Economic inequality in the Netherlands in 8 figures 1 Comparedwithothercountries,income inequalityisrelativelylowintheNetherlands Economic inequality is high on the international political and academic agenda. How does the Netherlands perform in terms of economic inequality and its consequences? And what might be done to improve The degree of inequality in the income distribution – measured using the Ginicoefficient – varies widely from country to country, as figure 1 illustrates. If we look at the oecd statistics, the Netherlands occupies a middling position in Europe. It is not so unequal as the us or the uk, but is more unequal than countries which the Netherlands often regards as its ‘equals’, such as Denmark or Belgium. If we look at the most recent figures from the leading cross-national data centre Luxembourg Income Study (lis), income inequality in the Netherlands is relatively low. that performance? These questions are addressed in this factsheet in 8 figures. Figure 1: Income inequality in different countries: disposable household incomes, measured using the Gini-coefficient, 2010 Gini-coefficient oecd Gini-coefficient lis 0.40 0.35 0.30 The Netherlands Scientiļ¬c Council for Government Policy (wrr) serves as an independent advisory body for the Dutch government. Its task is to provide sound information on developments that may affect society in the long term, to identify obstacles and problems and to provide new perspectives and policy alternatives. 0.25 0.20 N or D wa en y m Fi ark nl Be and lg iu A m us Sw tria G ed N er en et m he an rl y an d Fr s an Po c e la N Ir nd ew el a Ze nd al an d It a l Ca y n A ad us a tr al i Sp a ai n u k oe u cd s -3 4 This factsheet is based on the wrr publication ‘Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid’ (‘How unequal is the Netherlands? An exploration of the development and consequences of economic inequality’), M. Kremer, M. Bovens, E. Schrijvers and R. Went (eds.). Amsterdam: aup, 2014. Translation factsheet: Julian Ross, Carlisle, uk. © wrr 2014 | Source: oecd 2013, lis (www.lisdatacenter.org) 2 But the gap between the top and bottom 10 percent is widening 3 Gross median household income is stagnating; new vulnerable groups Measured using the Gini-coefficient, income differentials in the Netherlands widened in the 1980s, after which they stabilised. One limitation of this measure of inequality is its heavy emphasis on changes around the middle. Consequently, income inequality is increasingly compared using other measures, such as the gap between the average income of the highest and lowest 10 percent of the income pyramid. According to calculations by Salverda (2014), this gap has widened in the Netherlands since 1985. The growth in this income inequality is due in part to increasing pay differentials (De Beer 2014). Developments on the labour market, such as increasing use of technology and globalisation, play a role here. These developments mean that, as in the us, gross median household income in the Netherlands, i.e. the income of most households before deduction of tax and social security contributions, is stagnating. In addition, there are new and existing categories of workers in the Netherlands who are at greater risk of ending up at the bottom of the income ladder, such as single earners and a proportion of the 800,000 self-employed workers (Salverda 2014, De Beer 2014). Figure 2: Standardised income inequality: S10-S1 ratio versus Gini-coefficient, The Netherlands, 1977=100, 1977-2011 160 Figure 3: Median gross household income in the Netherlands and the us, 1977-2012 120 140 110 120 100 100 90 S10 : S1 us Netherlands © wrr 2014 | Source: Salverda 2014, cbs 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 80 1977 1981 1985 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 80 Gini-coefficient © wrr 2014 | Source: Salverda 2014, us Census and cbs 4 Redistributionthroughtaxandsocial securitysystemlargelycompensates for(gross)incomedifferentials Figure 4 shows that, without government intervention, the Gini-coefficient in the Netherlands (in the middle of the 2000s) would have been 0.57, just as high as in the us at that time. However, thanks to the welfare state, the secondary income distribution (the distribution of net incomes) is a good deal less unequal in the Netherlands: the redistributive mechanisms of tax and social security take the Gini-coefficient in the Netherlands down to 0.33 compared with 0.42 in the us. Figure 4: Income inequality and redistribution via tax and social security in different countries, early to mid-2000s Gini-coefficient after tax and social security Gini-coefficient before tax and social security us Canada uk Ireland Australia Norway Sweden Finland Denmark Netherlands Germany Switzerland Austria Spain Japan Korea Taiwan 0.00 0.42 0.38 0.41 0.35 0.38 0.37 0.33 0.35 0.33 0.33 0.36 0.31 0.47 0.33 0.38 0.33 0.49 0.37 0.44 0.36 0.42 0.10 0.20 0.30 0.40 0.57 0.55 0.63 0.63 0.55 0.57 0.57 0.58 0.56 0.57 0.60 0.55 0.57 0.50 0.60 0.70 © wrr 2014 | Source: Cassidy 2013, Gornick, based on most recent lis datasets There has been a marked increase in this redistribution in the Netherlands in recent decades (Caminada et al. 2014). In 2012, redistribution through the tax and social security system reduced the primary income inequality by 49 percent, compared with 45 and 41 percent, respectively, in 2001 and 1990. This increase in redistribution is accounted for largely by redistribution of income among the growing group of older persons, aged over 65; the redistributive effect of the state pension system (aow) is very strong in the Netherlands. For those of working age (15-65 years), redistribution by the government has not increased in recent decades. 5 Wealth in the Netherlands: much more unequally distributed than income E co n o m i c i n e q u a l i t y concerns not just income, but also wealth. As in other countries, wealth in the Netherlands (the value of people’s assets) is more unequally distributed than income. This is illustrated in figure 5. According to this figure, the wealthiest 10 percent of the population own more than half (61 percent) of the total wealth in the Netherlands. The top 2 percent within this group actually hold no less than a third of that wealth, while the lowest 60 percent of the Dutch population together hold 1 percent (rounded off) of the total wealth. The middle groups in Dutch society have relatively little wealth, partly due to the extensive welfare state, and it is primarily the lowest decile who have debts. In international perspective, wealth inequality in the Netherlands is on the high side (Van Bavel 2014). Figure 5: Distribution of net household wealth across ten deciles (based on wealth), The Netherlands, 1 January 2012 70 61 60 percentage (%) of total wealth 50 40 30 19 20 12 7 10 -4 0 0 0 1 1 2 3 4 5 3 0 6 7 8 9 10 © wrr 2014 | Source: Van Bavel 2014, cbs 6 Social consequences of economic inequality: less social and political trust According to the now famous book The Spirit Level by Wilkinson and Pickett (2009), a high level of income inequality has negative effects for everyone, not just for the lower income groups. This is because income inequality has psychosocial effects as well as material effects. When there is pronounced inequality, people constantly compare themselves with others, giving rise to ‘social evaluation anxiety’ (see interview with Wilkinson, Kremer and Schrijvers 2014). Figure 6 shows that not all the social consequences found by Wilkinson and Pickett remain intact after extensive (European comparative) research: high income inequality does not have an immediate adverse impact on criminality or social participation, for example. High income inequality does however lead to reduced upward social mobility and less social trust: greater economic distance also implies greater social distance. Moreover, trust in political and other institutions declines across the whole population, and especially trust in constitutional democracy and parliament. It is striking to note that this process is more pronounced at the upper end of society than in the lower echelons (Van de Werfhorst 2014). Figure 6: Social and political consequences of income inequality High income inequality Views on democracy, Euroscepticism Status anxiety Political participation Mental health Social and institutional trust Psychosocial effects: trust, stress, interpersonal comparison Personal subjective well-being No robust effects: subjective health, criminality, family formation, social participation Physical complaints Social mobility Quality of housing Resources distributed more unequally among members of society © wrr 2014 | Source: Van de Werfhorst 2014 7 Economic consequences of inequality: less growth? There are indications that high economic inequality also has a negative impact on economic growth. Several mechanisms have been identified which could plausibly cause income inequality to hold back economic growth, though there is as yet no consensus on this among economists. Figure 7 contains a schematic representation of four mechanisms which are cited in the international literature as means by which high income inequality could impede economic growth. Not every mechanism necessarily has the same effect everywhere and at all times (or in the same degree), and the first two mechanisms in the figure (underconsumption and private debt) can also (temporarily) work against each other. There are also indications that lower economic growth is not conducive to stabilising or reducing income inequality, and can therefore exacerbate the effects of the four mechanisms; the dotted line in the figure refers to this process (Went 2014). Figure 7: How income inequality could hold back economic growth Underinvestment in human capital Underconsumption Private debt Political lobbies More income to the top; less propensity to consume; more luxury goods Consumption