Inequality, Impacts, and Policies
Abstract and Keywords
Keeping economic inequality in check is an uphill battle, though countries differ. General drivers seem mediated, moderated, accelerated or perhaps even replaced by demographic, institutions or policy-making changes. Growing inequality is not found robustly linked to worsening social outcomes (health, deprivation, housing, social cohesion, etc.), though better longitudinal data may change this; Social stratification is manifest. Political impacts (e.g. legitimacy) seem stronger, underpinning deep concerns about political influence of the rich, feeding into policies increasing inequality. People on low incomes face effects on health, living conditions, social ties, child development. Redistributing income is imperative so as to alleviate poverty and promote equality of opportunities. Prevention policies cannot replace direct redistribution. The best performing countries have a large welfare state that invests in people, stimulating them to be active and adequately protecting them when everything else fails. This continues to offer the best prospect for rich countries pursuing growth with equality.
This volume and the collaborative research project on which it is based come at a time of ever more pervasive worries about growing inequalities in rich and not-so-rich countries, their consequences for society, and the potential for collective action to counteract these trends and effects. The worsening of the income distribution in most of the advanced economies in the last thirty years has been a main reason behind the resurgence of the debate on inequality.
As early as the 1980s, influential writings were already predicting a growing divide between ‘winners’ and ‘losers’ in post-industrial advanced economies. De-industrialization, economic globalization, and technological progress played a central role in such claims. Standardized mass production, it was argued, was giving way to specialist production in rich countries, with profound implications for the relative fortunes of more-skilled versus less-skilled workers in those countries. The winners, estimated at roughly a third of the population, would be those with the talents and education to compete and thrive in the global economy, with the costs being borne by the less skilled.
Looking back over the past twenty to thirty years from where we stand now, the biggest ‘winners’ have turned out to be even more of an elite group than the top third of highly educated and talented workers, or so it appears. The fiercest debate today is about the disproportionate income gains made by the top 1%, and the even more extreme gains by a tiny group at the peak of that elite segment. The Great Recession, meanwhile, may have made the rich temporarily somewhat less rich, but it is deeply affecting the daily lives (p.329) of the unemployed and the poor and the prospects for the future of many of the employed.
Against the backdrop of such debates and concerns, this volume first re-examines claims that inequality is inexorably on the rise, and that this is part of a general trend across developed economies. We systematically map income inequality trends at various levels, and elaborate on earnings and wealth, in thirty countries over the past three decades, complementing existing analyses. Jointly with this mapping we endeavour to shed additional light on the drivers of inequality, the forces underpinning observed trends, with a special focus on education and its tremendous expansion in recent times.
The GINI project and this volume have devoted much of their attention to investigating the impacts of increasing inequality across core domains of social and political life. Wilkinson and Pickett have prompted much interest in this issue with their book The Spirit Level, which argues that income inequality is harmful to society in a range of ways. Societies with higher income inequality are judged to have lower levels of social cohesion, higher crime rates, higher mortality rates, worse health, more educational inequalities, lower social trust, and lower political involvement. While their claims have been the subject of much academic debate and at times strong criticism on methodological and empirical grounds, they have resonated remarkably in the wider societal debate. Thus the question of what impacts there are from income inequality on other spheres, if any, has been a major concern of the book and the underlying research.
A third major component has been policy. What has policy done to restrict—or perhaps endorse—the growth in market income inequalities? What, if anything, can policy do to counteract that growth? What can policy do to make sure that those at the lower end of the income redistribution obtain a share of economic resources that allows for a decent life in a rich society? Here the book looks in particular into employment, social protection, social investment, and education, which are core elements of European Union policy objectives and strategies at national and supranational level. In addition to the headline targets of an employment rate of 75% and tertiary educational attainment by 40% of the younger generation, the Europe 2020 agenda contains clear poverty and social-inclusion targets. Together with the European’s recent Social Investment Package (European Commission, 2013) aimed at human-capital investment, these are a cornerstone of an effective policy to combat poverty and social exclusion in Europe, complementing the effects of growth and employment.
In the remainder of this concluding chapter we concisely sum up the key findings in the different fields and the broader messages coming out of this book. We will also mention remaining research questions and possible (p.330) avenues for further research and end with reflections on what this means for policy.
13.1 Income, Earnings, and Wealth Inequalities
As a point of departure for the present volume the Introduction summarizes evidence from the companion volume of thirty country studies (Nolan et al., 2014) that income inequality has increased in most of the developed world from the 1980s, albeit with some variation in timing and magnitude. In Chapter 2, when looking at the sources of variation in this respect, we find that the thirty-year period can be split into two main sub-periods: in the first one, earnings are the main driver of increasing inequality in income; in the second one, reduced redistribution by the state and the shift from labour to capital become the main drivers. Sometimes, regional inequality growth lies hidden behind a stable national outcome (Belgium); also, increasing inequality at the top and bottom tails of the income distribution may not show up in the standard Gini coefficient (Spain, Greece, Ireland), or a stable outcome at the beginning and end of the period may be the product of decline followed by increase (France). An assessment of causal explanations found in the literature shows that the focus on long-run ‘equilibrium’ stories such as international trade and technical change presents some significant empirical puzzles. A more convincing story that takes into account a broader set of stylized facts, suggests a role for structural imbalances related to international relations and the global distribution of capital, and also for ideological changes that shape policy orientations. The same factors seem to be closely intertwined with the increase of instability of the global economy that paved the way for the financial crisis. The linkage between an unequal world and an unstable world is a strong argument in favour of reducing the sources of inequality. Finally, there may also be a causal channel running from the financial crisis to inequality. As a response to the crisis strong fiscal consolidation is put in place, through increasing indirect taxation, cuts in public spending, and other measures that tend to increase inequality. As long as the national or international fault lines that created inequality and financial instability persist, the timing and the way in which fiscal consolidation has been implemented will result in a higher level of inequality, without addressing its main underlying causes.
