with increasing inequality, the substantial fall since around the 1990s is not in line with inequality trends. There is also contradictory evidence for the Netherlands, France, Poland (although clearly factors related to the transition were important here), Canada, Luxembourg and Greece. Interestingly, victimization rates increased in the late 1980s and late 2000s in Belgium, where inequality remained stable, although, as the authors carefully tease out, there were underlying tensions in Belgium which may have played a part.
Health and Health Inequalities
As Kenworthy and Smeeding outline in the United States chapter, three main hypotheses have been put forward to explain why income inequality might have an adverse effect on health:
1) If for health outcomes there are decreasing returns to income, that is the health return on a marginal unit of income is lower for a high-income individual than a low-income person, then redistribution of income from rich to poor would improve average health outcomes.
2) Wide disparities in income within a society increase stress and anxiety due to heightened relative deprivation and/or status competition.
3) Greater income inequality may produce heightened opposition by the rich to higher taxes, thereby blocking expansion of public health care coverage or widespread adoption of new medical technology. If so, the quality of health care services and the quantity of its provision may improve less than they otherwise would.
For health and health inequalities, we focus on trends in life expectancy although many other outcomes are reported in the country case studies.
Life expectancy. Across the 30 case studies we mostly observe upward trends in life expectancy (Romania being an exception), but the extent to which these trends can be related to changes in inequality is unclear, with perhaps some evidence in the USA, for example, that the rise in life expectancy appeared to slow as income inequality began to increase in the 1980s. While life expectancy is longer for women than men, in most countries the gap has narrowed since the 1980s (the exception once again being Romania). This convergence could be due to an equalization in labour force participation and the changing industrial structure of employment, with the shift from heavy industry and manufacturing (which were male dominated) to services which have lower occupational health hazards. These overall increases in life expectancy are primarily related to medical advances (improvements in early detection and diagnosis, drug treatments, surgical advances, etc.), increases in real incomes and living standards, improved access to health care, reductions in smoking, as well as the shift in industrial structure already mentioned, rather than the varied patterns of income inequality trends. It is clear that the huge shock to the former Soviet-led countries in Central and Eastern Europe had a negative effect on life expectancy but this appears to be temporary and was not uniform across all countries.
However, another common finding across the countries is that there are stark gradients in life expectancy. These gradients are delineated by income, education and social class. Evidence on gradients is not available for all countries or across the full 30-year time span (p.725) for many countries, but where trends are available we find increasing social gradients in a number of countries, for example, the UK, Greece, Sweden, Luxembourg, Finland, the US, Slovenia, the Netherlands, Belgium and France. Not all of these countries are characterized by growing income inequality over the same time period but the exceptional cases such as Slovenia point to other explanations such as increases in privatization in health services allowing the better off to purchase better health care and avoid treatment delays.
Assuming that an individuals’ life satisfaction increases linearly with income up to a point, after which the marginal utility of income falls (i.e. there are diminishing marginal returns to income), then a rise in inequality with average income unchanged should lead to a decline in mean subjective well-being or life satisfaction. Any increase in the share of income of the well off at the expense of lower-income individuals will lead to a bigger loss in life satisfaction for the lower-income individuals than the well off would gain.
In Germany, it was shown that satisfaction with life in general and with different aspects of individuals’ lives (health, job and income) generally followed the trends in net income. It was also found in Bulgaria and Romania that the low average levels of life satisfaction tended to follow the economic circumstances of the country rather than inequality trends, reflecting the poor living standards in both countries following transition. Also in Poland, the positive time trend in life satisfaction seemed to follow increases in living standards rather than the concurrent growth in inequality. In Ireland, too, average life satisfaction fell during periods of economic stagnation and increased in the economic boom rather than accompanying any inequality trend. Life satisfaction trends in Greece also appear to follow economic cycles rather than inequality trends.
In Finland, average levels of life satisfaction have been consistently high and do not appear to be related to changes in inequality (or economic conditions), but a bifurcation has occurred with both increases in ‘very happy/very satisfied’ at one end of the spectrum and increases in very ‘unhappy/dissatisfied’ at the other end. This highlights once again how the focus on averages can conceal important underlying changes. In Luxembourg, life satisfaction was also found to be high and the modest increase in inequality did not appear to affect the level of happiness or life satisfaction. However, a comparison between Estonia and Latvia does appear to suggest that the higher inequality in Latvia could partly explain the lower average relative levels of life satisfaction, compared with Estonia.
