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

2. 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).

3. 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

4. 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?

5. 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

6. Growing inequality

7. 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

8. Gross and net income inequality
Everywhere state reduces income inequality

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

10. 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.

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

12. 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?

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

14. 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!)

15. 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

16. 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

17. 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