"Cross-Country Comparisons of Inequality in Market and Disposable Income: Policy Matters"

Stephen Gordon looks at the relationship between inequality and government policy:

Cross-country comparisons of inequality in market and disposable income: Policy matters, Worthwhile Canadian Initiative: This graph is taken from a recent Luxembourg Income Study (LIS) working paper (45-page pdf):

Click on graph to enlarge

The countries are arranged in ascending order of inequality in disposable income, and  the Nordic countries take four of the top five positions. What strikes me is the extent to which this is due to government policy: the Gini coefficient for market income in Canada is the same as Denmark's, and is quite a bit lower than in Sweden. Indeed, Sweden is closer to the US than it is to any of the other Nordic countries.

A recurrent theme in discussions of the Nordic model takes the form of "That's all very well, but those policies won't work here without [insert some feature of Nordic countries here]." Libertarian types who would otherwise approve of the free market dynamism of the Nordics assert that the Nordic model can only work in small, homogeneous countries. As a general argument, I'm not convinced - but I can see why it would be hard to export the Nordic model to the US.

At the other end of the spectrum - those who would otherwise approve of Nordic levels of spending on social programs - some (eg: this commenter) point to the role of trade unions. But it's hard to conclude from this chart that union density matters much when it comes to reducing inequality. For example, look at Germany (where unions play a crucial role in setting wages) and the US (where they are decidedly less important): both have identical levels of inequality of market income. The distribution of disposable income is lower in Germany because of its redistributive policies, not because unions are more powerful.

That's not to say that cross-country institutional/cultural idiosyncrasies aren't important; they are. But there's little reason to believe that these factors have to be  changed before the Nordic model can work.

Comments

[ndd]

I'm afraid I don't know what definitions of "market income" and "disposible income" the author is using, or why that would lead to a reduction of the Gini coefficient.

Would it be possible to supply that information to those of us who are laypeople? Thanks.

[reason]

ndd ... read the original paper. Cash Transfers and income tax are used to adjust from market income (i.e. Pre-tax, social security income). Transfers in kind and indirect taxes are excluded. I suspect they would have strengthened, rather than weakened the conclusions.

[anne]

"But it's hard to conclude from this chart that union density matters much when it comes to reducing inequality. For example, look at Germany (where unions play a crucial role in setting wages) and the US (where they are decidedly less important): both have identical levels of inequality of market income. The distribution of disposable income is lower in Germany because of its redistributive policies, not because unions are more powerful." *

Rubbish, complete rubbish. Unions in Germany are both a reflection of social-economic attitudes and reinforce those attitudes. Unions have been continually and successfully active politically in Germany, continually shaping policy. What a ridiculous essay.

* There is a word missing in this concluding sentence.

[me]

wht portion of german inequality comes from reunification? what were unequality measures b4 1989?

[reason]

Anne,
I don't know why you are attacking the essay as regards the small aside about unions. He doesn't talk at all about the political influence of unions (which is definitely on the decline by the way) only the observed degree of market income inequality. He is simply making the point, that trying to directly influence market inequality may not be a particularly effective way of combating inequality, whereas tax and transfer policy is.
The author is progressive like we are. His policy prescriptions may be different than yours but he makes a good empirical case for them.

[CALLAHAN]

On income, Tony Snow is resigning from his $168,000 white house press secretary job, as he is "in a financial crisis".

I am betting that those presidential candidates, and others who use the loose term "decent wages" are not thinking of anything even remotely close to $168,000.

To Tony: how would you like to eek out an existence on my $70,000 wages (considered very high by today's standards)?

I would consider my wages decent at $100,000.

[kthomas]

CAL, let's layoff Tony, for now. I can't stand that guy, but he's suffering now. His cancer is aggressive, so he will not be among us for long.

[Bruce Wilder]

reason: "He is simply making the point, that trying to directly influence market inequality may not be a particularly effective way of combating inequality, whereas tax and transfer policy is."

