Economic and social drivers

of rising inequality in Europe

Mario Pianta Università di Urbino

LUISS workshop, Rome, 30 September 2016

1. Trends

Times of extreme inequality

Worldwide: 2016 the richest 1% of the world

may own the same wealth of all the other

human beings (Oxfam 2015)

Lower disparities among country averages

When the relevance of the incomes of the

richest 1% is considered, inequality has

increased in spite of higher average income in

(highly unequal) emerging countries such as

China and India (Anand and Segal, 2014).

The economics of inequality Need for a comprehensive view of distribution

and inequality in the economic system,

considering all relations, at diff. levels:

Functional distribution of income between

profits and wages

Within profits: financial rents, retained profits,

dividends, who gets them?

Within wages: how equal?Top managers’”wages”

How these incomes reach individuals: personal

distribution of income, resulting inequality

50,0

52,0

54,0

56,0

58,0

60,0

62,0

64,0

66,0

68,0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Germany

France

Italy

United Kingdom

United States

Japan

Labour income share, 1991-2013 Wage share of GDP adjusted for the income of the self-employed

(compensation per employee as a percentage of GDP at market prices per person employed).

Data from European Commission AMECO database, from: ILO Global Wage Report 2014/15, p.11

10%

15%

20%

25%

30%

35%

40%

1975

1976

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

United States

Japan

Germany

France

United Kingdom

Italy

The capital share in advanced countries, 1975-2010 Adapted from Piketty (2013), Figure 6.5, p.351.

For sources and data see piketty.pse.ens.fr/capital21c

100

102

104

106

108

110

112

114

116

118

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Labour productivity index

Real wage index

Growth of labour productivity and average wages Wage growth is calculated as a weighted average of year-on-year growth in average monthly real wages

in 36 economies. Index is based to 1999 because of data availability.

Data from ILO Global Wage Database; ILO Trends Econometric Model.

From: ILO Global Wage Report 2014/15, p.8.

25%

30%

35%

40%

45%

50%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Europe

The share of income of the richest 10% in the US and Europe Adapted from Piketty (2013), Figure 9.8, p.514.

For sources and data see piketty.pse.ens.fr/capital21c

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

France Germany Netherlands Sweden Italy UK US

1980 1990 2000 2010

The top 1% income share in advanced countries, 1980-2010 Calculations on data from the World Top Income Database

http://topincomes.parisschoolofeconomics.eu/

Personal distribution of income Data from household surveys, sources: OECD,

the World Bank, WIDER, Luxembourg Income

Study, etc

gross incomes reach individuals as market

outcomes;

they become disposable income (in cash) after

taxes and benefits;

they become extended disposable income if

we add the value of non-cash, in-kind services

0,3

0,35

0,4

0,45

0,5

0,55

France Germany Netherlands Denmark Sweden Italy UK US

1985 1995 2010

Gini index of inequality in household market incomes, 1985-2010 Gini index on equivalised household market incomes.

Calculations on OECD data, http://www.oecd.org/social/income-distribution-database.htm

0,15

0,2

0,25

0,3

0,35

0,4

France Germany Netherlands Denmark Sweden Italy UK US

1985 1995 2010

Gini index of inequality in household disposable incomes Gini index on equivalised household disposable incomes, after taxes and monetary transfers.

Calculations on OECD data, http://www.oecd.org/social/income-distribution-database.htm

0,000

0,050

0,100

0,150

0,200

0,250

0,300

0,350

0,400

France Germany Netherlands Denmark Sweden Italy United Kingdom

United States

Cash Extended income

Gini index of inequality in cash disposable incomes

and in extended income considering public services, 2007 Gini index on equivalised household market incomes (after taxes and monetary transfers)

and on extended income (including the value of public services obtained).

Adapted from OECD (2011), data from http://www.oecd.org/social/income-distribution-database.htm

Mirko Armiento

What about wellbeing? A monetary alternative to GDP:

The Sustainable Welfare Index for Italy, 1960-2013

GDP and Sustainable Welfare Index per capita,

Italy, 1960-2013

2. Explanations

Four engines of inequality

The power of capital over labour

Oligarchs capitalism

Individualisation of economic conditions

The retreat of politics

INCOME DISTRIBUTIONENGINES OF INEQUALITY

POWEROF CAPITALOVER LABOUR

OLIGARCHSCAPITALISM

INDIVIDUALIS.OF ECONOMICCONDITIONS

RETREAT OFPOLITICS

FinanceLab. ctrlTechnol.Globalis.

Positionsof rents

MORE PROFITS

LESS WAGES(excludingtop managers)

HIGHERFINANCIALRENTS

LOWERRETURNS OFPRODUCTION

MORE DISPARITIESBETW. WAGES

POLICIES FAVOURING MARKET INEQUALITYLESS REDISTRIBUTIONTHROUGH POLICIES, TAXES, PUBLIC EXPEND.

