Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Reckoning With Inequality

Jeffrey Frankel 23rd March 2016

Jeffrey Frankel

Jeffrey Frankel

When it comes to the rise in economic inequality since the 1970s in the United States and some other advanced economies, it doesn’t really matter which measure of income distribution we choose: They all show the increase. And, while many competing explanations have been proposed, we do not need to agree about causes to concur on sensible policies to address the problem.

There are many ways to measure inequality. Each can tell us something different. Many Asian countries’ recent economic success has reduced inequality by some measures (for example, a big fall in the poverty rate), but not by others (the high-low range has increased). In the US, however, all measures of inequality have pointed in the same direction since the turn of the century, reflecting the fact that the benefits of economic growth have gone almost exclusively to those at the top. The share of income received by the top 0.5% has reached 14%, where it was in the 1920s.

Normally, one would think that diagnosing the cause of such a fundamental shift would be a necessary step in prescribing a cure. In that case, one might be discouraged by the over-abundance of plausible explanations that have been offered and the difficulty in choosing among them.

Thomas Piketty’s Capital in the Twenty-First Century emphasizes what he sees as a very long-term trend arising from a high return to capital, which causes inherited wealth to accumulate at a faster rate than earned income grows. Piketty’s book, published in 2013, did much to put inequality back on the agenda of American economists. But most researchers believe that the sources of widening US inequality lie primarily within earned income, rather than arising from the difference between earned income (wages and salaries) and unearned income (return on capital).

The first explanation for earned-income inequality is technological change, which raises the demand for skilled workers faster than the supply. But, while this can explain a widening wage or income gap between skilled and “unskilled” workers (defined according to whether they are college-educated), this has little to do with the gap between the top 1% and the rest.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

The second explanation is what is called “assortative mating,” according to which highly accomplished professional men no longer marry their secretaries, but instead choose highly accomplished professional women.

The third is the winner-take-all character of many professions, from dentists to university professors to movie stars. Because modern media tell us who is the best dentist in town or the best movie actor in the world, relatively small differences in abilities win far bigger differences in income than they used to.

According to the fourth explanation, the very high compensation of corporate executives, especially in the financial sector, is not a return to services that are in demand because they are socially valuable (like having gone to medical school or having been born with acting talent). Rather, managers essentially get to set the terms of their own pay, through compensation packages that reflect failures of corporate governance, tax law, and financial engineering. Stock options, for example, have failed in their original goal of relating pay to performance.

Finally, an especially popular explanation is that the rich have captured the levers of power, through campaign donations. The politicians they finance are only too eager to enact favorable policies.

But many policy prescriptions to ameliorate inequality apply regardless of the cause. Most would make the tax system more progressive, by, for example, lowering the effective marginal tax rate for low-income workers – what US President Barack Obama has called “making work pay.”


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Enhancing the earned-income tax credit is a live option today, and Obama proposed in his January 2016 State of the Union address expanding wage insurance, which currently helps workers who lose their jobs because of trade but could be extended to those who lose their jobs due to technological change. Similarly, the payroll tax for low-income workers could be eliminated.

In light of looming deficits for America’s Social Security and Medicare programs, such changes in the tax code should ideally be revenue-neutral. The Republican candidates for president this year, as usual, propose massive tax cuts, focused on the rich, without a plan for how to pay for them.

The US can raise additional revenue with which to address inequality in fiscally responsible ways. The tax break for “carried interest,” by which hedge-fund managers’ income is taxed at low capital-gains rates, should be abolished (as Democratic presidential candidate Hillary Clinton favors), and the exemption for the estate tax (originally expanded by George W. Bush) could be reduced. At the same time, the cap on payroll taxes for upper-income workers could be raised, and distorting tax deductions, like that for mortgage interest, could be tightened for upper-income households.

A lot should be done on the spending side, too. Examples include universal high-quality preschool, health insurance for all, and infrastructure spending.

Many of those who are upset about inequality are attracted to the banner of Bernie Sanders (or that of Donald Trump). Many believe that one must break up banks in order to address the root cause of the problem, which is thought to be that the rich have “bought” politicians.

Money in politics is indeed a big problem. But what do politicians use all that money for? It doesn’t go into their pockets (at least not in the US). It goes to running for office: campaign advertisements and mobilizing supporters. In my view, voting for candidates who will enact the right policies is a far more direct strategy for addressing inequality – and much else – than voting for those who want to break up the banks to reduce the amount of money available to dissuade voters from supporting the right candidates.

© Project Syndicate

Jeffrey Frankel

Jeffrey Frankel is Harpel Professor at Harvard University’s Kennedy School of Government. He directs the program in International Finance and Macroeconomics at the National Bureau of Economic Research, where he is also on the Business Cycle Dating Committee, which officially declares U.S. recessions. Professor Frankel served on President Clinton’s Council of Economic Advisers (1996-99); his responsibilities as Member included macroeconomics, international economics, and the environment.

Home ・ Politics ・ Reckoning With Inequality

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Sakharov,nuclear,Khrushchev Unhappy birthday, Andrei SakharovNina L Khrushcheva
Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube