In tackling the problem of income inequality, while rich countries can learn from each other, there isn’t a one-size-fits-all solution.
Income inequality in the United States has risen dramatically since the late 1970s, with the share of total income going to the top 1 percent doubling, while real wages and household incomes for most others have stagnated, despite reasonably strong economic growth. This is central to a “grand narrative” of inequality now prominent in commentary and public debate, and believed to apply across most of the world’s rich countries. However, the reality is not so simple – nor is finding solutions to the challenges of income inequality.
The grand narrative sees inequality rising inexorably, and this inequality is blamed for long-term stagnation in living standards for ordinary working families and a “middle-class squeeze.” It also identifies globalization and technological change as key drivers, polarizing the labour market into a small, cognitive elite with secure, well-rewarded jobs versus everyone else, who have insecure poorly paid work, and opportunities are choked off. This toxic combination, then, is held responsible for a wide range of social and political ills; not least, the erosion of solidarity, social trust, faith in democratic institutions; and politically, the election of US President Donald Trump, the UK’s Brexit vote, and the broad rise of populism, which is seen as a threat to democracy.
This grand narrative undoubtedly captures important aspects of the US experience, although even there it doesn’t represent the whole picture. Furthermore, as far as other rich countries are concerned, the evidence highlights the diversity of their experiences in recent decades, making the grand narrative a rather poor fit.
Household surveys show that income inequality has risen significantly since the 1980s in about two-thirds of the rich countries of the OECD, leaving one-third where it has not risen significantly. Figure 1 shows what has happened to the Gini coefficient, the most commonly used summary indicator of income inequality, since the 1980s and early 1990s: inequality did not rise everywhere, and where it did, the scale of that increase varied widely. Countries such as the UK and Sweden saw inequality go up as sharply, as did the US, but for others, the increase was often much more modest. Inequality rose decade by decade in the US, but the UK’s increase was mostly concentrated in the Thatcher years of the 1980s; Sweden’s came in the 1990s and in discrete episodes, rather than the continuous rises seen elsewhere. Tax data show pretax income shares at the very top increasing in many countries, but again, this varies widely across countries.
Turning to ordinary living standards, the experience with respect to income growth around the mid-point of the income range has been even more varied. Figure 2 shows that incomes in this income range indeed stagnated in purchasing power terms since the early 1980s in Japan, Italy and the US, and grew only modestly in Germany. However, these countries were the poorest performers: the UK, for example, saw substantial income growth from the late 1980s until the mid-2000s, and its growth has declined since then. Countries such as Australia, Belgium, Canada, Denmark, Finland and Sweden also saw periods of quite strong growth.
Crucially, in the period since 1980 across the rich countries the relationship between trends in inequality and in income growth around the middle is weak. Middle incomes have generally lagged behind growth in GDP per capita, but again, the extent varies among countries. Rising income inequality was only one contributing factor. Therefore, knowing what happened to inequality in a given country would have been of little help in predicting the pace of growth in middle incomes.
How far rising inequality and stagnating living standards over the past four decades has been driving the recent rise in populism across the rich countries is also open to question. In the US, what has been described as a “retro reaction by once-predominant sectors to progressive value change,” has also been important. The white working-class population whose livelihoods have been negatively affected through decades of manufacturing decline are the core constituency of support for Donald Trump, but economic dysfunction combines with cultural and demographic factors in a way that makes them very hard to disentangle. Similarly, the complexity of factors is evident elsewhere: for example, support for populist parties has risen in Austria and France, where inequality has been fairly stable over time, as well as in countries where inequality has increased. It has also risen in countries where income growth has been quite robust, such as Poland, as well as ones where median incomes have stagnated, such as Hungary.
The evidence does suggest that economic insecurity has been a significant driver of the recent “demand” for populism (in terms of voting preferences), and this insecurity may exacerbate negative attitudes toward immigration, also a key part of support for populist parties. This may, however, reflect the continuing impact of the Great Recession as much as it does longer-term trends, and it is not confined to countries where inequality has risen significantly in the longer term.
The US context is thus a very particular one, and it has only limited lessons for other rich countries. Experiences, contexts, and challenges vary across the rich countries to such a degree that no single narrative does them justice. Losing sight of this complexity is hazardous, in terms of both understanding and responding to those challenges.
Stagnating wages and rising inequality share some common roots, and some of the policies required to effectively address inequality, such as strengthening wages and the bargaining power of labour and reinforcing redistributive capacity, would also enhance income growth for ordinary households: in that sense, there is scope for a “double dividend.” However, the case for tackling inequality should not be reduced to this purely instrumental one, pushing fundamental concerns about fairness and social justice into the background.
The often discussed one-size-fits-all solutions to inequality, such as a universal basic income, on closer examination turn out to mean very different things, depending on the structure and generosity of the income-support system that they would replace. While there is scope for learning from each other, every country will have to find its own road to salvation in tackling inequality and promoting inclusive growth.
This article is part of the Ensuring inclusive prosperity when all boats aren’t being lifted special feature.
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