In the USA, life satisfaction could be regarded as roughly following inequality trends but with a long time lag (of about a decade), with mean happiness stable in the 1970s and 1980s but falling slightly in the 1990s and 2000s. There is also evidence that the social gradient widened in the 1970s, which was prior to the increase in inequality; but also widened in the beginning of the 1990s, which is more consistent with inequality trends. Gradients delineated by education were found in a number of countries. In the Netherlands, higher levels of education were found to be associated with higher life satisfaction, which increased over time. The authors of this country chapter speculate that this could be an indirect impact of increasing inequality since the late 1990s, due to the increasing role of education in determining success in the labour market alongside reduced labour market opportunities for those with a low education. An education gradient in life satisfaction was also found in (p.726) France, Belgium (the only non-CEE country in the study to be marked by falling life satisfaction from the mid 1970s to mid 1980s despite stable inequality) and Ireland.
4. Political and Cultural Realms
The possible impacts of economic inequalities extend beyond individual well-being. Outcomes in the realm of political behaviours and orientations are worth investigating too. Possible relationships between inequality and political outcomes have direct repercussions for the legitimacy of politics. If individuals (or particular groups of individuals such as the poor) refrain from political participation, or see their preference for redistribution ignored, or lose trust in their fellowmen, democratic governance may be threatened. Whereas other studies have demonstrated, using cross-sections of populations in many countries, that the level of income inequality in a society is associated with a number of political outcomes, the current volume enlarged our understanding of how, within countries, trends towards rising inequality have coincided with trends towards increasing problems in the realm of political representation and social trust. In this section results are summarized for three groups of outcomes: voter turnout; social trust; and popular opinions on income redistribution.
If inequality and relative deprivation leave those who are less well off feeling socially and economically excluded, this can lead to political disengagement. A general move to the centre ground in politics can exacerbate this problem leaving the disadvantaged feeling that the political elite are unable to empathize with the issues that are most important to them but, instead, focus on wooing the median voter. The well off can form a powerful political lobbying group and are able to persuade governments to protect their interests. The Netherlands chapter quotes Solt (2010) who makes a similar argument, ‘As the rich grow richer relative to their fellow citizens, they consequently grow better able to define the alternatives that are considered within the political system and exclude matters of importance to poor citizens. Poorer citizens, less and less able to place questions of concern to them on the agenda, increasingly stay away from the voting booth’. The implication is that rising inequality will lead to falling voter turnout and differences across groups will widen. In a study of US States, Solt (2010) does find that where income inequality is higher (other US States and other points in time), citizens are less likely to vote. The authors of the Japan chapter choose to make a different argument. They suggest that an increase in inequality would lead to more people being willing to participate in political activities to redress deteriorating differentials in society. However, given the psychosocial effects of inequality and relative deprivation those who are economically disadvantaged may feel disempowered in other domains and will be less likely to vote but may ultimately express their views in different ways.
In Belgium, Luxembourg, and Australia voting in general elections is mandatory and consequently voter turnout is very high in all three countries. Elsewhere there is a common downward trend in voter turnout. Following transition from Soviet led systems, and (p.727) the introduction of free general elections across the Central and Eastern European countries, voter turnout has decreased. Perhaps surprisingly, even the first free election in Poland in 1991 was marked by very low electoral engagement, with only 43 per cent of the electorate voting in this election. In Romania, voter turnout started higher at 86 per cent but has continued on a downward path to an all-time low of 43 per cent in 2012. Voter turnout in Bulgaria started reasonably high in 1991 at 82 per cent and although turnout has declined since then, in 2009 voter turnout was 61 per cent. Hungary also seems to have managed to retain fairly respectable voter turnout rates. In contrast the Baltic countries have some of the lowest voter turnout rates in Europe.
In Japan, voter turnout rates have fallen and important gaps between the voting behaviour of the older and younger age groups have been identified. There is some concern that the lower voter turnout rates among the younger age groups highlight the weak political power of this group. In Italy, a similar concern is raised. In Ireland, voter turnout rates have fallen since 1980, and were lowest towards the height of the economic boom in 2004. In other countries there appears to be a closer link between falling voter turnout and increasing inequality. For example, in Canada, voter turnout fell from 65 per cent in 1980 to 55 per cent in 2010 but the largest decline occurred in the 1990s at approximately the same time as the largest increase in income inequality, suggesting a negative effect of inequality on democratic engagement. In many countries, rising inequalities have coincided with lower turnout at elections, in particular in a number of Central and Eastern European countries (the Czech Republic, the Baltic States, Poland, Romania, Slovakia), but also in coordinated market economies in Western Europe (Finland, Germany, Sweden, the Netherlands).
