Public policy and European society University of Castellanza Session 3(a) Inequality in Europe and the USA 9 March 2017

Outline Inequality How and why is the USA so different? Measuring economic inequality Growing economic inequality How and why is the USA so different? Causes of growing inequality and why it matters Reading for today: Wickham, Unequal Europe, Chapter 4 (Section 2).

Defining income Different definitions of income Market income Disposable income Less taxes, plus transfers Imputed income Example: ‘cost’ of state education Unit: Individual or household Equivalised household income – income adjusted for household size Sources: surveys, tax returns

Income distributions Gini coefficients 0=complete equality, 1 = complete inequality Percentages of people (e.g. Deciles) What is the income of (e.g.) the poorest 10%? P90/P10 decile share: gap between richest 10% and poorest 10% S90/S10 decile share: gap between average income of richest 10% and of poorest 10% Percentages of income What percentage of people have (e.g.) less than 50% of the average (mean or median) income?

Income inequality 1970s-2010: Gini coefficients Year France Germany Italy Sweden United Kingdom United States Mid 1970s 21.2 26.9 31.6 Mid 1980s - 25.1 28.7 19.8 30.9 34.0 Mid 1990s 27.7 26.0 32.6 21.1 33.7 36.1 2000 26.4 32.1 24.3 35.2 35.7 2005 28.8 28.5* 33.0* 23.4* 33.5 38.0 2010 30.3 28.6 31.9 34.1 Note: * Figure for 2004 Source: OECD Statistics- Dataset: Income Distribution and Poverty

Growing inequality

Income inequality 2010 Gini (at disposable income, post taxes and transfers) P90/P10 disposable income decile ratio S90/S10 disposable income decile ratio France 0.303 3.6 7.2 Germany 0.286 6.7 Italy 0.319 4.3 10.2 Sweden 0.269 3.3 6.1 United Kingdom 0.341 4.1 10.0 United States 0.380 15.9 Source: OECD Statistics- Dataset: Income Distribution and Poverty P90/P10 ratio of upper bounds of decile; S90/S10 ratio of average in decile

Gross and net income inequality Everywhere state reduces income inequality

Income distributions Income distributions are more or less equal and have different shapes

Growing inequality in USA The table is based on percentages of units: (households) It shows the share of all income (‘Percentage of Income’) received by each 20% (‘Quintile’) of the population Source: Ryscavage, p59.

Growing inequality in USA… For the last 40 years: the very rich have got richer; the poor have stayed the same

Gender equality and social inequality…. Source: Ryscavage. P.98. Chart shows during the 1960s and 1970s growing equality amongst women (the period when women began to enter the workforce), but then from the late 1970s inequality amongst women increases. By contrast inequality amongst men has been rising since the early 1970s. And what does this say about inequality between households?

Rich get richer: especially in USA Share of pre-tax income going to top 1%; Source: OECD

Why is USA more unequal than Europe? Overall government spending Higher in Europe (EU15) than USA, especially on social programmes transferring to households; US military spending far higher State programmes Income support Health care Sickness and injury Disability Pensions Impact of Taxation Labour market regulation Goods market regulation But charity? US inequality because of both extremes: (a) ‘The American poor are really poor’ (b) American rich are really rich Source: Alesina and Glaser, chapter 2 In general bigger government means more equality (but Italy!)

Growing inequality: some possible causes Globalisation Falling demand for unskilled labour Competition for unskilled jobs through outsourcing and/or mass immigration Sectoral and structural change Fewer well-paid male manual jobs (see ‘Full Monty’ film) Service sector more polarised than manufacturing industry Mass unemployment New impact of women’s labour force participation Earnings inequality within sectors Privatisation & marketisation Lower demand for unskilled Winner takes all job market’ Managers able to demand higher ‘remuneration’ especially in financial services Political Tax cuts and changes benefit rich Reduced income support and welfare Decline of trade unions The big difference between the USA and Europe seems to be political

Impact of crisis Percentage point change in the Gini coefficient at disposable and market incomes between 2007 and 2010 Crisis increases market income inequality Transfers reduce this increase Solid bar: Disposable income inequality. Diamond: Market inequality Source: OECD, Society at a Glance 2014

Does it matter? A moral issue? An efficiency issue? A universal issue Extremes of rich and poor are wrong An efficiency issue? Too much equality reduces growth? Or Inequality reduces growth? A universal issue Inequality is bad for everyone, including the rich Wilkinson & Pickett (2009), The Spirit Level: Why more equal societies almost always do better