In this blog I would like to explain the trends in income inequality over the last decades. Before we start analyzing what happened in the last decade we need to understand how to measure or which coefficient describes income inequality. There are many different methods to measure, but I am going to use the most common Gini coefficient. The well known coefficient, named after and developed by Italian statistician and sociologist Corrado Gini, deserves at least a short definition to make it clear to all of readers of this blog. The coefficient measures the distribution of income and shows us the inequality of disposal incomes. The coefficient ranges from 0 to 1. The value 0 refers to a perfect equality, what means that everybody gets the same share of income and 1 refers to an opposite, when all income goes to the population or person with the highest income.
Gini coefficient of income inequality, mid 1980s and late 2000s
The graph reflects the ongoing increase of income inequality in most of the countries till the beginning of financial crisis. Why did that happen? To be accurate, the real disposal incomes increased by 1,7 % a year in average, but the increase was higher in the richer population than the poorer, so the inequality is higher. There are different factors that influence income inequality such as economic development, demographic (e.g. aging), political, cultural and environmental, then macroeconomic factors. As from public economic point of view I will go further and look at why income taxes and benefit systems become less effective in redistribution of income. The less effectiveness is clearly visible in the growth of Gini coefficient in the Nordic countries where the redistribution of income is really high. Now, let us go through three instruments which are crucial for cash redistribution. The redistributions were led mainly by benefits which over time lost their progressivity. The increased benefits, which started to support more out-of-work population caused that more unemployed people chose to use the benefits instead of working which rose the gap between the richest and the poorest population and increased income inequality. The next instrument is social contribution which has minor effect on income inequality. The last instrument is the income tax. Its redistribution was cancelled by using two opposite effects, lower income taxes and more progressive taxation. To sum up, the income inequality will probably increase more as the redistribution instruments are less effective and it is expected that the income of richer people will rise faster than the poorer ones.
Kaasa, A. (n.d.). Factors of inequality and their influence mechanisms:a theoretical overview. Retrieved from http://www.mtk.ut.ee/orb…/febawb40.pdf
OECD. (n.d.). An overview of growing income inequalities in OECD countries: Main findings. Retrieved from http://www.oecd.org/els/soc/49499779.pdf