How to Tackle Rising Inequalities in Europe?

www.madariaga.org
How to Tackle Rising
Inequalities in Europe?
Madariaga Report – 14 June 2012
After decades of unequal growth, the European response to the crisis – focused only
on budgetary discipline and enhancing competitiveness – is likely to increase
inequalities even more. Is it possible to get out of the paradigm of a trade-off
between competitiveness and social justice? How can the EU make itself relevant
and what kind of social dimension should be added to the economic governance
architecture? What role should be played by tax redistribution and which role by
structural policies of social inclusion?
A Citizen’s Controversy with
Ana Llena-Nozal,
Economist, OECD.
Wojtek Kalinowski,
Director, Veblen Institute for Economic Reform.
Moderated by:
Pierre Defraigne
Executive Director, Madariaga – College of Europe Foundation.
Reporter : Chiara Galluccio
14, Avenue de la Joyeuse Entrée
B-1040, Brussels, Belgium
Tel: +32 2 209 62 10
E-mail: [email protected]
Ana Llena-Nozal started
by explaining the main
findings of the OECD’s
Report ‘Divided We Stand:
Why Inequality Keeps
Rising’1, which analyses
how inequalities among the
working-age population
have developed over the
long-term up to the recent
“Great Recession”.
Firstly, even if the 2008 crisis might have a huge
impact on income inequality, inequality raised in
17 out of 24 OECD Member States despite
employment growth in the two decades up until
the recession. The increase hit both traditionally
high income-inequality countries such as the US,
and low income-inequality ones, such as
Scandinavian countries.
Inequalities rose mainly due to the sharp increase
in the top 10% of best paid workers, while the
10% of lowest paid worker incomes stagnated.
This phenomenon was particularly acute in the
English speaking countries.
According to the data, the impact of income
taxes and the benefits system on income
inequalities reduces the latter by about one
quarter. But the effectiveness of this
redistribution mechanism has weakened over time
– indeed, from a 50% reduction over the period
from the mid-1980s to the mid-2000s, it only
contributes presently to a 20% reduction of
income inequalities.
Indeed, while the overall redistribution has
increased, this was not enough to offset growing
market-income inequality. This is explained by the
fact that changes in overall redistribution were
1
For more information, see:
www.oecd.org/document/10/0,3746,en_2649_33933_49147
827_1_1_1_1,00.html
1
mainly driven by benefits, and those became more
redistributive during the 1990s but less effective
since spending shifted from benefits targeted at
low-income working people towards ‘inactive’
benefits (early retirement, disability, etc.).
Secondly, Llena-Nozal analysed the potential
impact of the crisis and the consequent austerity
measures on inequalities. Incomes at the top of
the matrix will suffer due to a decline in both
stock prices and interest rates. Moreover,
because of the increasing unemployment rates,
there might be a growing gap between the
incomes of the unemployed labour force and
working households. In this regard, there might be
household coping strategies – such as young
people returning to live with their parents, or
women increasing their working hours.
The report shows that the distributional impact
depends on the tax-benefit policy mix. More
specifically, tax and social contribution changes
affect higher incomes more, while changes to
benefits and pensions hit those on low incomes.
Austerity measures have different
consequenc
es. For
instance,
while the
impact of
progressive
pay cuts on
the public
sector
affected
more
households
at the top of
the
distribution
matrix, the increased value added tax (VAT)
affects the lowest segment of the income matrix
disproportionately.
“...both
redistribution
and inclusive
employment
policies are
crucial and
complementary.”
| Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012)
It should be noted that even if the economic crisis
and the austerity measures have led, in some
cases, to lower household income levels,
inequalities have increased little in several
countries because of the injection of stimulus
packages in initial years. However, previous
recessions have increased inequality because of
the employment divide between the rich and poor,
and further tax-benefit changes could increase the
cost of austerity to low-income groups.
To conclude, Llena-Nozal outlined the suitable
policies that should be put in place in order to
effectively reduce inequalities and promote
economic recovery, underlining that both
redistribution and inclusive employment
policies are crucial and complementary. These
measures focus on tax and benefit reforms,
employment measures and education policies.
Regarding tax and benefit reforms she underlined
the relevance of government transfers in
safeguarding
low-income
households.