Chapters 3 and 4 dwell on two important issues that are not captured in the above focus on income inequality (and are examined here in addition to the GINI country studies): the effects of earnings from labour on the income distribution on the one hand, and the distribution of wealth, a dimension of (p.331) riches significantly different from income, on the other hand. Annual earnings in the labour market are by far the most important contributor to household market incomes. In a cross-country perspective of twenty-five European countries based on the EU-SILC survey data, the inequality of these earnings also drives the distribution of household incomes to a large extent and at all levels—not only for market incomes but also after transfers, taxation, and equivalization in relation to household size and composition. This labour effect concerns the inequality over the distribution as a whole, as measured by the Gini coefficient, but particularly also the top shares in the income distribution.
We consider how income generated by individuals in the labour market links to the household earnings distribution, how household earnings inequality compares to labour market inequality, and how joint labour supply is organized across households. The main conclusion is this: households do in fact enhance labour-market inequality, slightly more than doubling it, primarily by working more hours as a result of household joint labour supply higher up the distribution. Interestingly, this enhancing effect is rather similar across the twenty-five countries with only a few exceptions. So, households do make an important contribution to the level of inequality in earnings within all countries but they add relatively little to cross-country variation. As a result, between countries the initial individual wage inequality is decisive, its cross-country differences are substantial, and these are amplified by the household contributions. Investigating the organization of joint labour supply across households distinguished by the number of earners (single, dual, and multiple) we find multiple earning—and their hours worked—strongly concentrated at the top of the earnings distribution. The incidence of dual earners and multiple earners differs significantly between countries, but the two are largely complementary to each other, which helps to mitigate the inequality effect. Thus the composition of the household population may differ between countries while at the same time the aggregate contribution of household earner demographics to inequality is much the same across the countries.
Wealth is an important dimension of inequality receiving far less attention than income or earnings, partly because of data availability and quality but also because it has been regarded as less important than income when looking at the wellbeing of households. While income and expenditure are typically analysed separately from each other, wealth cannot be fully understood without accounting for the opposite side of the balance sheet, debt, if only in terms of assessing current liabilities and financial wellbeing. In addition, studying wealth is complicated by its varied nature—housing, capital, business ownership—and the lack of information about (p.332) often highly important elements such as pension entitlements; studying wealth inequality can be complicated also by the presence of negative values. Even if the comparison of cross-country indicators of wealth inequality is cumbersome, there are two straightforward facts to be noted. First, wealth inequality is high relative to income inequality. Second, it increased over the last decades in some countries and over the few years from the Great Recession in others. The reasons for this increase can be found in the growing importance of financial assets, of debt in some countries, and of billionaires, and in the developments of taxation. Our examination also highlights that an insightful analysis of wealth inequality needs to take into account the income position of households. The distribution of wealth over income is less dispersed than wealth itself, with the exception of the USA. This can be explained by the role played by debt, which is clearly linked to income.
As the stock of wealth reflects the accumulation of historical inequalities between households and gives an indication of how current inequalities will project into the future, it can convey more information about the financial wellbeing of households than an exclusive emphasis on the financial flows of incomes. There is also evidence that wealth is a driver of socioeconomic inequalities, over and above income and education, through a ‘wealth effect’. As higher-quality comparable wealth data become available it is likely that this topic will attain more prominence in the future.
13.2 Educational Inequalities
Educational inequality is a well-known key driver of income and other socioeconomic inequalities and is further discussed in Chapter 5. Educational inequality can be identified according to three main indicators of individual education: the number of years of schooling completed, the levels and types of qualification achieved, and the test scores that capture actual competences. The first and the last are the more comparable across countries, while the second is more reliant on the institutional design of the education system, which is country specific. While all three indicators define inequality within each generation, inequality of opportunities can be assessed by looking at the distribution of educational attainment in one generation relative to the same distribution in the generation of its parents. Over the last century, most rich and not-so-rich countries have achieved almost universal attendance at secondary schooling (saturation). Therefore a core issue facing educational policies in advanced economies is the further expansion of schooling at tertiary level, where social origins are still strong determinants of educational opportunities.
(p.333) At tertiary education level, countries are still very different, and cross-country convergence is far from being realized. Up to the oldest generations the Nordic, Eastern European, and Anglo-Saxon countries have higher participation rates while, in spite of growth, Continental European countries remain behind and do not catch up. The difference mainly relates to dual systems, as found in Germany and elsewhere, that for a long time have constrained access to tertiary education while promoting higher secondary vocational training. The persistence of cross-country differences and the absence of convergence to a ‘common European model’ are also witnessed by the lack of a common pattern of development. While some still claim that there is an inverted U-shaped relationship between income inequality and economic development, no such relationship is found in the data on educational inequality in Europe. If anything, inequality in schooling (measured by the Gini index computed over the years of schooling) is rising among the youngest cohorts in many European regions.