I agree with reason that he is making that point, and I agree with anne that his point is rubbish.

That one can readily get data on tax and transfer and make calculations indicates that one can readily get data and make calculations. The fact of being able to get data and make calculations does not indicate anything at all about political dynamics. What he defines for convenience as "market incomes" are not privileged from being themselves the outcome, in part, of public policies, on the one hand, nor is there any sense in the proposition that unions would have no effect on the existence and shape of tax and transfer.

[Bruce Wilder]

One thing that disturbs me about the chart is that the disposable income gini for most countries corresponds with other gini numbers I have seen, but the U.S. 37 is very low.

The U.N. survey for 2000, which seems, somehow to get the same numbers as appear in the chart for Germany or Sweden, would be, not 37, but
41 for the U.S.
And, if you asked the Census Bureau, they would have said
45
47 is the lastest number from Census.

That's a pretty big difference between 37 and 45 or 47.

Just as a sidenote, I wonder what the political impetus is, behind the report. Luxembourg is the Beverly Hills of countries -- no poverty to speak of, but rich people, who are spectacularly, unfathomably rich.

[Tom Geraghty]

I posted this over there, but worth reiterating: Unions seem to play an important role in reducing wage inequality, which is much lower in the Nordic countries than in the US, even if market income inequality is not.

[Denis Drew]

Wages are more unequal in Germany??? Until the recent slight increase in the American minimum wage, 25% of Americans earned less than the monetary minimum wage in Europe ($9.50/hr) -- not even counting full medical, four weeks paid vacation, etc., etc. -- and Germany is the best paying country. Until the slight increase, 25% of American workers were earning less than the federal minimum wage of 1968 ($9.50/hr adjusted)!

I have been watching the wages of myself and everyone I know tail spin for three decades while per capita output has grown 2/3. Adjusted for "top-coding" the Census figure for average family income of the top 20 percentile is $250,000/yr ($176,000 nominally). Of course that mostly goes to the top 1% -- not their fault; nobody else seems to want it; read below:
***************************
American workers have no idea of the need to bargain collectively AND to bargain sector-wide, as it is done around the better paid world -- that is the alpha and omega of American inequality. In what amounts to a cult: the free market is misunderstood to free us of the responsibility or worry to equalize power in the labor market.

The free market should be seen as just the OS of the economy, the neutral operating system -- nothing more (remarkable as it is) which can run monopoly, monopsony, the race to the bottom or sector-wide bargaining with equal ease.

The ULTRA SIMPLE answer to American inequality is to stop running the race to the bottom and start running sector-wide bargaining.

Most economists can only see unfair market outcomes when the perps are as big and colorful as Standard Oil and John D. Rockefeller -- totally missing the same unfairness (not "distortion" or "failure" -- see below) at the fast food level.

I would no longer use the terms "market failure" or "market distortion" having gained the understanding that the the market (magical as it is at what it does) should be expected to be a value free, morally neutral sorting mechanism -- just the OS.

American labor has to wake up to how unionization is done in the rest of the world -- thats all!

[german_reader]

@anne,

unions here in Germany have lost much of their influence. Union membership declined from around 12 million in 1991 to slightly more than 6 million today ( compared to 35 million paid employees ).

This decline was not enforced by political decisions as in the UK. It's the result of a socio-economic shift from relative stable employment conditions in manufacturing with large groups of workers in single sectors of the economy, which could be easily organized, towards a more diversified and individualized service economy. And it's the symptom of a general disappointment about the influence of unions in the times of globalization. Unions often cannot prevent, that factories are closed or employers demand longer working hours or wage restraint.

The influence of unions on market income is limited. They can make deals about the wages of normal employees, but their influence on manager or entrepreneurial income is very restricted. And this the part of national income, which is most important for inequality in market income (= before tax and social transfer income ).

Nevertheless as "Bruce Wilder" says, unions are an important political factor. And they have a stark influence on working conditions and are a significant player in the political system of most European countries. And a vast majority of people here in Germany wants strong unions and a fair social and tax policy. Political parties must recognize this ( they often don't ).