Furthermore, income support needs to be properly
targeted and designed in order to prevent losses
among low-income earners during the period of
2
fiscal consolidation.
Llena-Nozal explained that the guarantee to
equal access to high-quality public services
should be implemented, and the increased “tax
capacity” among top-income households should
be taken into account – which does not
automatically mean an increase in marginal
personal income tax rates – particularly with
regard to the improvement of tax compliance, the
elimination of tax deductions and tax reassessment on all forms of property and wealth.
Concerning employment, more jobs can clearly
lead to sustainable cuts in inequality, provided
that employment gains occur in jobs that offer
career prospects. Labour market reforms should
be aimed at addressing segmentation, which
implies tackling inequalities between standard
and non-standard employment, and access to
2
employment should be facilitated for underrepresented groups (youth, young mothers,
elderly, migrants, etc).
Finally, education policies are vital to
addressing inequalities in a sustainable and
lasting way. These measures should focus on
investing in human capital and promoting upskilling of the workforce; investing from early
childhood through formal education and work in
order to ensure equality of opportunity for
children from disadvantaged backgrounds; better
job-related training and education for the lowskilled through incentive measures; and equal
access to formal education over the working life.
***
Wojtek Kalinowski initially specified that even if
he agrees with Ana Llena-Nozal’s factual analysis,
and with most of her final recommendations,
issues such as the financial difficulties of investing
in education in the current austerity framework, as
well as the trade-off between taxation and
private consumption, still remain open.
Reconciling these objectives gets more difficult as
we proceed to concrete policy recommendations.
One key entering point into
the debate about
inequalities concerns social
mobility, which is at the
heart of the “economy of
trust” in our societies.
Data show that social
mobility indicators,
meaning the probability
that children will have a
different life pattern (professionally, socially, etc.)
compared to their parents, is much higher in
Scandinavian countries compared to continental
Europe and still much higher than in the US.
But the Scandinavian model should not be
idealised. Indeed, there are alarming changes in
terms of growing inequalities even in these
| Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012)
societies. Furthermore, the present positive figures
in terms of social mobility are the result of
policies put in place in the 1970s, and the current
policy evolution in Northern countries suggests
a shift towards less social mobility in the future.
It is thus essential to use a relative scale of
comparison in order to avoid a distorted
comparison among countries.
The historical evolution of the welfare state
model is very instructive too, remarked
Kalinowski, particularly concerning income
distribution, the organisational patterns aimed at
providing public goods and social services, the
rationale behind the taxation system and labour
market regulation.
Kalinowski then analysed the sustainability
issue, which has been addressed exclusively
through the technological dimension technology is too often considered as the only
suitable tool to solve the sustainability issues -,
whereas, in his opinion, technological progress
will not achieve our sustainability objectives such
as low-emission economy, etc. We need a deeper
social transformation of our societies, our ways of
life and our culture, and this shift needs in turn
more equality-oriented policies.
As argued by Tim Jackson in his book Prosperity
Without Growth: Economics for a Finite Planet,
material growth cannot be decoupled from
monetary growth, especially if we look at it from
the point of view of the global economy. This idea
should seriously be taken into consideration since,
historically, inequalities have been justified by
“trickle-down” economics which has been and
still is a very powerful narrative. “Trickle-down”
economics is based on the assumption that letting
rich people getting richer – which implies highincome tax cuts – would generate wealth that
would somehow trickle-down the ladder to the rest
of society. Facts testify that this narrative does not
coincide with the economic reality. Indeed, after
3
the financial crisis, the link between rising
3
inequalities, financial instability and economic
crisis appeared blatant.
“Trickle-down” economics was supported in the
early 1960s by political neoconservative thinkers
in the US, who relied on a vision of unlimited
growth and on a promise of accumulation of
material well-being. It should be noted,
Kalinowski stated, that this belief in growth was
shared by thinkers on both the Left and the
Right and was considered as the precondition for
social well-being and political stability.
The main challenge today is to put the economy
on a more sustainable pattern. Factually there
are physical limits to growth regardless of the
ideological debate “for or against growth”.
Alternative scenarios to the ‘infinite growth’
myth lie in new lifestyles. The most
unsustainable lifestyles are founded at the (very)
top and the very bottom of the income matrix, and
that is the reason why the sustainable agenda
needs more equal societies. Clearly this implies
more sacrifices and the crucial question is how
these sacrifices will be shared within societies. It
should be noted that there is no blueprint for the
sustainable agenda and solutions will follow
different patterns according to specific features
and circumstances of any given country.