sustained despite stagnating or falling income by borrowing or addressing savings Increase in share in income of 10%, 1% (or 0.1%) Fewer resources for investments in education, own business, health Less effective demand (and innovation); greater instability Less consumption when debts are repaid or inability to borrow further and save more More resources for lobbies/donations to sustain existing situation Reduced increase in human capital Less economic growth © wrr 2014 | Source: Went 2014 Figure 8: Predistribution and redistribution Predistribution Whether economic inequality is too high or too low is a political judgement. Those wishing to reduce economic inequality generally look at redistributive instruments. According to De Beer (2014) and Salverda (2014), for example, existing policy could focus more on the needs of workers at the bottom end of the labour market, such as single earners and (some) self-employed persons, for example via an earned income tax credit. Another example is the suggestion to tax income from wealth more and income from employment less (Van Bavel 2014). However, more attention could also be devoted to ‘predistribution’: an attempt to reduce pay differentials on the labour market, rather than ‘repairing’ them afterwards through the tax and social security system. Particularly in countries with a strongly redistributive income policy, such as the Netherlands, there are grounds for asking whether it is desirable and effective to compensate even further for a skewed distribution of gross pay through the tax and social security system. Figure 4 above shows that the secondary income differentials (the amount of money people have in their wallets) are the same in Japan as in the Netherlands (both countries have a Gini coefficient of 0.33). However, the differentials in gross pay are less marked in Japan than in the Netherlands (0.49 compared with 0.57), so that less redistribution is needed. · Pay agreements · Consumer pressure · Profit-sharing at companies Redistribution · Income tax · Wealth tax · Tax credits · Social security € € € € € € € €€ Income inequality 8 Economicinequalitycanalsobe reducedthroughmorepredistribution € € € €€ €€ €€ © wrr 2014 | Source: Kremer, Bovens, Schrijvers, Went 2014 In practical terms, predistribution could be achieved through statutory pay regulations (minimum wages and capped top rates of pay) and collective bargaining negotiations (in which representatives of employers and employees play a crucial role), or by reforming companies (for example to create associations and co-operatives), or through consumer pressure (consumers could for example deliberately choose products made by companies with low pay differentials). Economic inequality is thus not only a matter for the government. References Bavel, B. van (2014) ’Vermogensongelijkheid in Nederland. De vergeten dimensie’, in M. Kremer, M. Bovens, E. Schrijvers and R. Went (eds.) Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid, Amsterdam: aup. Beer, P. de (2014) ‘Groeiende beloningsverschillen in Nederland’, in M. Kremer, M. Bovens, E. Schrijvers and R. Went (eds.) Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid, Amsterdam: aup. Caminada, K., J. Been, K. Goudswaard and M. de Graaf-Zijl (2014) De ontwikkeling van inkomensherverdeling in Nederland 1990- 2012. Department of Economics Research Memorandum 2014.02, Leiden : Leiden University. Cassidy, J. (2013) ‘American inequality in six charts’, The New Yorker. 18 November. Available on: www.newyorker.com/online/blogs/johncassidy/2013/11/inequality-and-growth-what-dowe-know.html. Kremer, M., M. Bovens, E. Schrijvers and R. Went (eds.) (2014) Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid, Amsterdam: aup. Kremer, M. and E. Schrijvers (2014) ‘Waarom inkomensongelijkheid nadelig uitpakt voor iedereen. Een gesprek met Richard Wilkinson’, in M. Kremer, M. Bovens, E. Schrijvers and R. Went (eds.) Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid, Amsterdam: aup. oecd (2013) Crisis squeezes income and puts pressure on inequality and poverty. New Results from the oecd Income Distribution Database. Paris: oecd. Salverda, W. (2014) ‘De tektoniek van de inkomensongelijkheid in Nederland’, in M. Kremer, M. Bovens, E. Schrijvers and R. Went (eds.) Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid, Amsterdam: aup. Went, R. (2014) ‘Inkomensongelijkheid en groei’, in M. Kremer, M. Bovens, E. Schrijvers and R. Went (eds.) Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid, Amsterdam: aup. Werfhorst, H. van de (2014) ‘Politieke en sociale gevolgen van inkomensongelijkheid’, in M. Kremer, M. Bovens, E. Schrijvers and R. Went (eds.) Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid, Amsterdam: aup. Wilkinson, R. and K. Pickett (2009) The Spirit Level. Why Equality is Better for Everyone. London: Pinguin Books. wrr | Buitenhof 34 | P.O. Box 20004 | 2500 EA The Hague | The Netherlands | Tel. +31 70 356 46 00 | www.wrr.nl