MORE INEQUALITY

TOP 10%RISE OF TOPINCOMES

BOTTOM 90%INCOME FALL,MORE DISPAR.

Greaterinheritance,interg. ineq

The four engines of inequality and

their impact on income distribution

THE DYNAMICS OF CAPITAL

MORE PROFITSLESS WAGES

THE DYNAMICS OF INCOME

LESSCONSUMPT.

MORE ACCUMUL. OF FINANCIALWEALTH

LOWER PROD.INVESTMENT

LOWERDEMAND

LOWER GDPGROWTH (g)

HIGH RETURNSTO FINANCIAL WEALTH

LESS ACCUMUL. OF PRODUCTIVECAPITAL

MEDIUMRETURNS TOPRODUCT. CAPITAL

HIGH RETURNSTO CAPITAL (r)

r > g

SPECULATIVEBUBBLES, INSTABILITY

SLOWER IMPROV.OF PRODUCTIONEFFICIENCY

Cyclical crisesmay destroy

capital

MOREINEQUALITY

Risingratiototal capital/income

What for prod. capital?

How canhigh returns be

sustained?

The dynamics of income and

the dynamics of productive and financial capital

Which are the causes of inequality?

IMF (Dabla-Norris et al., 2015), OECD 2011,2015

Finance, trade, technology, skill premium,

education, labour flexibility, union power,

institutions

Weak explanations

What are the deeper, fundamental sources of

inequality?

Piketty “Capital in the XXI century ‘Fundamental laws of capitalism’:

rise of the capital/income ratio (β)

high rate of return to capital (r)

rise of the capital share (α = profits/income)

α = r·β, ‘first law of capitalism’.

slow down in income growth (g), due to

stagnation in population and slow rise of

productivity, with stable propensity to save (s)

β = s/g, ‘second law of capitalism’.

100%

200%

300%

400%

500%

600%

700%

800%

1970 1975 1980 1985 1990 1995 2000 2005 2010

Va

lue

of p

riva

te c

ap

ita

l (%

na

tio

na

l in

co

me

)

Private capital is worth between 2 and 3.5 years of national income in rich countries in 1970, and between 4 and 7 years of national income in 2010. Sources and series: see piketty.pse.ens.fr/capital21c.

Figure 5.3. Private capital in rich countries, 1970-2010

U.S. Japan

Germany France

U.K. Italy

Canada Australia

Piketty’s returns on capital

Returns to capital are greater than the rate

of growth (r > g).

rate of return on capital close to 5%, while

GDP growth rates in advanced countries < 2%.

Avg rate of return to capital (net of the effort to

manage investment) 4-5% 1770-1930, 7% in

1940, falling to 3% in 1980-1990

The implications of r>g If at least some of the returns to capital are

invested to expand it, the accumulation of

capital is faster than growth, resulting in

growing capital/income ratios.

The amount of profits paid to capital has to

increase; a growing share of income has to go

to capital,

Higher inequalities are therefore the result

of the importance of capital and the

slowdown of growth.

THE DYNAMICS OF CAPITAL

MORE PROFITSLESS WAGES

THE DYNAMICS OF INCOME

LESSCONSUMPT.

MORE ACCUMUL. OF FINANCIALWEALTH

LOWER PROD.INVESTMENT

LOWERDEMAND

LOWER GDPGROWTH (g)

HIGH RETURNSTO FINANCIAL WEALTH

LESS ACCUMUL. OF PRODUCTIVECAPITAL

MEDIUMRETURNS TOPRODUCT. CAPITAL

HIGH RETURNSTO CAPITAL (r)

r > g

SPECULATIVEBUBBLES, INSTABILITY

SLOWER IMPROV.OF PRODUCTIONEFFICIENCY

Cyclical crisesmay destroy

capital

MOREINEQUALITY

Risingratiototal capital/income

What for prod. capital?

How canhigh returns be

sustained?

The dynamics of income and

the dynamics of productive and financial capital

INCOME DISTRIBUTIONENGINES OF INEQUALITY

POWEROF CAPITALOVER LABOUR

OLIGARCHSCAPITALISM

INDIVIDUALIS.OF ECONOMICCONDITIONS

RETREAT OFPOLITICS

FinanceLab. ctrlTechnol.Globalis.

Positionsof rents

MORE PROFITS

LESS WAGES(excludingtop managers)

HIGHERFINANCIALRENTS

LOWERRETURNS OFPRODUCTION

MORE DISPARITIESBETW. WAGES

POLICIES FAVOURING MARKET INEQUALITYLESS REDISTRIBUTIONTHROUGH POLICIES, TAXES, PUBLIC EXPEND.

