In Episode 1 of Series one of the Dial podcast, Prof. Dr. Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys at the University of Munich discusses the DIAL Working Paper, Measuring unfair inequality: reconciling equality of opportunity and freedom from poverty.
Christine Garrington 0:03
Welcome to DIAL a podcast where we tune into evidence on inequality over the lifecourse in today’s episode we are asking should we be measuring income inequality differently. I am joined by Andreas Peichl Director of the ifo Center for Macroeconomics and Surveys at the University of Munich, who as part of NORFACE funded research has developed a new measure that could change the way we think about who owns what and help policy makers looking to tackle income inequality.
Andreas Peichl 0:30
Typically inequality measurement or the way inequality is measured is comparing the actual the observed distribution of some outcome – let’s say income or wealth – and compared to some norm or reference distribution and in the standard approach of measuring inequality this reference distribution is perfect equality. The assumption is that the perfect state of the world would be when everybody earns the same income or everybody has exactly the same wealth. When you look in the philosophical literature this is not the case that perfect equality is seen as desired objective for society because they might be reason why someone should earn more than someone else. For example if you are working much harder, working longer hours and put in more effort then philosophers and also people, if you ask people on the streets they would say that someone who is working more and putting in more effort should deserve to earn more. So that’s why we though okay so if we measure inequality always against the benchmark of perfectly quality then we are somehow missing out what people are thinking about distributive justice or how you should perceive inequality. That’s why we thought we should as well as the measure of what we call fair and unfair inequality. There are some inequalities which are fair because they are due to different levels of effort people working harder and then there are inequalities which are unfair.
Christine Garrington 2:03
Indeed, that brings me quite nicely onto the second question about the fact that you have sort of explained it in a way that many of us really do think of inequality as being intrinsically unfair but you are sort of arguing aren’t you that it is not bad per se. So tell us a bit more about your thinking behind that.
Andreas Peichl 2:21
Everybody is different. We have different preferences and we behave differently and that’s why we shouldn’t have at the end all the same outcomes. Some of us would like to work some others don’t like to work, but enjoy more leisure and in the end if you would make everybody equal, and then that would be perfect equality, not only in terms of income but then we should also make everybody equal in all other dimensions and that would be a very boring world if everybody were the same. When thinking about income or inequality in incomes, the question is okay where, what is basically the reason for this inequality? Is it something which society thinks is fair society thinks is unfair. And of course you could argue all income inequalities are unfair and if this is your normative prior, then this is fine and then you should use the standard approach. So we’re not saying that this is wrong but if we look in surveys and where we ask people about their preferences for redistribution or distributive justice. People allow for some, some differences in incomes, if it’s due to effort. What people object is if people earn more for reasons beyond their control and so if it’s for example, due to parental background or race or gender. So if, if I’m earning more because I’m a white male coming from a rich household then this is seen as unfair. Whereas, when working or earning more because I’m working harder and then this is seen as fair.
Christine Garrington 3:58
That’s really interesting and what you’re looking to do is try to reconcile what you describe as two different prominent fairness principles into this new measure of unfair inequality that you’re going to explain to us. Can you explain what those two prominent fairness principles are and why you think they’re important.
Andreas Peichl 4:15
Yeah, so why do we think they are important before talking about them is because that’s sort of the two most prominent ones coming out of this, these questionnaire surveys and also that they are widely discussed in the philosophical literature and that’s why we thought, okay, would be interesting to combine those and there are separate literatures on both. So the first principle is equality of opportunity and the second principle is freedom from poverty. Equality of opportunity they are in the philosophical literature different versions of it but the basic concept is to say okay income differences can be differentiated into what is coming from these effort variables and the other part which is coming from, what is called circumstances – factors beyond your control, like your parental background. And then equality of opportunity is a concept of saying, okay, how would you evaluate a given distribution, knowing that you have these different income differences and then they’re in what’s called in the literature, different compensation and reward principles that can get very technical and complicated. The basic idea again is that inequalities due to these effort variables, these responsibility variables they are fair and equalities due to circumstances, inequalities due to circumstances are unfair. So people would say, okay, in general we agree to this but people also agree to a different statement which is basically that no one in a society should live in absolute need or absolute poverty so there should be a minimum subsistence level, where everybody at least that everybody can make ends meet somehow or at least can survive, but that’s also when you look at that welfare state, what happens. Of course, depending on the country but you have the Nordic countries in Europe where you have a very large welfare state or continental Europe and even in the US where you have a smaller welfare state you have something like food stamps are something which is helping the poor at least to survive. In that case you don’t care whether someone is poor because of his own choices or own effort, or because of circumstances. If someone is poor, you will help them, and in something in one way or another. And that’s sort of combining these two principles.
Christine Garrington 6:41
It’s fascinating stuff and you mentioned the USA, a few moments ago, and you’ve used the measure to look at the development of inequality over time. In the US, what do you find?