Two exceptions to this general trend are the US, where voter turnout in presidential elections and off-year elections have remained fairly stable since 1970, despite the large increase in inequality, and France where voter turnout has remained fairly stable at around 70–80 per cent. Spain is also an exception, with turnout rates remaining stable, but, as the country chapter makes clear, for historical reasons the political context remains very important there.
Most countries exhibit marked differentials in voting patterns between education and social groups. In Sweden, voting is very stratified by education groups, where individuals with higher levels of education are more likely to vote than individuals with lower levels of education, and there is evidence that the gap widened from 8–9 percentage points to 15 percentage points. Despite stable voter turnout rates in the US, there is a steep social gradient with higher educated Americans much more likely to vote. This is also the case in Italy, with both an age and education divide, where there is concern that young less educated people are losing political weight by staying away from the voting booth. In the UK there is evidence of a social gradient, which widened in 1997 and increased substantially in 2005. Available evidence for the 2010 general election suggests that this wide divide has remained and may even have deteriorated further. The fall in voter turnout in the UK from 78 per cent in 1992 to 66 per cent in 2010 was driven by plummeting turnout among lower social classes. As the main increase in inequality occurred during the 1980s this looks to have been a lagged effect although it could be influenced by the fact that the top continued to increase their share of income even after the Gini coefficient levelled off. Exceptionally, in Spain, voter turnout among the lowest education/income groups is marginally higher than the top income group, reflecting again the importance of the political context in Spain.
Two dimensions of trust are examined, trust in institutions and trust in other people (also called generalized trust). Trust in institutions is said to indicate a system’s legitimacy and confidence in institutions to perform efficiently and fairly. Where inequality is high, trust can break down between individuals and institutions. Although the evidence in the country chapters is rather limited concerning institutional trust, some relevant patterns emerge.
There appear to be a greater range of trends for trust in institutions than is observed for a number of other variables. It is clear that economic crisis and political scandal led to a reduction in trust in political institutions (government, parliament and political parties) and trust tends to follow an electoral cycle with trust higher at the start of a parliamentary term than mid term or towards the end of a term. Trust in the police and the judicial and legal systems tends to be higher, more stable and less affected by economic cycles. Trust in financial institutions is affected by crisis and periods of deregulation. There are generally lower levels of trust in Central and Eastern European countries, which seems to be a legacy from the Soviet era. This is perhaps most visible between East and West Germany. Latvia shows one of the lowest levels of trust in Europe and the most unequal distribution of income. By, contrast, Estonia has seen falling inequality over the last decade and increasing levels of trust. In Poland, a clear relationship is noted between the level of income inequality and the level of generalized trust.
On the whole, though, the relationship between inequality and generalized trust is rather weak. If the figures appearing in the country chapters are examined together, there is no relationship between the level of inequality and the level of generalized trust once GDP per capita is controlled for. This is an important finding, because one important factor in why inequality is held to be harmful to society is that it lowers trust: to the extent that inequality is related to ‘societal ills’, the findings presented here suggest that it is not significantly through reduced trust that this comes about.
Nevertheless, it is important that strong social gradients in trust are found in many countries where this information is available (France, Spain, Poland, the UK, US, Finland, Sweden, Luxembourg) but the gaps have not widened everywhere. For example, in the UK they appear to have narrowed as a result of falling trust of others among the highest educated group, stayed the same in the US but widened in Poland, Finland, Sweden. Bulgaria is an outlier, where it is reported that the least educated report higher levels of trust than those with higher education. Individuals with degree level qualifications in Bulgaria appear to be most critical of parliament, the judiciary and the government.
Attitudes to Inequality and Redistribution
In this section we assess the evidence across countries and over time for individuals’ perceptions of inequality in their own country, and whether or not they agree that their government should redistribute income from those who are well off to those who are less well off.
While tolerance towards inequality, or the more active ‘taste’ for equality (Roemer, 2009), does vary across countries, perhaps due to cultural differences or arising from historical experiences, negative or positive, it does appear to respond to changes in inequality over time.