Despite a declining trend in educational inequality, we do not observe an analogous trend in earnings inequality, even though the two measures are positively correlated (though at a varying degree of explanatory power). Among the possible explanations of these diverging trends, one main factor concerns the distribution of competences in the adult population. Unfortunately, for the vast majority of European countries we do not have repeated observations on the level of competences of the same individuals, and scholars are forced to make heroic assumptions about the stability of the distributions over different age cohorts. However, existing datasets (such as IALS, ALL, or the forthcoming PIACC) provide snapshots of the distribution in representative samples of the population, which allow decomposition of the relative contribution of social origin, schooling, and labour-market experience in the formation of competences.
13.3 Social Impacts
Increasing inequalities in income, wealth, and education may be regarded by many as objectionable in themselves, but another core concern to which they give rise is the potential negative impact they may have on a very wide and diverse range of social problems. We have examined the relationship between income, education, or wealth inequality and a range of outcomes, including poverty, family formation, trust, crime, health, housing, and intergenerational mobility. There are indeed sometimes striking correlations at the country level between income inequality levels and aggregate indicators of social outcomes in the domains just listed. There is considerable debate about whether such correlations reflect a causal relationship, the joint (p.334) determination of these outcomes and inequality by other underlying factors, or a purely spurious relationship. While there has been interesting debate and speculation about potential channels of influence, strong channels of causal transmission from increasing inequality to these social outcomes have not been convincingly demonstrated in the literature.
The first main focus of attention here (in Chapter 6) is on a range of outcomes brought together under the broad banner of ‘social cohesion’, such as poverty and deprivation, the family, crime, trust, and social capital. In addition to looking at overall outcomes, we have looked at social gradients and other measures of inequality.
The empirical relationship between income inequality and poverty depends in the first place on how poverty is defined and measured. When poverty is measured vis-à-vis relative income thresholds, poverty and income inequality are seen to be strongly associated with each other, but one still cannot simply ‘read off’ trends in poverty in a particular country, or rankings compared with other countries, from conventional summary inequality measures. When the focus is instead on poverty vis-à-vis thresholds fixed in purchasing-power terms, or on material deprivation, the major factor accounting for differences across countries and change over time is average income levels. Income inequality contributes little extra to explaining cross-country differences in deprivation once this is taken into account, though changes in inequality over time may have some impact on trends in deprivation. Average income levels and deprivation both influence subjectively assessed levels of economic stress, but deprivation seems to have the greatest impact where national income levels are high and inequality is low.
As far as family-related features such as fertility, marriage and divorce, lone parenthood, etc. are concerned, many of these are not characterized by a distinct and consistent social gradient across countries. Even where they are, income inequality per se does not seem to play a major role in accounting for differences across countries, and trends in income inequality explain little of the dramatic changes in family life seen in many countries in recent decades. The relationship between income inequality and crime is particularly difficult to assess empirically, partly due to the variability in crime statistics across countries and over time. There is some evidence for a relationship between income inequality and levels of violent crime, but crime rates in many counties have fallen when income inequality was increasing, notably in the USA, and income inequality is clearly only one of a complex set of factors at work. Patterns of punishment, however, bear a much clearer relationship to income inequality and welfare regimes.
Some social-psychological features such as levels of social solidarity and trust are associated with inequality levels in a bivariate context, but when appropriate control variables are introduced and multi-level and longitudinal (p.335) forms of statistical analysis applied the relationship is weak or non-existent. While there is some evidence of a negative association between income inequality and self-reported happiness, it is limited and not clear-cut. Overall, the findings with respect to inequality and various aspects of social cohesion highlight the importance of seeing income inequality as only one facet of social stratification more broadly conceived.
In Chapter 7, the focus then turns to the relationship between income inequality and health, the topic of some of the most active debates and research on the social impacts of inequality. Research in this field in the course of the GINI project looked inter alia at the relationship between self-assessed health, income, and material deprivation, using longitudinal data for Spain. The results show at the general level that individuals’ relative position in the income distribution, in terms of the gap between their income and others, has a negative effect on health, while absolute income level does not (controlling for this gap). However, with the more detailed focus on poverty it is actual material deprivation that has a negative effect on health rather than one’s deprivation level relative to others’. Where individuals suffer financial difficulties, lack basic necessities, live in poor housing, and go without key durables this is bad for their self-assessed health, but relative income also matters. This provides an important perspective on the ‘absolute versus relative income’ debate.
Another study, of the relationship between mortality rates and poverty rates across rich countries, used pooled cross-sectional time-series models to identify a significant relationship between child poverty and infant/child mortality. Interesting differences were found between welfare regime types, with Nordic regimes outperforming other regime types in terms of limiting infant and, to a lesser extent, child mortality; however, a number of other regime types outperformed Nordic regimes when it comes to adult mortality.
The fracturing of jobs into ‘good jobs’ and ‘bad jobs’ has accompanied the general upward trend in inequality in many countries. The link between job quality (working conditions and employment relations) and health has received far less attention than that between income or social gradients despite the fact that employment relations and conditions form the conceptual basis of many social classifications. There is accumulating evidence that adverse working conditions are related to poorer health, particularly the mental health of workers, and that low pay is related to poorer physical health. This is an important area of research not just for understanding the social determinants of health inequalities but also the social impacts of and behind recent inequality trends.
