Income inequality and redistribution in post-industrial democracies: demographic, economic and political determinants 1

Abstract

This article analyses the determinants of market income distribution and governmental redistribution. The dependent variables are Luxembourg Income Study data on market income inequality (measured by the Gini index) for households with a head aged 25–59 years and the per cent reduction in the Gini index by taxes and transfers. We test the generalizability of the Goldin–Katz hypothesis that inequality has increased in the USA because the country failed to invest sufficiently in education. The main determinants of market income inequality are (in order of size of the effect) family structure (single mother households), union density, deindustrialization, unemployment, employment levels and education spending. The main determinants of redistribution are (in order of magnitude) left government, family structure, welfare state generosity, unemployment and employment levels. Redistribution rises mainly because needs rise (that is, unemployment and single mother households increase), not because social policy becomes more redistributive.