(p.729) Slovenia, for example, was shown to have a low tolerance for inequality and there was an increase over time in the share of individuals who perceive inequalities to be too large, despite being one of the lowest inequality countries. In Sweden, it was found that dissatisfaction with present economic inequalities increased over time (along with increases in inequality) and underpinned support for a universal and generous welfare state with redistribution. Austrians too express a strong dislike for inequality but, interestingly, when inequality increased a little during the 1990s, Austrians became more accepting of inequalities and there was a fall in the share who thought that governments should redistribute. Since the 1990s, both of these shares have increased again. In Canada, as inequality increased, opinion reacted against this trend and there was an increase in the share of Canadians who felt that incomes should be more equal. In addition, there was an increase in the share of Canadians who thought that governments should act to reduce income differences. Across the Baltic States, most residents thought that current levels of inequality were not justified, while there was less support for redistribution in Estonia where inequality is lower.
In the UK, the vast majority of people think that inequality is too high and the trend in this share mirrors the trend in income inequality, but lower shares believe that the government should redistribute more. It is interesting to note that individuals with the highest and lowest educational levels are most likely to agree with government redistribution: that is the individuals most likely to gain and the individuals most likely to ‘lose’ (in terms of income) through increased government redistribution. In the US, while many Americans believe that inequality is too high there is limited support for enhanced redistribution through taxes and transfers. Instead Americans are more likely to support increased government spending on programmes designed to enhance opportunity and economic security, such as education and health care.
It is fair to conclude that across these rich countries populations are averse to high income inequality, that aversion tends to go up as inequality rises, and that there is evidence that tolerance varies across countries reflecting historical contexts and ideologies. There is generally less support for government redistribution but it is often still high.
One important question is why trends in inequality do not mirror public opinion on government intervention focused on the income distribution. Why is it the case that, despite the fact that large proportions of the population want more equality, and want more government involvement to achieve this, inequalities have often risen rather than fallen? A first answer to this question is that inequality results from external forces that can only partially be affected by social policies, such as globalization and skill-biased technological change. However, as the next section will discuss, policies do have pronounced impacts on income distributions, so this answer is not entirely satisfactory. Another answer may be more convincing, which is that popular opinion may not affect political decision-making and policy change because opinions on inequality are not salient enough in the political sphere. As described in Salverda et al., (2013), a lack of salience in politics results from, first, socially divergent turnout rates at elections. If the poor, or the uneducated, refrain from political participation, their views are under-represented in the political arena (Pontusson and Rueda, 2008). Second, inequality attitudes themselves may be of decreasing importance in choosing a political party in the election booth. Other issues have gained weight in politics between the 1980s and early 2000s, replacing concerns with equality. As of today, in an era showing increased concerns with inequality in the public discourse (particularly in English-speaking high-inequality countries such as the USA and UK), it is plausible that inequality attitudes may become more important again in electoral choice.
(p.730) 5. Effectiveness of Policy
Institutions and Welfare State policies are repeatedly highlighted as playing a prominent role in shaping and dampening background inequalities across the country case studies. Background inequalities across rich countries have been affected by economic globalization and a general shift from heavy industry and manufacturing towards increasingly service-based economies. This economic restructuring has largely led to an increase in demand for high-skilled workers, putting pressure on background inequalities, in some cases amplified by socio-demographic and sociological trends like educational homogamy. At the same time, and usually as a result of concerted policy efforts, educational attainment has increased across rich countries. To some extent this has dampened increasing returns to education.
Countries that appear to have been most successful in tempering increasing background inequalities have a combination of strong labour market institutions with coordinated wage-setting agreements (effectively preventing background inequalities from feeding through to market income inequality) and strong Welfare States which redistribute income through the tax and benefit system (equalizing differences between market income and disposable income). Some of the country case studies emphasize that it is the absence of these policies and institutions that has had an impact on inequality (in for example the US and Korea). There are many others where the weakening of institutions and Welfare States is linked to increases in inequality (Sweden, Canada, UK, Australia, Germany, to name just a few).
The chapters on the CEE countries bring to life how closely observed inequality trends can be linked to regulatory and structural reforms. After the collapse of the Soviet Union, the CEE countries experienced a major transition shock, marked by massive labour shedding and declining wages. Moreover, during the 1990s, many CEE countries started to restructure their economies and Welfare States, taking a turn towards liberalization. However, the extent and phasing of liberalization differed. In the Baltic States, for example, Estonia was very quick to implement market reforms, while Latvia and Lithuania first lagged behind and then also took a radical turn towards market-conforming reforms. The increases in inequality these countries saw clearly reflect these differences in phasing.
