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Scotland's Inequality Trends and Policy Responses
- 1. Inequality in Scotland David Bell and David Eiser 15 October 2014
- 2. Changing Understanding of Inequality • The neo-liberal view – Kuznets Curve - as an economy develops, a natural cycle of inequality occurs, driven by market forces. These initially increase inequality, and then decrease it. – “Trickle down” economics – those at the bottom of the income distribution benefit from gains made at the top (Okun’s “leaky bucket”) • Growing opposition … – The Spirit Level: Wilkinson and Pickett • More equal societies have better economic, social and health outcomes – Capital in the 21st Century: Picketty • increasing inequality of income and wealth since 1970s, particularly • returns from capital are likely to grow faster than the economy itself, and faster than the owners of that wealth are likely to be able to spend it – Some industries (e.g. financial services) able to capture rents, increasing top-end incomes
- 3. Changing Views of Inequality • There is now widespread acceptance that current levels of inequality are excessive (IMF/World Bank/ILO) • Instrumental arguments in favour of containing/reducing it – health inequalities, equality of opportunity, • e.g. Ostry, Berg and Tsangarides (2014) - IMF – “it is an empirical question whether redistribution in practice is pro- or anti-growth” – “more unequal societies tend to redistribute more” – “lower net inequality is robustly correlated with faster and more durable growth, for a given level of redistribution” – “redistribution appears generally benign in terms of its impact on growth; only in extreme cases is there some evidence that it may have direct negative effects on growth”
- 4. Changing Policy Environment • IMF (2013): ‘higher inequality seems to lower growth’ • OECD (2011): ‘inequality can stifle social mobility, making it harder for talented and hard-working people to get the rewards they deserve’. • Scottish Government (2013): ‘Scotland is currently part of a UK economic model and society which is one of the most unequal in the OECD. Such patterns of inequality will continue to have a negative impact on growth and prosperity over the long-term.’
- 5. Thinking about the determinants of inequality • Economic forces – Globalisation – Technological change • Intended redistributive policy actions – Tax and benefits • Unintended consequences of policy – Regulation – Prices • Forthcoming paper - Inequality in Scotland: New Perspectives by David Bell, David Eiser and Mike McGoldrick - published at www.davidhumeinstitute.com on Monday 20 October
- 6. Measuring Inequality in Scotland • Wealth or Income? – Before taxes and benefits (gross) – After taxes and benefits (net) • Individual or Household? – Affected by housing market/household formation • Time period? – Hourly/Weekly/Annual/Lifetime
- 7. Ratio measures of inequality: Scotland, 2012/13
- 8. Another approach – Lorenz Curve/Gini Coefficient Top2% account for 12% of earnings Gini Coefficient proportional to area under 45 degree line Gini (earned income Scot = 0.4) Bottom 34% account for 12% of earnings
- 9. Earnings inequality in Scotland: rapid increase during 1980s, slower since then
- 11. Rise of the top 1-2%
- 12. Earnings inequality: drivers • 1980s and early 1990s: – Deindustrialisation and technological change: ‘hollowing out’ of labour market – Financial deregulation – Labour market deregulation and TU decline, particularly in private sector – Reduction in top tax rates • Late 1990s and since: – Continuing technological change and globalisation – Introduction of minimum wage – moderating rise – Increase in PT and temporary working, zero-hours contracts, underemployment – Increase in self-employment – Relatively poor performance of young in labour markets
- 13. Big rise in household inequality occurred in 1980s; inequality in Scotland similar to rest of GB outside London…