Poor housing conditions are detrimental for health but the overall relationship between inequality and housing is complex and could run in both directions. The literature in this area explores relationships between (p.336) inequality and house prices, housing quality, access to different tenure types, and status competition encouraging households to make riskier investment decisions. Home-ownership rates have tended to rise across much of Europe in recent decades (except in Germany). Governments have tended to encourage home ownership, even among low-income households—a subject of much recent debate in the USA—and ownership rates have been affected by property value developments, demographic change, mortgage-market deregulation, and building activity. Increases in income inequality can drive up house prices as higher-income households can afford to pay more. Increasing house prices can benefit existing owners but can also prevent low-income households entering the housing market, or mean a fall in the quality of the houses they can afford to buy. There is some evidence from the USA that increasing income inequality results in low income households experiencing more crowding and leads to increases in house prices. Research reported in this volume has focused specifically on the relation between income inequality and access to housing for low-income households. The effect of income inequality in countries at a similar level of economic affluence is found to operate through the absolute level of resources, while in countries at different stages of economic development, differences in affluence determine access to housing. Higher inequality was found to be positively related to the likelihood of experiencing crowded housing conditions for low-income owners.
The growth in income inequality across many countries over the last thirty years and the variation in inequality across countries at a point in time have led analysts to question whether higher inequality is associated with lower rates of intergenerational mobility. The evidence on cross-country variation in intergenerational income mobility suggests it is negatively correlated with income inequality. The evidence from within-country studies analysing the effects of changes in inequality on intergenerational mobility are less clear-cut. For the UK, for example, economists find falling intergenerational income mobility as inequality increased, but sociologists dispute this, pointing to estimates of stable social class fluidity over the same period. Evidence for the USA suggests that intergenerational mobility remained fairly stable as income inequality increased.
Recent contributions to the intergenerational-mobility literature present new evidence on intergenerational mobility in the top of the income and earnings distributions. Using a large dataset of matched father–son pairs in Sweden, intergenerational transmission is found to be very strong in the top of the two distributions, more so for income than for earnings. Sons’ IQ, non-cognitive skills, and education are all found to be unlikely channels in explaining this strong transmission. The greater persistence in income than earnings suggests that it is the capital income component that drives this (p.337) finding. Results suggest that Sweden, known for having relatively high intergenerational mobility in general, is a society where transmission remains strong in the very top of the distribution, and that wealth is the most likely channel. These findings are important particularly as a number of countries have experienced increases in concentration of income, earnings, or wealth at the very top of the distributions over recent years. In a similar vein, GINI project studies have looked at the effects of parental wealth holdings, financial assets, and housing equity, on children’s outcomes in early adulthood, including educational attainment, labour-force participation, earnings, and home ownership. For all these outcomes positive associations were found with parental wealth, which operate over and above the influence of parental education and income. These results suggest that wealth plays an important part in the way parents’ financial position can influence their children’s future lives.
13.4 Political and Cultural Impacts
Important societal consequences of inequalities may be found in the political and attitudinal spheres. If political attitudes and behaviours become more strongly stratified between status groups in unequal societies, inequality may have far-reaching effects on what people believe is fair, how they participate in politics and associations, and how they vote. And, perhaps even more important, if such strongly stratified political behaviours and opinions are reinforced by the distribution of incomes, there may be severe consequences for the legitimacy of the political system of Western societies.
Several economic and sociological theories formulate a link between income inequality and redistributive preferences, which is examined in Chapter 8. When inequality increases, people with falling incomes will obviously express increased needs for social redistribution. However, some theories also highlight that under circumstances of rising economic uncertainty (of which inequality is only one aspect) it is not only the social groups with falling incomes but also the less well-off facing uncertainties who may opt for higher levels of social spending. People’s expectations, their social context or values, and their views on the reasons for poverty (whether it is due to lack of individual effort or to luck in life) may have a significant impact on the individual preferences for social policy.
When the evidence about macro and contextual determinants of redistributive preference is analysed, it turns out that higher inequality is associated with stronger preferences for redistribution. In addition, it is found that the structure of inequality (i.e. the relative distances between the various (p.338) income groups) matters for the determination of the demand for more social spending. The deeper the poverty is, the larger the demand for redistribution. However, while higher inequality induces a larger strain on the state, the existing (pre-crisis) size of the state may constrain its further growth and the extension of redistribution, not only in terms of the public budget but also in terms of the attitudes of the public. Also, support for policies depends on the form of the proposed redistributive programmes (cash or in kind, assistance or insurance type), and the potential targets (which segments and social groups are considered as the needy), as well as on the institutional setting (whether education, unemployment benefits, or health spending, to name a few).
If people have preferences concerning the level of inequality, then their desired level of redistribution will depend also on the difference between the level of inequality perceived and the level of inequality desired. Consequently, the information people have about the level of existing income inequality and the values they hold about the acceptable level of inequality are important inputs into the formation of redistributive preferences. Cross-sectional studies show that perceived levels of inequality is to some extent higher in countries with higher income inequality, and accepted levels of inequality also tend to be higher. Results exploiting inter-temporal variation in inequality and attitudes show that attitudes towards inequality seem to respond to changes in actual inequality: discontent with inequalities increases when inequality is rising. Discontent with the level of inequality, however, increases only moderately with the rise of inequality, which might result from the increase in individuals’ accepted levels of inequality when actual inequality is on the rise.
Political participation is one of the most important factors that can have a large effect on the level of redistribution. More highly educated people are more likely to vote, and, if voter turnout decreases—and it has been decreasing dramatically in most European countries—it is likely that the turnout for less educated, lower-income people will decrease relatively more, as observed, for example, in the UK. Lower-income people are more likely to support greater redistribution, and therefore a diminishing turnout might influence politics to reduce the level of redistribution aspired to, which in turn might affect the resulting level of inequality. This has an impact on political choices (regarding redistribution), but can also affect legitimacy and approval of democratic procedures.
As has been said, rising inequality may have important repercussions on the legitimacy of democracies in European and other Western societies. Inequality, according to the research carried out in the GINI project and reported in Chapter 9, systematically affects both public opinion and the orientations of political parties.