There are also a few instances where institutions have been strengthened or Welfare States have increased the extent to which they redistribute income—notably the UK under New Labour, to a limited extent, Greece (although poor fiscal discipline meant that this was not sustainable), Portugal, and Spain. Interestingly, newly industrialized countries such as Korea seek a strengthening of the public social safety net as this can no longer be provided by the rapid expansion of employment, which in practice drew in many at the bottom of the educational and income pyramid in recent decades. However, for many other countries these appear to be exceptions to a more general pattern of Welfare State retrenchment.
Collective Wage Bargaining Systems, Labour Market Regulation and Minimum Wages
Some of the most extensive and coordinated collective wage bargaining systems are found in Belgium, Austria, and Luxembourg: all enjoyed low and relatively stable inequality. The (p.731) chapter on Belgium, for example, sees the stability of its strongly centralized and coordinated wage setting system as a key factor in stable income inequality. In contrast, countries which experienced a decline in collective wage bargaining systems also experienced rising inequality, for example Germany, Finland and Australia. For example, the chapter on Australia sees changes to Australia’s wage-fixing institutions as contributing to increasing wage disparities and, in a similar vein, the chapter on Italy discusses at some length labour market regulation as a key driver of inequality patterns there.
Some chapters focus on particular elements of labour market regulation. The chapter on Bulgaria details the role of the minimum wages in observed inequality trends. Estimates presented in the UK chapter suggest that the minimum wage introduced there in 1999 helped to reduce inequality. In the Ireland chapter it is reported that the minimum wage introduced in 2000 has effectively underpinned the bottom of the earnings distribution. The Luxembourg country case study states that a high statutory minimum wage provided a floor that compressed the bottom of the wage distribution. Where real minimum wages have stagnated or declined, this has been associated with growing income inequality in countries such as Canada, Australia and Portugal. Real minimum wages in Canada (set by provincial governments) either stagnated or declined in the mid 1990s—the period of greatest growth in income inequality. The chapter on Portugal details how the steady devaluation of the minimum wage relative to the average wage, the considerable drop in union density, and the deregulation of the labour market all contributed to the increase in wage inequality. The Netherlands lowered the minimum wage and social benefits very significantly in real terms and even more so relative to trends in earnings and other incomes.
Cash Transfers and Taxes
Without a doubt, the policy sphere receiving most attention across the country case studies is the effectiveness of cash transfers and tax revenue in reducing inequality. A number of countries which experienced a retrenchment of their Welfare States discuss the links with rising inequality. In Australia, the cash transfer system became increasingly targeted but income inequality continued to rise as the size of the Welfare State shrank. The Australia chapter also highlights how policy drift can affect outcomes. That is to say incremental, not easily observable policy-related processes can accumulate into sizeable changes. The example is given of unemployment benefits, which are indexed to prices and therefore did not keep pace with rising wages and household incomes. The result has been that working-age social security recipients fell further and further behind community living standards in Australia.
Canada and Sweden effectively reduced cash transfers following recessions in the 1990s and this is thought to have had an effect on rising income inequalities. The underdevelopment of the welfare state in Romania is seen as a weakness in the fight against inequality and poverty with people forced to rely on kinship and subsistence agriculture during times of need. The lack of a national poverty strategy or universal income support programme plays a significant role in the high levels of income inequality in Italy, with the family still regarded as the main provider of welfare. In contrast, the Austrian case study concludes that a major explanation for the moderate increase in household income inequality is the largely intact redistributive function of the Austrian welfare state.
(p.732) The introduction of dual tax systems, where different tax rates apply to capital and labour income across a number of countries, has been highlighted as a factor that has contributed to rising inequality, and to increases in top income shares in particular. Capital is generally given preferential treatment under tax regimes and due to the very unequal distribution of capital and the fact that capital income is highly skewed to top income households this tends to exacerbate inequality. In Sweden, the introduction of a dual income tax system, differentiating between labour and capital income to the advantage of the latter, is seen as an important factor behind the rise in income inequality, likewise in Germany and France. In many countries taxes on wealth, capital gains, and inheritance have been reduced or even abolished. In France, the country case study highlights the fact that the French tax system is not progressive since people at the top of the distribution pay proportionally less tax than people at the bottom. The fact that this was reinforced during the 2000s is put forward as an explanation for the rise in inequality and especially the growth of top income shares.
In looking across the various country case studies, then, it is striking that country experts in assessing inequality trends emphasize the major role played by policy changes and changes to the broader institutional environment.