MORE INEQUALITY

TOP 10%RISE OF TOPINCOMES

BOTTOM 90%INCOME FALL,MORE DISPAR.

Greaterinheritance,interg. ineq

The four engines of inequality and

their impact on income distribution

1. The power of capital over labour

10-15% of GDP moved from labour to capital

The power of finance

Control over labour

Technological change

International production

Power of finance By 1990 liberalisation of capital movements, surge

of capital flows for FDI, financial assets, etc.

US: ratio of profits of the financial sector to profits

of non-financial activities has increased from 20%

in the 1970s to 50% after 2000 (Glyn, 2006, ch.3).

Complex markets for credit, stocks, bonds, real

estate, currencies, futures, commodities,

derivatives, driven by short-term speculative gains

Major bubbles, collapse of 2008, instability

Benefits go to top 1-10%

Piketty on finance Financial assets grow much faster than wealth.

Sum of financial assets and liabilities was equal

to 4-5 years of income in the 1970s; in 2010 is

between 10 and 15 years in the US, France,

Germany and Japan, 20 years in the UK (p.305).

Ratio between market value and book value of

corporations: end of 1970s was 30-50%; in 2010

is close to 120% in the UK, 100% in the US,

80% in France (Germany, Japan 50%) (p.297).

Control over labour 2012 OECD Employment Outlook: lower labour

share is the result of labour-displacing techn.

change, rise of competition, delocalisation and

imports, reduction of public ownership. These

“could be partly explained by their effect on

workers bargaining power”(p.111).

Reduced coverage of collective bargaining

systems, lower role and membership of trade

unions; All this “probably explains part of the

deterioration of low-skilled workers’ position”

(ibid.).

Wage disparities Stronger unions lead to lower inequalities

within wages and in the economy as a whole

OECD “In it together” (2015): weaker labour

market institutions lead to rise in wage

inequality “declining union coverage has a

disequalising effect on the wage distribution”

“high union density and bargaining coverage,

and the centralisation/co-ordination of wage

bargaining tend to go hand in hand with lower

overall wage inequality”(p. 42)

Non standard jobs OECD: Rise of non-standard jobs that “can

also be associated with precariousness and

poorer labour conditions”, they pay less and

lack “empl. protection, safeguards and fringe

benefits”. “Earning gaps are especially wide

among low-skill, low-paid workers: non-

standard workers in the bottom 40% of earners

typically suffer wage penalties of 20%”

More insecurity risk of job loss, strain

“Labour flexibility benefits the rich” IMF study (Dabla-Norris et al., 2015) shows

that a decline in organised labour institutions is

associated to higher inequality (Gini) “likely

reflecting the fact that labor market flexibility

benefits the rich and reduces the bargaining

power of lower-income workers”. “More lax

hiring and firing regulations, lower minimum

wages relative to the median wage, and less

prevalent collective bargaining and trade

unions are associated to higher market

inequality” (p.26).

Technological change

Skill biased technological change

ICTs, greater demand for skills, higher wages

for educated workers, lower demand for

unskilled workers, more wage inequality

Associated to trade and offshoring effects

Need for more detailed analysis of technology

(process vs. product), of its distribution effects

on profits, wages, of skills (professional groups,

tasks), different mechanisms for diff. skills, etc.

International production Richard Freeman (2009): globalisation doubled

the labour force available in the world, lowered

the capital/labour ratio, greater (relative) scarcity

of capital, resulting in higher profits and lower

wages. Increasing trade, greater openness lead to

greater inequalities within countries.

Jobs transferred to emerging countries (with low

wages, weak unions, regulation, etc.), lower

demand for labour, lower wages, more inequality

Offshoring and profits (Milberg,Winkler, 2013).

2. Oligarchs capitalism Today’s inequality is due to the rise of top

incomes –1% or 5% of the population

Low income/social mobility: education has

little effect on incomes, incomes and

education are affected by parents’ conditions

Strong trasmission of inequality from one

generation to the next

Strong importance of inheritance in wealth

inequality

87,593,3 90,5 91,2

96,890,0 88,0

12,56,7 9,5 8,8

3,210,0 12,0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

France Germany Netherlands Denmark Sweden Italy UK

"Within" inequality "Between" inequality

The importance of education on inequality in earnings, 2006

Three educational groups; inequality measured by mean log. deviation,

decomposed between the (small) share between educational groups

and (large) share due to disparities within each educational group

Franzini and Raitano (2015), data from EU-SILC survey (2007).

Earning disparities depends on: Role of education (limited)

Structural specificities of jobs (industry, firm,

capital available, professional group, etc);

Type of labour contract, job protection etc.

Personal, family-related characteristics of

individual workers.

