What to do about rising inequality

Monday, 2 June, 2014
An EU-funded study has resulted in the most comprehensive picture yet of the widening income gap across Europe between top earners and other workers – and how it affects societies. It will help policymakers make informed decisions on how best to reduce the gap – and support those who are falling behind.
Is growing income inequality in Europe a problem? Yes, say researchers for the EU-funded GINI project, who have the data on earnings and incomes over the 30 years to 2010 showing the rich are getting wealthier and the rest are falling behind.

In countries with higher income inequality the poor tend to be less politically involved – meaning their interests are not well represented in democratic decision making, the researchers found. Meanwhile, increasing income for a few and greater concentration of wealth in their hands means more political influence for the rich.

Reducing the gap through better tax and income support policies would help ensure everyone can participate in society, the researchers conclude. They propose changes to minimum wage rules, higher taxes on top wage earners, more tax benefits for those earning less, and binding EU targets on poverty reduction.

“The research shows that the best performers among rich countries in terms of employment, economic and social cohesion have in common a large welfare state that invests in people,” says GINI project coordinator Wiemer Salverda of the University of Amsterdam. “This continues to offer the best prospect for rich countries pursuing growth with equality.”

Ways to reduce inequality

GINI recommendations are based on what Salverda says is the most comprehensive database currently available on income inequality, with analysis of its impacts in 25 EU countries (Cyprus, Malta and Croatia are not included), the US, Canada, Japan, South Korea and Australia.

Around 200 researchers working as local teams in each country collected and analysed data from 1980 to 2010 on such measures as income, health and educational attainment, social cohesion and inclusion, upward mobility, crime, and political participation.

The researchers found income inequality has generally been increasing, but with marked differences across countries in trends and impacts. These differences show that institutions and policies, including those on education, have an important role in reducing inequality, they say.

Slovenia and the Czech Republic had the lowest levels of income inequality overall in 2010 while Lithuania and Latvia had the highest in the EU, slightly behind the US.

“A major conclusion was that as inequality increases, political participation tends to fall among those who are at the bottom in terms of earnings, while the very rich are able to have a bigger influence on policy,” says Salverda. “This is a danger to democracy and a major concern.”

On minimum wages, the researchers call for the EU to ensure that all member countries have such a minimum, and that the rate at which it is set is high enough to have an effect. Seven EU countries do not currently have a statutory minimum wage. One of them, Germany, plans to introduce one soon.

They also call for higher taxes on top earners. That recommendation is in line with a call for a global wealth tax made by Thomas Piketty in his best-selling book “Capital in the Twenty-First Century”, which has set off a firestorm of debate around the world on inequality. Piketty led GINI’s team in France.

EU countries should also consider a US-style earned income tax credit, says Salverda. This US anti-poverty measure supports working families in low-paying jobs. The benefit is provided on condition a household member continues to work a minimum number of hours a week.

Another recommendation is to make the EU targets on reducing poverty – proposed as part of the Europe 2020 strategy on growth and jobs – legally binding on all member countries. Investing more in education and skills would also help, says Salverda.

Policies such as expansion of compulsory education and financial support to help more people attend higher education institutions have a clear impact on reducing inequality, the researchers found.

GINI’s findings are available in online databases, country reports, and discussion and policy papers, and in two volumes on the project published in 2014 by Oxford University Press. The research team has also made presentations to the European Commission and to policymakers around the EU.

“Inequality is much more on the public agenda these days,” says Salverda. “Our research helps in understanding why it is increasing, how much that matters, and what can be done about it.”

Growing Inequalities' Impacts
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