Union membership in Scandinavia is much higher than in Germany. In Denmark nearly 80% of all workers are organized. This explains why their influence there is so strong.

[german_reader]

Meant "strong" influence. Stark in english means obviously something different than the German "stark" = strong.

[reason]

Thanks German_reader,
and I would remind Anne and Bruce Wilder you can walk and chew gum at the same time.

[real person from the real world]

Incomes at $70k or below $100k not being adequate? When I started my job, I was at $8/hr..... and in IT, that was low, but a lot higher then other entry level jobs. Try living around $24k per annum. My clerk at the local bank is making the same. Actually, it is not so much the income, but the cost of what you have to pay to get need services and buy necessities. There are a lot of complaints by economists that Americans do not save, and spend too much, but for a lot of us credit cards and their usurious interest rates and fees, are the only way to make ends meet. But after a point, how do you pay off the card and get off the non-so-merry-go-round? by getting a home equity loan. As for iPods, and iPhones, and other fancy goods, those making in excess of $40k, need something to spend their disposable income on. Problem is, the stuff is all made overseas, where labor is cheap. The decline of unions in the US is certainly partially do, at least, to scandals of mob influence, and big bad communism.

[real person from the real world]

Incomes at $70k or below $100k not being adequate? When I started my job, I was at $8/hr..... and in IT, that was low, but a lot higher then other entry level jobs. Try living around $24k per annum. My clerk at the local bank is making the same. Actually, it is not so much the income, but the cost of what you have to pay to get need services and buy necessities. There are a lot of complaints by economists that Americans do not save, and spend too much, but for a lot of us credit cards and their usurious interest rates and fees, are the only way to make ends meet. But after a point, how do you pay off the card and get off the non-so-merry-go-round? by getting a home equity loan. As for iPods, and iPhones, and other fancy goods, those making in excess of $40k, need something to spend their disposable income on. Problem is, the stuff is all made overseas, where labor is cheap. The decline of unions in the US is certainly partially do, at least, to scandals of mob influence, and big bad communism.

[Denis Drew]

What percentage of inequality due to lack of unions in this case?:
In preindustrial England individual weavers made a decent living -- low productivity but an adequate checks and balances program running on the free market OS.

In stark contrast the 100 (?) times more productive steam loom operators were reduced not just to subsistence, but to the lowest level of barely staying alive: they and their families living on oat cakes three times a day because they could not pay for wheat bread. Percentage of inequality due to lack of (sector-wide) collective bargaining: 100%.

Germany has mandatory sector-wide labor agreements. All workers performing the same job in the same geographic locality work under one unified contract. Workers are free not to join the union but they work under the contract.

In France 8% join the union but union contracts set the terms for all firms, unionized or not. Quebec, Canada mirrors this set up.

Last I heard German CEOs still only make 20 times what the a average worker makes, not 400 times like their current US counterparts (who make only 20 times as much 25 years ago).
The pay of the president of Mercedes-Benz jumped from 3 million dollars to twelve million when the acquired Chrysler.

Most if not all the supposedly not-union reasons for inequality in the US would not happen if we had strong union presence (a.k.a., sector wide bargaining: the only form of unionizing that I can see surviving in the current hyper-bean counter management environment): 1939 minimum wage ($4.50/hr but no taxes), no universal health care, disadvantageous trading agreements, etc.

The minimum wage certainly would not have dropped almost in half since 1968 ($9.50/hr) while average income doubled. The Crips and the Bloods could not survive a $12.50/hr minimum wage (w/health care; w/o paid vacations, Americans would rather take the money) -- and would not want to; who would want $10/hr for risking life and liberty?

Raising the minimum wage from $5.15/hr to $12.50/hr would add less than 4 percent to the cost of GDP output -- and presumably less than 4 percent inflation for one year -- about what we grow per capita every two or three years -- and would virtually end poverty in the US. But it will never happen in a post union environment.