-5%

0%

5%

10%

15%

20%

25%

30%

Germany France Spain Italy UK Ireland Denmark Finland

White-collar's offspring Manager's offspring

Inequality in earnings. Earnings gaps for children of managers

and white collars with respect to children of blue-collar workers

Estimated coefficients from OLS model. Franzini and Raitano (2015),

data from EU-SILC 2005 survey.

0%

20%

40%

60%

80%

100%

120%

140%

Germany France Spain Italy UK Ireland Denmark Finland

White-collar's offspring Manager's offspring

Inequality in education. Probability of attaining a university degree

for children of managers and white collars with respect to

children of blue-collar workers (avg. partial effects from logit model)

Franzini and Raitano (2015), data from EU-SILC 2005 survey

0,00

0,10

0,20

0,30

0,40

0,50

0,60

β coefficient of intergenerational elasticity; with a value of 1,

inequality among the new generation is the same as in the old

Corak (2013)

0,20

0,25

0,30

0,35

0,40

0,45

0,10 0,15 0,20 0,25 0,30 0,35 0,40 0,45 0,50 0,55

US

UK

ItalySwitzerland

France

Spain

Japan

Germany

Sweden

New Zealand

Australia

Canada

Denmark

Finland

Norway

Degree of intergenerational transmission

Gini index ondisposableincome

The reproduction of inequalities “Great Gatsby curve” (Corak,2013, Krueger,2012).

30%

40%

50%

60%

70%

80%

90%

100%

1850 1870 1890 1910 1930 1950 1970 1990 2010 2030 2050 2070 2090

Cu

mu

late

d v

alu

e o

f in

he

rite

dd

we

alth

(%

to

tal w

ealth

of th

e liv

ing

)

Taking into account capitalized inherited wealth increases the inheritance share; PPVR definition (capitalized income in the limit of the current wealth) limits this effect. Sources and series: see piketty.pse.ens.fr/capital21c

Figure S11.4. Share of inherited wealth in total wealth, France 1850-2100 (2010-2100: g=1,0%, r=5,0%)

Partially capitalized inherited wealth(PPVR definition)

Non capitalized inheritance (Modigliani)

3. Individualisation of

economic conditions Unequal condition among workers

Education and family background

Dynamics pointed out above on labour changes

ILO report: “over 6 out of 10 wage and salaried

workers worldwide are in either part-time or

temporary work.Women are disproportionately

represented (ILO, 2015, p.13). This has lasting

effects on lifetime incomes and pensions,

expanding disparities at the bottom

Individualism rules? Deep diffusion of individualism in

neoliberalism:

strong individual identity not linked to

collective ones, weak social bonds

behaviour, work, incentives based on

individual attitudes, less room for coll.

contracts, solidarity

disparities become more

“acceptable”/justified

4. The retreat of politics

Less public activities

More markets producing profits and unequal

outcomes

More liberalisation, more finance

More deregulation, more profits

Less taxes, expend. and redistribution

(see presentation 5)

Policies for reducing inequality

a. Rebalancing capital-labour relations

b. Stopping oligarchs capitalism

c. Reducing individualisation of economic

conditions

d. A return to policies of effective

redistribution

Are policies on inequality possible?

The rich vs democracy

The policy process is increasingly influenced

by the élite interests

Politics and parties rely on funds from the rich

and corporations (US in particular)

Int’l pressure and power of financial market

make it difficult to change policy (Greece)

Hollowing out of democracy?

OECD 2015 “In it together” “rising inequality is bad for long-term growth”

“structural policies are needed, but have to be

carefully designed and complemented by

measures that promote a better distribution of

the growth dividends (p.22).

IMF 2015 “lower net inequality is robustly correlated with

faster and more durable growth” “redistribution

appears generally benign in terms of its impact

on growth” (Ostry et al., 2014, p.4).

“if the income share of the top 20% (the rich)

increases, then GDP growth actually declines

over the medium term” (Dabla-Norris et al,

2015, p.4)

decline of unionisation is a major factor in rising

income inequality (Jaumotte and Osorio Buitron,

2015).

Policies for reducing inequality, 1 policies on each engine of inequality

a. Rebalancing capital-labour relations

Regulation and downsizing of finance

Limiting positions of rent

A fair distribution of the benefits of technology

and productivity

An effective minimum wage and greater role of

national labour contracts

Policies, 2 b. Stopping oligarchs capitalism

Controlling top incomes

A high inheritance tax

c. Reducing individualisation of economic

conditions

Reducing the fragmentation of employment

contracts

Strengthening an egalitarian public education

Policies, 3

d. A return to policies of effective

redistribution

International and national taxation of

wealth

Greater progressivity of the personal

income tax

A minimum income

Progressive tax on income

In the UK before Thatcher in 1979 the top

rate was 83%; in the US the top rate was 91%

until 1963, and 70% until 1980. Need to close

loopholes and deductions for the rich.