(p.339) It appears that positive attitudes towards democracy are negatively related to the level of inequality in a society. Individual-level income is positively related to support for democracy, a relationship that holds regardless of the level of income inequality in the country. Importantly, in established democracies, the gap between rich and poor in terms of their support for democracy increases as inequality rises. This increasing polarization occurs not so much because the poor are less supportive of democracy than the rich in unequal societies, but mainly because the rich are much more supportive of democracy in egalitarian societies. This finding also has implications for electoral politics. If governments hope to increase democratic values, they must convince the wealthier part of society that an egalitarian society may be in their own interest.
In addition, as inequality rises, people tend to be less concerned with societal responsibilities such as politics and civic participation. However, there is also evidence that higher inequality is associated with a stronger work ethic. In unequal societies people tend to think that wellbeing is the responsibility of individuals themselves rather than of government or society as a whole. These findings are consistent with the idea that the level of income inequality found in a particular society largely reflects public opinion. That is, high levels of income inequality are largely a function of limited policies of redistribution, which in turn reflects the idea of individuals’ own responsibility. Such a pattern of increased reliance on one’s own efforts, and less on others, may be detrimental to the ‘social contract’ underlying collective social policies. In that sense, high levels of trust and solidaristic sentiments can serve as a protective factor, with policies to combat increasing inequality more likely to be supported, and their erosion can heighten the risk of further increases.
Importantly, the salience of the redistribution issue mentioned above is of paramount importance. Inequality appears to influence public opinion on redistribution only when inequality is a significant political issue. Salience is not guaranteed, however, because those who benefit most from redistribution—i.e. those on low incomes—often feel they have little say in politics and thus tend to be less engaged. Of particular concern to the salience issue is the legitimacy of political decisions. The gap in participation between the rich and poor, or between the well-educated and the poorly educated, is larger in unequal societies than in egalitarian societies. This would mean that, in more unequal societies, there is a larger gap between public opinion on redistribution and actual political decision-making on this issue, simply because redistribution is a less important issue. A misrepresentation of public opinion (especially of people belonging to the lower parts of the income distribution) could invoke further gaps in political participation between the advantaged and the disadvantaged. As income inequality rises, politics could become more strongly the domain of the well-educated and the better-off.
(p.340) Finally, we also explored how transnational forms of governance may be affected by inequality. In this regard, it is clear that inequality has direct repercussions both for how political parties position their public platforms and commitments, and for public opinion on European integration. Political parties tend to be more concerned with the protection of workers against globalization when inequality is high. Globalization has winners and losers, and the ‘losers’ (i.e. low-skilled workers) need protection. Not surprisingly, there is evidence that the losers have become increasingly critical of European integration. It is particularly interesting that parties on the far right of the political spectrum have become especially affected by inequality. Centre-left and centre-right parties, however, have become less protectionist or nationalistic, illustrated by more modest anti-globalization positioning irrespective of the level of inequality. The general effect of increasing inequality, however, has been to dampen enthusiasm of parties and publics to embrace supranational integration.
Together with a range of other findings, the bottom line of our research is that inequality poses substantial dangers to democracy and openness in national political life, highlighting the importance of policies and measures that may redress inequality.
13.5 Redistributive and Educational Policies
Observing the debate on how to reduce income inequality and what is arguably its most problematic manifestation, poverty, one is struck by how widely opinions vary about the relative merits of alternative courses of action. On some key issues views are in effect diametrically opposed. This is perhaps nowhere more true than when it comes to the role of work, particularly paid employment. An important section of opinion basically holds that more people in work equals fewer people in poverty and, by implication, that an elaborate welfare state with large-scale redistributive efforts is not a prerequisite for a low level of poverty, provided that enough people have jobs. The idea that, ultimately, the best and most sustainable egalitarian strategy is an employment-based strategy has long been advocated and is scrutinized in Chapter 10. The basic argument has common-sense appeal. People who are not in work tend to occupy the lower strata of the income distribution. If more jobs become available and low-income people take up these jobs, improving their income position, the result is a selective rise of incomes at the lower end and thus a reduction in income inequality and the share of the population in poverty relative to the median. An alternative view holds that we are increasingly confronted with a trade-off between employment (that is, non-government employment) and income equality. The idea here is (p.341) that high levels of non-subsidized employment can in present-day economic circumstances only be achieved at the cost of a large low-paid (service) sector and more ‘poverty in work’. Such arguments are in line with an important stream in the academic and popular literature on the effects of economic globalization and skill-biased technological change on the labour-market position of less qualified workers in rich countries. Research does suggest that this picture of a uniform shift away from low-skilled work needs nuance. Technological change, real as it is, has not simply entailed a demand shift away from lower-skilled labour and towards more highly educated workers. There has been job growth in both the highest-skilled (professional and managerial) and lowest-skilled occupations (personal services), with declining employment in the middle of the distribution (manufacturing and routine office jobs) as a result. While the dynamics in the different segments of the labour market are complex, the overall picture does add up to one of increasing inequality.