Andreas Peichl 6:51
inequality in the US, increased starting in the late 70s, early 80s and it continues to increase until today, more or less, and when we look at this measure of unfair inequality take this into account, you see that this unfair bit of inequality started to increase a bit later on in the 1990s. So, if this, if you take this at face value it will say okay the increases in inequality in the 80s, they were fair. There were reductions in marginal tax rates and maybe because of this people work harder and work more. And because of this, we saw some increases in inequality, but it was due to higher effort, but in the in the 90s the increases in inequality that we see they, they were coming mostly to the more unfair part. And so maybe because this more unfair part started to increase that’s also the reason why people got more concerned about it but that’s, of course, just speculation but I think it’s very interesting if you, if you see these results and compare it with also what was going on in these times and in the debate.
Christine Garrington 7:59
Yeah, what do we learn to think from the use of your measure, compared with that of total inequality?
Andreas Peichl 8:05
We see that is in our measure that the increase in this unfair part of the inequality that that really starts only in the 90s not already seen in the late 70s early 80s. Now, one could use this measure, for example, to relate it to political outcomes for example to, to the polarisation of political votes and more populist extreme voting outcomes. I mean we’ve seen in the US we now have a populist President there and that might be the consequence of this increasing unfair inequality. We also did a country ranking in the paper for European countries but you could also put the US in there, the unfair bit in the US is relatively high compared to other European countries. And that might be the reason why people are very unhappy and this led to the political outcomes that we have now.
Christine Garrington 9:01
Yeah, very interesting in it. Tell us a bit more about that comparison of countries in in Europe, the US aside, what do you see there and what’s different there?
Andreas Peichl 9:12
In general it comes out that Nordic countries and continental European countries are seen as or according to this data as much fairer than Southern European and Eastern European countries for the baseline measure in the paper it’s the Netherlands that it comes out the best whether the unfair bit of inequality is the lowest and Italy and two other Eastern European countries. These countries where the unfair bit is the highest and then you can look at these different countries and the contribution of these different components. One example country is Sweden where this inequality of opportunity that is very low so we know from other studies just on equality of opportunity that Sweden is typically the country that is seen as the country with the most opportunities, but if you add this freedom from poverty together then Sweden is not the best country anymore but only around ranked 10th or so because the poverty bit in Sweden quite high. These rankings are different compared to just using one of these measures or one of these principles and I think that it’s also important, it’s not that you can just do one of these things it’s really the combination that matters.
Christine Garrington 10:21
In public discourse I think it’s fair to say, isn’t it, that you know around income inequality there’s very often a major focus on those people earning the most money but your research seems to suggest that focus should be shifted somewhat. Can you explain a bit about where it should be shifted to and why?
Andreas Peichl 10:40
In a way, it’s a salient coup for two reasons. One is in terms of inequality measurements of the work by Thomas Piketty and Emmanuel Saez using tax return data and looking at the income trends of the top 1% for example. That’s relatively easy to measure in the data and it’s easy to communicate. The share of total income going to the top, the richest 1% that’s relatively easy to communicate. Trying to communicate our measure is much much more complicated so that’s, I think that’s why one of these focuses there but that’s also we see a huge increase especially in the US, and also in the UK in the share of income going to the top 1%, but this is not true overall in, in many other European countries, this share did not increase much or it’s relatively stable. If we were to say it’s only the income share of the top 1% that matters for unfairness you wouldn’t see any unfairness in many countries, especially those that come out as relatively unfair. In our European comparison there are many countries where this is income share of the top 1% didn’t really increase a lot in the last 20 years. Our point is that this unfairness is especially important at the bottom of the distribution because we use freedom from poverty as one of the normative criteria to evaluate an income distribution, and there are many countries where there’s a lot of poverty and this, I mean if you take this into account and, sort of, by definition, you get higher values of inequality or unfair inequality, just focusing on the rich is making the implicit assumption that all income going to the very rich that’s per se unfair, and which doesn’t have to be the case at least according to our approach.
Christine Garrington 12:35
This research is part of a wider project, looking at the links between our childhood circumstances and how we get on much later in life. What more can we look forward to from your team?
Andreas Peichl 12:43
The general idea is to specifically look at these different normative foundations have different ways of measuring so this equality of opportunity or unfair inequality intergenerational mobility and how these, these different approaches and concepts are linked and or how they how they could be linked, and also looking at different ways of measuring inequality and so we try to come up with some new theoretical concepts of how to measure inequality or how to reconcile existing approaches, and then to be able to use these to tell stories about what happens over the lifecourse where our big inequalities where maybe smaller inequalities which of these inequalities are fair? And how does this differ across countries? And ideally we also want to say something about policy reforms so there will be all these countries that we are looking at there were different types of reforms – labour market reforms, education reforms and so on. To see how these reforms impacted inequalities. That could be very interesting and hopefully also very policy relevant for policymakers, that are thinking about these reforms or maybe changing some of these promises.
Christine Garrington 14:02
“Measuring unfair inequality: reconciling equality of opportunity and freedom from poverty” is a working paper available for download at www.dynamicsofinequality.org, where you can also find details of all the DIAL research projects. Thanks for listening to this episode of our podcast, which is presented and produced by Chris Garrington, edited by Elina Kilpi-Jakonen