Concerning the labour market, Kalinowski
remarked that different kinds of reforms were
started some 20-30 years ago; they all aimed at
inclusiveness and full employment, but today we
witness the outcome, which is the exact opposite.
Indeed, the labour market is currently
characterised by a strong polarisation with
high-quality jobs and career patterns on the one
side, and low-skilled and precarious jobs and
permanent exclusion the other. Moreover, this
polarisation has led to the ‘diploma inflation’
phenomena in many countries – such as France –,
which is fuelled by fierce competition among
potential workers.
| Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012)
“Alternative
scenarios to the
‘infinite growth’
myth lie in new
lifestyles.”
Measures to
address this
problem have
been put in
place, such as
social
investment in
human capital
– which is
clearly vital to
upgrade
workers skills as well as to develop their aptitude
to adapt to labour market evolutions.
But, as a matter of fact, labour market policies
failed to achieve these objectives because of the
neoliberal dogma based on infinite growth through
the supply side. This model is obviously
unsustainable because of physical limits to growth
and demographic pressure.
Kalinowski concluded by insisting on the fact that
to effectively address rising inequalities, lifestyles
must change in our societies. This implies, for
instance, work sharing programs and rebalancing
work and leisure in order to successfully achieve
the transition from “job societies” –
characterised by labour market polarisation and
consumerist behaviour during spare time – to
“work societies”– where leisure time would be
spent, among other things, on socially productive
activities which would strengthen human
cooperative interaction and solidarity.
***
ve to enhance unemployed worker skills
through training workshops has been blocked
by a government which has threatened local
authorities to cut their social benefit spending.
Another participant asked about the causes of
the crisis by highlighting that the public deficit
is a consequence rather than a cause, and it was
then stated that tackling growing inequalities is
an effective tool to address the public deficit
issue. Another participant criticised the OECD
analysis of income distribution since it is biased
by the fact that the highest 1% of income is not
submitted to taxation.
Ana Llena-Nozal firstly remarked that there is a
lack of long-term historical data concerning the
evolution of inequalities and major economic
crises across different countries. In most OECD
countries overall inequalities have increased over
the past 15 years, but the top-income share has
deeply decreased since the beginning of the 21st
century, and particularly after the Great
Depression.
Concerning the causes of the crisis, evidence so
far is mixed and the debate is still ongoing. In the
US, for example, the sharp increase in inequalities
encouraged households in the lowest segment of
the income distribution scale to borrow beyond
their means. But this logic does not necessarily
apply to other OECD countries. Previously the
debate focused on what extent the crisis has
fuelled inequalities, but the debate is now actually
reversing to ask what extent growing inequalities
may cause an economic crisis.
DISCUSSION
4
4
During the discussion the audience raised the
issue of the historical evolution of economic
recessions and inequalities. A participant
underlined the existing clash between
institutional solutions (tax and welfare) and
creative initiatives; he illustrated this clash with
the ‘Manchester episode’, where a local initiati-
Regarding the link between inequalities and public
deficits, she underlined the fact that the two issues
are not antagonist and can be addressed
simultaneously. The reason why many countries
are focused on reducing their deficits relates to the
evidence presented by prominent economists that
favour the consolidation of public finances as a
precondition for economic revival. But recent
| Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012)
studies, from the IMF and the International
Labour Organisation for instance, argue that
exclusively concentrating on deficit and public
debt reduction may slow down economic recovery
because of the lack of investment and job creation,
and the consequent revenue decrease which in turn
increases the deficit. Indeed, the sustainability
issue means a critical trade-off between investing
in the future and creating more and better jobs on
the one hand, and the deficit spending policies
which generate huge indebtedness for the future
generations on the other hand.
Wojtek Kalinowski first recalled that fighting
inequalities does not exclusively mean pulling
people out of poverty, but also encouraging the
effective promotion of equal opportunities to
access education and work.
4
He then illustrated effective policies aimed at
decreasing inequalities with the concrete example
of Sweden. Indeed, in the 1960e and 1970s
massive governmental investments – which
essentially covered the entire population of
children in Sweden – have been dedicated to
childcare and have allowed Sweden to tackle
educational inequalities.