What is also clear is that past employment growth in Europe and elsewhere—and we should not forget that there were very strong net employment gains prior to the crisis—did not deliver the hoped-for declines in poverty and inequality. In fact, the contrary was true for the most part. Employment growth, where it occurred, did not primarily benefit poor people, and this happened in a context of eroding income support as provided through social insurance and social assistance. The overall redistributive impact of the tax/benefits systems also declined. The reasons why job growth did not benefit the poor are complex. Policy options exist to make sure that the poor partake more when new job opportunities arise. Active labour-market policies can play an important role here. But we should be under no illusion. When it comes to improving the plight of persons with the weakest profiles in terms of skills, experience, and aptitudes, active labour-market policies appear to have their limits. There are simply no examples of countries that achieve low poverty just by having well-functioning labour markets without extensive direct income redistribution mechanisms. The Nordic countries stand out in having high employment rates in combination with low poverty rates and overall inequality levels. It should not be forgotten that precisely the same countries also spend heavily on direct income transfers, including towards those already in work. The combination of work and welfare-state income is more pervasive there than anywhere else. In addition, income support provisions for those with no work attachment are among the most generous and adequate from the point of view of poverty relief. The European Commission recently stated that social protection is an additional cornerstone of an effective policy to combat poverty and social exclusion in Europe, complementing the effects of growth and employment. It is important that this does not remain a vague intention. Minimum-income protection levels have declined. (p.342) Policymakers can, if they have the political support, bring about a (partial) reversal by bringing social safety nets to a higher level.
Important voices argue, however, that policy should shift from fighting symptoms to tackling in more comprehensive and radical ways the root causes of exclusion, low earnings, and limited upward mobility. Within the social-investment strategy public services are a key instrument. These are the subject of Chapter 11. Some actually advocate a drastic reallocation of social expenditures towards such services, and then especially those services that support families in coping with the work–family life balance, and those that enhance human capital. The social-investment strategy intends to sustain a skilled and flexible labour force, which can easily adapt to the constantly changing needs of the economy and thrive in it. Optimally, it brings both an increase in economic efficiency and also a reduction in inequality and poverty, or so it is claimed. In-kind provisions of all types matter if societies are to be made more egalitarian. The mounting empirical evidence on childcare services and early childhood education brings out very diverse results, with some cautionary notes. In most countries the actual use of childcare services remains socially stratified. This is even the case in some countries where the consumer cost of such services is close to zero for those on the lowest incomes. Other parameters matter, such as access, availability, and quality of the services. Moreover, if quality of childcare is not similar within a country and low-income families typically mainly use lower-quality care, then this may hamper egalitarian outcomes in the longer run. As a result, investment in equal quality is also important, as are connections with other policy domains, such as complementary parental-leave systems and the quality of the regular school system.
As already mentioned, educational policies are effective in reducing educational inequalities, even if some reforms are more effective than others, irrespective of whether inequality is measured within generations or across generations. Policies that broaden the access to secondary and tertiary education are the most effective in reducing inequality in schooling. By matching age cohorts from different datasets we have established that competences acquired when in school are as important as years of schooling in shaping earnings inequality later on in the labour market. This throws up the question of which policies are capable of reducing educational inequalities along either the quantity dimension (years of schooling) or the quality dimension (competences acquired in school). When considering the first dimension (schooling), we claim that some policies (such as expansion of compulsory education or financial support in college) have a clear impact of inequality reduction, mostly through raising the bottom tail of the distribution of intended attainments. However, other policies (especially those aiming to expand the autonomy of educational institutions) may have more uncertain (p.343) effects on inequality, since they foster differentiation among schools and universities, thus boosting the attainment of financially better endowed students at the risk of leaving behind students from more disadvantaged backgrounds. Conversely, when looking at the other dimension (competences) there is consensus in the literature that postponing the age of tracking in the educational system contributes to reducing the dispersion of competences. This contrasts with policies aimed at raising the degree of standardization of inputs (i.e. reducing the degree of school autonomy) and/or introducing central examinations, which seem less effective in reducing educational inequality in competences. In addition, a vocationally oriented secondary school system, which stimulates retaining in school the least motivated students (who often are also students with poorer cultural backgrounds), reduces the dispersion in competences in the adult population.
We have also highlighted the possibility that policies increase inequality because they raise the selectivity in admissions to education. In addition, we have investigated what drives the adoption of different educational policies within countries, and found support for the notion that progressive parties favour the expansion of access to education as a means to reduce income inequality, while conservative parties disregard the necessary homogeneity of public education, supporting policies that lead to school differentiation and competition.
13.6 Further Research
The evolution of income inequality throws up the interesting question of whether the groupings of countries that we established at the face value of their trends in income inequality can be linked to shared underlying factors and thus stand up to further scrutiny. Similarly, it is important to see how the examples found of episodic instead of gradual changes in inequality, which bring inequality to a seemingly structurally different level over a short period, relate to possible factors driving such rapid changes, and to tease out the implications for a broader understanding of inequality trends and explanations.
The findings on the contribution of earnings inequality raise some important questions for further research. First, they underline the role of household-earner demographics as a contributor to earnings and income inequality, in conjunction with the distribution of employment in relation to household joint labour supply. Beyond the effects of part-time employment in relation to dual earning, multiple earning in itself deserves more attention, including in relation to the role of single-person households, which seem to abound where multiple-earner households are few. There is (p.344) also a case for examining the effects of pay correlation between household members in a comparative framework. In addition, it seems commendable to analyse the relationship in the opposite direction and look at the effect that the household dimension of labour supply and earnings may have on labour-market inequalities, going beyond the perspective of the individual that is so central to the common analysis of these inequalities. For example, as a result of household joint labour supply a specific part-time segment of employment may be growing where a full-time worker ‘can no longer go’ and where the motives of labour supply and the rules of labour-market competition may differ. Finally, the rise in individual educational attainment may affect household labour supply and shift the boundary of household joblessness upwards along the educational distribution if educational homogamy concentrates labour market success among a smaller fraction of households.
With regard to the role of wealth and wealth inequalities there is still a long way to go for the systematic collection of internationally comparable and more comprehensive data. This can provide a more complete description of levels and trends with an improved country coverage, but should allow also a deeper analysis of the contributions of individual and household characteristics.
With respect to the generation of inequality in individual earnings as a result of educational attainment, there are at least two lines of research that are in their infancy: one concerns the formation of competences and their connection to the labour market; the other deals with modelling the institutional design of educational systems. Social scientists still know little about the role of cognitive and non-cognitive abilities, except for the fact that when they are partially observed these measures appear to be strongly correlated with labour-market outcomes (employability, earnings, prospect of career). It is not yet clear how these abilities are formed and whether (and when) they start decaying over the life-cycle. We do not even know whether there is some assortative mating based on these traits. Most of our ignorance derives from lack of appropriate data, despite their collection in other research fields, and a priority for the future is that research should progress in this direction. The other major knowledge gap relates to cross-country differences. The vast literature on the varieties of capitalism has proposed various classifications of national economies according to scope and size of welfare systems. The equivalent effort with respect to educational systems is less developed. The existence of tracking versus comprehensive systems of secondary education is well-recognized, but it is more complex to combine various dimensions and cover the whole range from pre-primary to tertiary education. The underlying issue here is whether there is a spontaneous convergence towards a unified model for educational systems in advanced countries, or whether (p.345) this can be encouraged by means of imitating best practices. Here the literature seems not to have achieved a unanimous consensus.
In seeking to capture and understand the ways in which increasing inequality may impact on social outcomes that are central to individual and societal wellbeing, further research might usefully take as its point of departure the message emphasized here, that at a focus on income inequality per se, especially as captured by single summary indicators such as the Gini coefficient, is unduly narrow. Adopting a broader stratification perspective incorporating (at least) social class and education, while much more complex to implement, is likely to be productive in moving forward a contentious set of interlinked debates that risk being trapped down a succession of blind alleys. To make significant progress, it will be important to develop and use longitudinal and multi-level data that allow causal processes to be properly explored. It will also be helpful to focus even more on mechanisms and on specifying testable hypotheses. This is a challenging task because of the data requirements and necessary modelling sophistication. Indicators of some social outcomes also need to be elaborated and combined into validated reliable indices where possible, since at present undue reliance has to be placed on specific individual items. In certain key domains, notably the study of deprivation and of the intergenerational transmission of advantage and disadvantage, the scope for comparative analysis is increasing but will continue to be constrained by the pace of improvement in the availability of harmonized data.
The research reviewed in this volume suggests a number of areas where future research could improve our understanding of the relative importance of various drivers and the dynamic relationship between inequality and social outcomes. For health, it was shown that relative income and absolute material deprivation are associated with poorer health outcomes in one country. It would be interesting to see if this finding can be replicated across countries and whether changes in relative income and absolute material deprivation over time are associated with a deterioration in health outcomes. A better understanding of the link between adverse working conditions and health and how recent trends in income inequality have been accompanied by changes in job quality is also important for developing policy recommendations to limit avoidable poor health.
The relationship between inequality and intergenerational mobility describes how inequality in one generation is imprinted onto the fortunes of the next generation. Recent research that seeks to establish the transmission processes and identify policies that increase mobility needs to be fostered. The increase in concentration at the top of income and wealth distributions observed in a number of countries appears to be a greater cause for concern if the results for Sweden are indicative of a broader trend towards rich (p.346) dynasties. To explore this social phenomenon further requires high-quality longitudinal data.
Concerning the impact of inequality on political outcomes, this volume has mostly looked at citizen’s attitudes and behaviours, and the legitimacy problem that arises from a stratification in politics among the population. It is, however, possible that the political consequences of increasing inequalities extend beyond individual outcomes, implying that there may be other channels through which inequality threatens the legitimacy of the political system. Some of these alternative routes could be studied in future research. One line of research that could be fruitful is to study how money can ‘buy’ political influence in different systems, and to study whether inequality enhances the opportunities for the top-income groups to mobilize their political power in this way. In the United States, the exceptionally high costs involved in running for elections is likely to induce a power difference between the rich and the poor that cannot be observed by simply looking at attitudes or political participation in population surveys. It will also be important to study the extent to which, among European countries, differences in how political parties are funded and in how elites are able to mobilize their political interest through financial contributions run in parallel with inequality levels in societies.
Another possible future line of research on political outcomes of inequality concerns the process of public opinion formation, and how different organizations are able to influence the population’s viewpoints on poverty, meritocracy, and the redistribution of resources. It is interesting to see that opinions on inequality largely reflect factual inequality levels. It is possible that think tanks, public intellectuals, and non-governmental organizations play a key role in how the attitudes are formed, and it would be relevant to study whether inequality is related to the level of influence that these parties are able to exert.
