Characteristics of Inequalities in Europe: Context and Policies

Conchita D’AmbrosioUniversité du Luxembourg

The questions

• What Europe’s particularities are when it comes to equity and equity-focused policies: are they similar or different from the issues confronted by other regions?

• How does Europe respond to inequality?

• How does Europe talk about equity and inequality? Are there similarities/differences in the terminology it employs?

• What can the global “South” learn from Europe?

What Europe’s particularities

Europe is different from the “South”.

Most of EU countries developed considerably after WW2, extended their welfare states, highly progressive personal income taxation.

It is highly affected by the recent economic crisis (high levels of unemployment, especially youth unemployment).

Union of relatively similar countries but also quite dissimilar.

One central bank, one monetary policy but many local governments, many social policies.

Different approach for social policy targets (no Maastricht).

Data: Gini in 2010

Association between inequality and GDP

History and past levels of inequality

Income inequality in most EU countries is significantly higher than thirty years ago (Atkinson, 2013).

The EU as a whole has failed to make a significant reduction in the proportion of its citizens living at risk of poverty.

Top income shares are growing in many countries.

However, it has not always been so.

One possibility is to use a weighted average of different aggregates.

The economic policies of the years of declining inequality

• Tax and transfer policy. Highly progressive personal income taxes. Progressive taxes on wealth, or on the transfer of wealth via inheritance.

• Expansion of the welfare state (let those at the bottom share).

• Labour market interventions (minimum wage).

• High regulation of capital markets

The following years

Many countries rolled back their welfare state and reduced redistribution.

This general trend has been documented by the OECD in their reports Growing Unequal (OECD, 2008) and Divided We Stand (OECD, 2011).

As summarised by the Secretary-General of OECD, ―from the mid-1990s … the reduced redistributive capacity of tax-benefit systems was sometimes the main source of widening household-income gaps (OECD, 2011).

The following years

It was a different environment:

Rising income inequality was also due to skilled-biased technical change: high demand for skilled workers, relative earnings of the latter increased.

Globalization also played a role: relative price of goods produced mainly by unskilled workers decreased, their wages decreased.

The following years

Atkinson (2013) highlights the continued decline in the share of income that accrues to labour.

“The part of added value allocated to labour reached a historically low level in 2006. This trend is in particular the result of technological progress and globalisation. It may have a negative impact on social equity, economic efficiency and macro-economic stability” (Summary of chapter in Employment in Europe 2007, European Commission 2007).

Rising profit share, which also goes “not to the ultimate holders but in management fees and other payment to financial services” (Atkinson, 2013).

Solution

Policies against increase in inequality include:

• Education and training;• Smart growth;• More redistribution;• Rises in top income rates;• Inheritance taxes;• Ownership of capital (e.g. child trust fund in UK);• EU-wide unemployment benefit;• EU-child benefits, EU basic income for children.

How does EU respond to inequality: Europe 2020

Europe 2020 is the EU's growth strategy for the coming decade.

We want the EU to become a smart, sustainable and inclusive economy.

These three mutually reinforcing priorities should help the EU and the Member States deliver high levels of employment, productivity and social cohesion.

How does EU respond to inequality; Europe 2020

The Union has set five ambitious objectives - on employment, innovation, education, social inclusion and climate/energy - to be reached by 2020.

Each Member State has adopted its own national targets in each of these areas.

Concrete actions at EU and national levels underpin the strategy.

The 5 targets for the EU in 2020

1. Employment

75% of the 20-64 year-olds to be employed

2. R&D / innovation

3% of the EU's GDP (public and private combined) to be invested in R&D/innovation

3. Climate change / energy

greenhouse gas emissions 20% (or even 30%, if the conditions are right) lower than 1990

20% of energy from renewables

20% increase in energy efficiency

4. Education

Reducing school drop-out rates below 10%

at least 40% of 30-34–year-olds completing third level education

5. Poverty / social exclusion

at least 20 million fewer people in or at risk of poverty and social exclusion

EU terms

Social exclusion and material deprivation

What can the global “South” learn from EU?

Smart growth

Smart growth means improving the performance in:• education (encouraging people to learn, study and update their skills)• research/innovation (creating new products/services that generate growth

and jobs and help address social challenges). Renewable energy.• digital society (using information and communication technologies)

Inclusive growth

Inclusive growth means:• raising employment rate – more and better jobs, especially for women,

young people and older workers• helping people of all ages anticipate and manage change through

investment in skills & training • modernising labour markets and welfare systems• ensuring the benefits of growth reach all parts of the EU