6. Concluding Section
In this concluding chapter we have summarized some key features of the findings across the 30 country case studies in relation to the evolution of income inequality, and a range of outcomes in the social, cultural and political realms that might potentially be affected by it. We have also summarized what the country studies suggest about the effectiveness of policies in mitigating or exacerbating background inequalities and the extent to which these inequalities can be linked to further divisions between individuals, families and social groups. Chapter 2 of this volume documented trends in inequality and relative poverty over the last 30 years, a period of time that spans major developments across all 30 countries, politico-economic transition in some, expansive commodification and financialization in others, deep cultural and demographic change in most. For the Central and East European countries this was most pronounced, with the period straddling the transition from Soviet-led to independent market-led economies. Not surprisingly, as these were heterogeneous countries at the outset, their pathways through transition have been extremely varied. Economic cycles have been a feature across all countries, through neither their timing nor their causes or effects were uniform. The transformation of large-scale industrial and manufacturing based economies to service based economies continued throughout this period at the same time as revolutionary developments in technology in the form of computing and information and communications technologies. Europe saw the European Union reach 27 member states, and deeper economic union was accompanied for many by monetary union with the creation and expansion of the Eurozone. There have also been substantial demographic and societal shifts in family formation, family configurations and gender roles with greater diversity and movement away from the male-breadwinner nuclear family model. This has provided new challenges for (p.733) Welfare States and has been a demographic driver behind some of the changes in inequality that we have observed.
The evidence and narrative embedded in these country chapters is suggestive of an ideological shift across many of these rich countries towards freer markets, smaller Welfare States, less regulation and less institutional power for unions, although this was not universal. Such Welfare State retrenchment could be accelerated during the current economic crisis as countries grapple with balancing budgets and reducing public debt. The neo-Conservative governments of the 1980s, in particular the UK and the USA, reacted to the ‘threat’ of globalization and increasing trade with low wage economies in the global south by large-scale privatization of state-owned enterprises and utilities, accompanying efficiency drives, rolling back the Welfare State, reducing the power of institutions such as trade unions and embracing monetarist supply-side economics. Perhaps further fuelled by the collapse of Soviet-led communism, these policies, which some refer to collectively as the ‘Anglo-Saxon model’, found favour with many governments. Elements of them can be seen in the way governments reacted to the 1990s recessions that hit the Nordic countries and Canada and to a certain extent Japan and Korea following the Asian financial crisis.
While Welfare State retrenchment and deregulation may be reflected in an increase in inequality across the income distribution, it may also over time underpin the growth in a powerful elite (including the ‘supra-national super rich’) with an increasing share of income and wealth, sometimes accompanied by a disengagement of less powerful more disadvantaged groups from the political process, as seen in plummeting voter turnout in a number of countries.
There are global forces at play that have put pressure on earnings inequality across rich countries, but the evidence in this volume clearly demonstrates that governments can react to these pressures in different ways, substantially affecting the extent to which they lead to increasing inequality in household incomes.
Income inequality has far-reaching consequences for peoples’ lives, and for society as a whole. We did not find strong evidence that increasing income inequality is associated with such negative social outcomes as more crime, more family breakdown, less trust and greater social immobility, at least in the relatively short term. The long-term effects of greater inequality remain to be seen, and will need to be carefully studied and monitored. In any case, it is been repeatedly demonstrated across the country studies that inequality in income is strongly associated with inequalities in other dimensions, including health, and these deep-seated social gradients are in themselves highly undesirable.
The country case studies provide evidence of a plethora of welfare policies both in the raising of revenue and its expenditure that are designed to (sometimes indirectly) reduce such differences between individuals and families. Cash transfers are used directly to assist those in receipt of low market incomes and the taxes funding these transfers and other public spending to varying degrees reduce market income inequality. In terms of broader social policies, publicly funded health and education are designed to raise population health and education, and to limit the extent to which income determines the level of health and education that people enjoy. These policies, and the welfare state more broadly, collectively create a corrective buffer, smoothing out differences between people and weakening the link between income from the market and other outcomes. The extent to which countries are successful in achieving this will also be reflected in the relationship between income (p.734) inequality and negative social consequences. The depth and breadth of the material presented in this volume represent a valuable resource on which further research can and will build, demonstrating the importance of properly understanding the national and institutional context and the role of policies in seeking to describe and understand the way inequality broadly conceived has evolved and is evolving.
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(1) Poland is an exception with falling prison populations since transition in the early 1990s. This is the result of inflated prison populations under communism which tended to fluctuate following protests, martial law (1986–1989) and amnesties. The high prison populations in Poland under communism accompanied low crime rates.