Brian Nolan, Professor of Social Policy and Director, Equity Employment and Growth Research Programme, University of Oxford
The idea is now commonplace that income inequality is inexorably on the rise.
The US experience in particular has become central to a new grand narrative prominent in public debate and taken to apply across rich countries: globalisation and technological change have polarised society into a small elite with highly paid, secure jobs on one side, and on the other side are growing numbers of people, including an increasingly “squeezed” middle class, in insecure, poorly-paid work.
This growing inequality is held responsible for a wide range of social and political ills. Not least the erosion of solidarity, social trust and faith in democratic institutions. And, politically, it caused the election of Donald Trump, the UK’s Brexit vote, and the broad rise of populism seen as threatening democracy.
This “grand narrative” undoubtedly captures important aspects of the US experience. But it does not represent the whole picture. And as far as other rich countries are concerned, examining the evidence highlights the diversity of their experiences over recent decades. As I’ve found in my research, this story is more often than not a poor fit for various countries around the world.
Different experiences
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. The following graph shows what has happened to the Gini coefficient, the most commonly-used indicator of income inequality. Inequality did not rise everywhere and, where it did, the scale of that increase varied widely. Countries such as the UK and Sweden did see inequality go up as sharply as the US. But for others the increase was often much more modest and even decreased for some.
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 in the 1990s, and these contained “episodes”, rather than continuous rises, are also common elsewhere. Tax data show pre-tax income shares at the very top increasing in many countries, but again this varies widely across countries.
When it comes to ordinary living standards, middle class income growth has been even more varied. The next chart shows that middle incomes have stagnated in purchasing power terms since the early 1980s in Japan and Italy, as well as the US, and grown only modestly in Germany. But these are the poorest performers.
The UK, for example, saw substantial income growth around the middle from the late 1980s up to the mid-2000s, in sharp contrast to its lack of growth since then. Countries such as Australia, Belgium, Canada, Denmark, Finland and Sweden also saw periods of quite strong growth.
Crucially, across rich countries the relationship between inequality and middle income growth is weak – throwing into question the link that gets made between the so-called squeezed middle and populism.
Middle incomes have generally lagged behind growth in GDP per head but again to widely varying extents, and rising income inequality is only one factor. Knowing what happened to inequality in a given country would have been of little help in predicting whether growth in middle incomes was strong or weak.
Not just the economy
The extent to which rising inequality and stagnating living standards over decades have driven the recent rise in populism across the rich countries is also open to question. Yes, the white working class population whose livelihoods have been hurt through decades of manufacturing decline provided the core constituency supporting Trump for president.
But economic dysfunction combines with cultural and demographic factors in a way that makes them very hard to disentangle.
The fact that support for populist parties has risen in countries where inequality has been fairly stable over time (such as Austria and France), as well as ones where inequality has risen, and in countries where income growth has been quite robust (such as Poland), as well as ones where median incomes have stagnated (such as Hungary), illustrates the complexity of the factors at work.
Read more: Inequality in the OECD is at a record high – and society is suffering as a result
The evidence does suggest that economic insecurity has been a significant driver of votes for populist parties. And this may exacerbate negative attitudes toward immigration, which also play a key role in support for populist parties. But this may also reflect the continuing impact of the 2007-08 financial crisis and ensuing recession as much as longer-term trends and is not confined to countries where inequality has risen strongly in the longer term.
The US context is thus a very particular one, with only limited lessons for other rich countries. No single narrative can do justice to each one’s varied experiences. And losing sight of the complexity at play is hazardous in terms of both understanding and responding to the specific challenges each one faces.
Stagnating wages and rising inequality share some common roots. So some of the policies required to effectively address inequality would also boost incomes for ordinary households.
But the case for tackling inequality should not be reduced to such simple terms, pushing fundamental concerns about fairness and social justice into the background.
While common forces such as the advance of AI and robots will continue to play out across rich countries, as in recent decades, the way they do so will depend on the institutions in place and the policies adopted there.
“One size fits all” solutions, such as universal basic income, turn out to mean very different things depending on the structure and generosity of the welfare system that it would be replacing. While there is scope to learn from experiences elsewhere, each country will have to find its own road to salvation in tackling inequality and promoting inclusive growth. – The Conversation