- 14. International comparisons: inequality of household net income high in UK…. 0.5 UK 29th out of 34 OECD Countries by Gini Coefficient of Equivalised Household Disposable Income Source: OECD 23/7/2014 0 0.1 0.2 0.3 0.4 0.6 Slovenia Norway Iceland Denmark Czech Republic Finland Slovak Republic Belgium Sweden Luxembourg Netherlands Austria Switzerland Hungary Germany Ireland Poland France RGB Korea Canada Italy Scotland Estonia New Zealand Australia Greece Japan Portugal Spain United Kingdom Israel United States London Turkey Mexico Chile Gini Coefficient
- 15. International comparisons: gross income inequality in UK very high, but tax-benefit system fairly redistributive 0 10 20 30 40 50 60 70 KOR SWIT US ISR CAN AUS NLD NZD ICE JPN POL EST ESP SWE NOR SLK DEN POR UK ITA GRE CZE LUX FRA GER SLO AUT BEL FIN IRE Gini coefficient Net GINI Redistribution
- 16. Another perspective on redistribution in the UK…
- 17. The great Gatsby curve…
- 18. Inequality: policy responses • Personal taxation and benefits – Income tax, property tax, capital gains, IHT, etc. – Benefits: low-income, out-of-work benefits, pensions, etc. • Labour market regulation – E.g. min/living wage, TUs and collective bargaining, ‘flexibility’ e.g. zero-hours contracts, etc. • Increased ‘in-kind’ spending – Education: Attainment gap and inter-generational inequality – Health: close link between income and health inequalities
- 19. How effective might fiscal policy be in influencing net income inequality in an independent Scotland? Change GINI Total govt. revenue implication (£m) 1p on basic rate -0.15% 239 1p on higher rate -0.07% 4 1p on SRIT (basic, higher, additional) -0.24% 232 Additional rate threshold reduced to £100,000 -0.12% -26 Increase rates of IS/ JSA by 10% -0.15% -50 Council tax revaluation -0.02% 5 Council tax rise of 10% 0.03% 137 Increase basic and 30-hour elements of WTC 10% -0.07% -61
- 20. How would a living wage effect inequality?
- 21. Distributional effects of living wage across households
- 22. Conclusions (1) • Inequality skews opportunity and limits intergenerational mobility • Rapid increase in earnings inequality in 80s: tech. change, industrial decline, labour market deregulation • Slower increase during late 90s and 2000s, mainly driven by changes in distribution of hours worked… • …but continued pulling away of highest earners • Overall household net income inequality largely unchanged since mid-1990s – tax/benefit system has mitigated small increase in earnings inequality • Inequality in Scotland very similar to rGB/rUK excluding London
- 23. Conclusions (2) • Inequality in UK remains high, but other countries ‘caught-up’ slightly in the 1990s and early 2000s • Inequality is higher in Scotland than in Nordic countries not because the UK’s tax and benefit system is much less redistributive than the Nordics, but because the inequality of market (pre tax and transfer) incomes is higher in Scotland • Fiscal policy levers can help address inequality, but unlikely in themselves to be a panacea • Achieving Nordic levels of inequality would require a shift not only in the tax and benefit system, but also in the distribution of market incomes • Inequality outlook uncertain: – Welfare reform – Computerisation and demand for skills
- 24. Thanks for your attention • Further material: – Bell, D.N.F. and Eiser, D. (2013) ‘Inequality in Scotland: trends, drivers, and implications for the independence debate’ – Eiser, D. and Comerford, D. (2013) ‘Constitutional change and inequality in Scotland ‘ – Eiser, D. ‘Inequality’ in ‘The Economic Consequences of Scottish Independence’ Beckmann, K., Bell, D.N.F. and Eiser, D. (eds), Helmut- SchmidtUniversität / Universität der Bundeswehr , Hamburg
Editor's Notes
- Chart shows weekly earnings inequality.
- An individual in top 1% now earns 20 times more than someone in bottom 1%, compared to 17 times in 1997. Individual in top 1% now earns 6 times more than median, compared to 5 times in 1997. But bottom 1% has slightly closed gap to median (3.6 to 3.2).
- Small changes to tax/ benefit policy unlikely to have major impacts on net income inequality; need a 5 pp decrease in GINI to reach Nordic levels
- Living wage reduces overall inequality, but increases gap between median and lower half of the income distribution