Regarding the sustainability agenda, a track could
be to complement national monetary policies with
local initiatives aimed at social inclusiveness.
During the second round of questions the
audience raised the issue of inequalities and
primary needs (food, housing); the role of the
territorial dimension in reducing social
inequalities; and the link between economic
growth, rising inequalities and democracy –
since, factually, active political participation is
inversely proportional to income shares. Finally
a participant raised the demographic dimension,
underlining that intergenerational inequalities
are rising too. Indeed, poor young people – who
contribute to decreasing birth rates in our socie-
5
ties – oppose increasing elder retired. This
demographic imbalance creates a vicious circle
that weakens economic recovery and
strengthens intergenerational tensions.
Llena-Nozal specified that while in the majority
of OECD countries governments are concerned
about growing inequalities, and that they are
working on solutions to address this issue, the so
called BRIC countries have to face other concerns.
Indeed, the BRIC countries are focusing on
economic growth as the main instrument to
address poverty and to promote economic and
social development.
Regarding inequalities and primary needs, she
highlighted the fact that poverty is a very different
issue compared to inequality. In several countries
outside the OECD, and particularly in Latin
America and in Asia, governments have put in
place policies to address poverty without taking
into account the inequality dimension. The result
has been an increasing amount of people have
escaped poverty – that is to say that these people
were able to meet their basic needs, which
corresponds essentially to being able to eat
properly – but simultaneously, inequality
increases in these countries. An exception is
Brazil, where efforts have successfully been made
to address inequalities, but it is important to
underline that the Brazilian government firstly
focused on poverty reduction and secondly has
been able to tackle inequalities.
Llena-Nozal also insisted on the fact that to tackle
skills mismatches, evident in many OECD country
labour markets, reform of education systems as
well as promoting vocational training are urgently
needed.
With regard to the inequality dimension beyond
the simple income disparity among the richest and
poorest, Llena-Nozal explained that the gender
wage gap has historically decreased; particularly
| Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012)
during the 1960s and 1970s when education
improved for women. But this gap is still a reality
today and it is not just about wage differences, but
also and especially about employment rate
differences between men and women.
Concerning the intergenerational solidarity,
benefit distribution shows that most of the
expenditures are indeed devoted to financing
pensions rather than to households and children.
This is a major question in terms of
intergenerational inequalities, particularly because
some OECD countries have reformed their
pension systems – through, for instance,
increasing the retirement age and not necessarily
by diminishing benefits for retired people – but,
simultaneously, the austerity measures have
touched more families and children rather than
retired workers.
Kalinowski focused on sustainable ways of living
and underlined that emerging economies – such as
China – are facing significant negative
consequences in terms of pollution and
environmental degradation because they are
adopting the lifestyles of advanced countries.
Europe should be a pioneer in inventing a
sustainable and enjoyable new way of life. In this
regard, new forms of wealth and happiness
measurements are being proposed; they should be
encouraged because the sole GDP is not a suitable
indicator anymore, since it neither takes into
account the environment dimension nor the
personal fulfilment dimension.
***
________________________________________
OTHER REPORTS
Une zone euro forte pour un euro
fort?
Madariaga Report, 14 October 2011
How can the eurozone
definitively preserve its
17 economies from
speculation on their
sovereign debt? How
can it get out of debt and
return to growth by
betting on a more
equitable distribution,
rather than on a social
and fiscal race to the
bottom
among
its
Member States? What
are the necessary and
feasible
institutional
changes to provide the eurozone with a real political
underpinning?
A
Citizen's
Controversy
with
Philippe
Maystadt, President of the European Investment Bank
(EIB), and Christian Saint-Etienne, Chair Professor
of Industrial Economics at the Conservatoire national
des Arts et Métiers, Paris.
________________________________________
He also insisted on the fact that local authorities
play a major role in actively tackling inequalities
by promoting innovative social policies and by
providing essential public social services, but
there is no ‘one size fits all solution’ so each local
reality should elaborate its own pattern.
5
Finally, concerning intergenerational tensions, he
suggested new forms of time organisation such as
‘work sharing’ or social activities that would
benefit both the volunteers and the recipients.
6
| Madariaga Report – How to Tackle Rising Inequalities in Europe? (14 Jun 2012)
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