Several key challenges in the area of policy research remain. Boosting employment rates continues to be a prime policy objective in many countries, in part driven by the idea that ‘the best protection against poverty is a job’. We know that employment growth has so far not delivered better outcomes in terms of reduced poverty and inequality. We know in part why this is, but the many and complex underlying causal dynamics have not been fully charted. One important question is why joblessness at the household level tends to be so persistent even in a context of high labour demand. The relative role of economic mechanisms, for example financial incentives of tax and benefit systems as these operate at the household level, versus more sociological mechanisms, for example the effects of educational homogamy, social capital, or neighbourhood effects, needs to be explored more systematically. Another crucial question is how we can improve minimum-income (p.347) provisions for those unable to make a decent living through the labour market. The adequacy of minimum-income protection leaves much to be desired almost everywhere, but at least a number of countries manage to combine relatively high minimum-income protection levels with well-functioning labour markets. What are the key conditions for generous income protection to be compatible with low chronic dependence? Particularly, what is the role of activation, empowerment, monitoring, and sanctioning policies? Income-support provisions that supplement low earnings appear to work relatively well in some settings, although relatively little is known about their longer-term effects, for example on wages, mobility, and skill formation. There continues to be a lively debate on whether targeting low incomes actually enhances or reduces the redistributive impact of policies. New evidence suggests that targeting may not be so bad, but the optimal level for various policies and in various settings still remains to be determined. Attaching requirements to benefits is also increasingly in vogue. There is a growing literature on conditional cash transfers (CCTs) in developing economies, but the short- and longer-term effects of various conditions still require further exploration, especially in the context of advanced economies.
Human and social investment is now high on the policy agenda. It seems entirely sensible that policy should focus on tackling in more comprehensive and radical ways the root causes of economic disadvantage. The range of policies that are discussed under the heading of social investment is very broad, and it is impossible to discuss here the many research questions that remain open. One clear research priority concerns the social stratification in the take-up and longer-term effects of many of such social-investment policies. Childcare services, for example, tend to have more beneficiaries towards the top of the income distribution. Even where childcare is not scarce, of good quality, and provided almost free of private costs for people on low incomes, the effective take-up remains skewed towards the higher-income groups. This may have less to do with the design of the policy itself than with the context in which the policy is embedded. In addition to the social stratification in take-up, there is evidence of social gradients in the longer-term effects. This may have to do with quality differences in the services to which people of various means have access, but many other factors appear to be at play as well.
13.7 Summing Up
Summing up, richer countries appear to face an uphill battle to keep economic inequality in check. The evidence that income inequality, at the level of earnings, market income, or disposable household income, has been (p.348) trending upwards over the past decades in a majority of these countries is relatively robust, albeit that sometimes important discrepancies exist across data sources that create uncertainty about the magnitudes of those increases. In addition, the trend towards rising inequality has not been universal. It has not happened in all countries, or to the same extent. Trends have rarely been linear. Increases in inequality, where these have happened, often occur in relatively short spells. This observation raises the issue of whether rather uniform and long-run structural trends such as globalization or skill-biased technological and organizational change, which are often proposed as the main drivers, are mediated, moderated, accelerated, or perhaps up to a point even replaced by other changes such as in demography, institutions, or even outright policymaking, which in turn could relate to a shifting politico-cultural basis.
The major question addressed in the book, and the research project underpinning it, was then the following: even if one did not regard rising inequality as problematic in itself, should it be a cause of great concern because of its impact on other outcomes of general importance, such as health outcomes and educational attainment (at the same time potential drivers of inequality), social cohesion and inclusion, intergenerational mobility, crime, democracy, and political participation and values? The evidence that higher income inequality in and of itself is harmful to a range of such outcomes, in terms of national averages or within-country gradients, varies across domains, and much of that evidence relates to cross-country variation in inequality and outcomes, which may reflect deeper factors. Increases in inequality over time have not been robustly linked to worsening social outcomes, though these may emerge in time as higher-quality longitudinal data become available and techniques that allow us to test causal relations are applied: the challenge of identifying, quantifying, and explaining a robust causal link between rising inequality and worsening outcomes remains. The fundamental role of social stratification more broadly conceived is manifest across most of the social domains studied, but income inequality on its own may be too narrow and specific a focus to fully capture this very complex set of phenomena. If the concern is not with income inequality itself but with its potential negative social impacts, redistribution of income may not in any case be the most obvious way of addressing such unwanted outcomes. Even if lower levels of income inequality create a setting conducive to better (distributional) outcomes in terms of health, education, social connectedness, etc., a strategy of income redistribution is unlikely to be very cost-effective. Public money is probably much more efficiently used on direct interventions to improve health, education, or social-cohesion outcomes, and to reduce social gradients in those outcomes.
(p.349) That said, people at the very bottom of the income distribution do face very real consequences from having insufficient financial resources. Financial poverty does affect health, material living conditions, social ties, etc., although the effects are not just a result of financial constraints. Financial poverty also affects child development and later chances in life. In other words, from the viewpoint of the empirical evidence there does exist a clear imperative to redistribute income so as to alleviate poverty and promote equality of opportunities. Designing policies aimed at preventing situations of economic disadvantage arising in the first place does not mean relegating direct redistribution to the background. Focusing on the other tail of the income distribution, though, the findings with respect to political behaviour presented here also underpin deep concerns about the way in which increasing income inequality can lead to greater political influence for the better-off, and especially the rich, feeding in turn into policies that further increase inequality. Such a dynamic may be among the many factors contributing to the economic crisis, which poses such risks for the life chances of the young and disadvantaged in many of the countries studied here.
This brings the state, and its redistributive role, back to centre stage. A substantial role for the state is compatible with a well-functioning and dynamic economy, where high and rising levels of inequality are not an inescapable fact of life. Higher employment, productivity, and social cohesion are achievable, but this requires collective action, with an associated price in terms of the share of income that individuals retain for their personal consumption. The best performers among the rich countries in terms of employment and economic and social cohesion have one thing in common: a large welfare state that invests in people, stimulating and supporting them to be active and adequately protecting them when everything else fails. This continues to offer the best prospect for rich countries pursuing growth with equality.