Public policy and European society
University of Castellanza
Session 3(a)
Inequality
in Europe and the USA
March 28 2014
Outline

Inequality
» Measuring
» Causes
How and why is the USA so different?
 Recent changes in Europe

Income distributions
Proportion of Population in Income Bands
USA
UK
>200
150 to 200
Sw eden
>120 to <150
>80 to <120
Italy
>50 to <80
<50%
Germany
France
0%
20%
40%
60%
Population (adult equivalent)
80%
100%
Income
distributions are
more or less
equal and have
different shapes
Growing inequality
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
» What is the income of (e.g.) the 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 within EU:
Gini coefficients mid 2000s
U
Es K
to
nia
La
t
Po via
rtu
ga
l
Sl
ov
en
Sw ia
e
De den
nm
a
Fi rk
n
Cz lan
ec d
h
Re
Au p
s
Be tria
Lu lg
xe ium
m
Ne bo
t h urg
er
lan
ds
Cy
p
Hu rus
ng
ar
Fr y
a
G nce
er
m
Lit any
hu
an
ia
M
alt
a
Sp
ai
Po n
lan
Ire d
lan
G d
re
ec
e
I
Sl t aly
ov
ak
ia
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
The Gini coefficient is the simplest measure of inequality of any distribution: 0
means total equality (everybody is equal) and 1 total inequality (1 person has
everything).
Are rich countries more equal?
Growing inequality in USA
Source: Ryscavage, p59.
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
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
And what does this say
early 1970s.
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
»

State programmes
»
»
»
»
»

Income support
Health care
Sickness and injury
Disability
Pensions
Impact of
»
»
»
»

Higher in Europe (EU15) than USA, especially on social programmes transferring to
households; US military spending far higher
Taxation
Labour market regulation
Goods market regulation
But charity?
In general bigger
government means
more equality (but
Italy!)
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
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
–
–
–
–

Earnings inequality within sectors
–
–
–
–

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
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
UK: more equal
Germany: more unequal
European convergence
Equal societies
(e.g. Sweden,
Germany) have
been getting more
unequal; but some
unequal societies
(e.g UK) have got
more equal
Impact of crisis
Crisis increases
market income
inequality
Transfers reduce
this increase
Solid bar: Disposable income inequality.
Diamond: Market inequality
Source: OECD, Society at a Glance 2013
Does it matter?

A moral 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