Mitigate Income Inequality Research Articles

The influence of income inequality aversion on redistribution in a democratic context

AbstractThis paper illuminates one mechanism by which democracy may fail to mitigate income inequality despite a widespread preference against it. When income inequality aversion is prevalent, high‐skilled, higher‐wage workers may adjust their working time to reduce inequality. However, the decrease in societal efficiency due to forgone high‐skilled labor outweighs an increase in efficiency from lower‐skilled workers. This implies that a pivotal worker may reject strong redistribution in favor of overall efficiency. Moreover, if the pivotal voter believes that a socially prevalent aversion already mitigates income inequality, a lower tax preference is further reinforced.

When Melius Abundare Is No Longer True: Excessive Financialization and Inequality as Drivers of Stagnation

ABSTRACT The apparently never-ending phase of economic slowdown that advanced economies have been experiencing in recent decades has recently contributed to the resurrection of the hoary old argument of ‘secular stagnation’. In this paper, situated intellectually within the strand of research documenting the negative impact on growth of inequality and financialization, we elaborate on the idea that such a prolonged period of stagnation is associated with a new paradigm of socio-economic policy, known as ‘finance-dominated capitalism’. In this way, we distance ourselves from the mainstream ‘secular stagnation’ narrative, adopting instead a post-Keynesian perspective that allows us to discuss the links between financialization and inequality, on one hand, and economic performance, on the other. Then, we submit our arguments to empirical scrutiny by undertaking an econometric analysis of 21 OECD countries between 1990 and 2016. The evidence indicates that excessive levels of financialization, along with high inequality and weak labor market institutions, have a negative impact on real growth. Based on our findings, we propose possible demand-side policies, to be implemented through expansionary fiscal measures, which could help sustain GDP growth and employment in the current context of stagnation, mitigating income inequality and sustaining an inclusive recovery at the same time.

Closing the Gap

Rising income inequality is a pressing political issue in Canada and internationally. Yet, policymakers in advanced economies have thus far failed to meaningfully address the issue. Tax policy is one of the primary tools available for governments to structure local distributive realities, but there is uncertainty regarding the ability of governments to take effective action in a globalized world economy. This policy brief puts forward viable reforms. The Canadian federal government can mitigate income inequality in Canada through targeted corporate and personal income tax reforms and a new approach to compliance enforcement.

Inflation and income inequality in a Schumpeterian economy with menu costs

This study incorporates heterogeneous households into a monetary Schumpeterian growth model via menu costs to explore the effect of inflation on income inequality. The source of income inequality stems from the unequal distribution across households’ assets. Given that households face the same wage rate, inflation that leads to a monotonically decreasing effect on economic growth helps mitigate income inequality by weakening the contribution of asset income relative to wage income.

The Great Divide

Growing regional inequality within countries has raised the perception that “some places and people” are left behind. This has prompted a shift toward inward-looking policies and away from pro-growth reforms. This paper presents novel stylized facts on regional inequality for OECD countries. It shows that regional disparity in per-capita GDP is large (even after adjusting for regional price differences), persistent, and widening over time. The paper also finds that rising nationwide income inequality is associated with both rising within-region income inequality and widening average income across regions. The rise in inequality is related to declining incentives for interregional labor mobility, especially for poor households in lagging regions, which are estimated to reduce by as much as one-third in the United States. Against these facts, the paper proposes a framework to identify whether, how and by whom fiscal policies can be used to tackle regional inequality. It outlines conditions under which those policies should be spatially-targeted and illustrates how they can be complementary to conventional means-testing methods in mitigating income inequality.

Human capital and income inequality in India: is there a non-linear and asymmetric relationship?

ABSTRACTThe article attempts to provide empirical evidence on the relationship between human capital and income inequality in India in a non-linear and asymmetric framework. To capture both long-run and short-run asymmetries, we have employed the non-linear autoregressive distributed lag approach using the relevant data from 1970 to 2016. Findings of the article suggest that education expansion acts as a major factor in reducing prevailing high income inequality, that is an increase in average years of schooling results in more equal distribution of income. In contrast, high economic growth, inflation and trade openness create unequal distribution of income. The asymmetric causality test results indicate that there is unidirectional causality running from female human capital, economic growth and inflation to income inequality. From a policy perspective, we suggest that education expansion should be used as a powerful tool to mitigate income inequality by emphasizing the quality of education. At the same time, policies geared towards social benefits, inclusive education, training for unskilled workers and price stability should be encouraged to attain fair income distribution in India.

FDI, income inequality and poverty: a time series analysis of Portugal, 1973–2016

Using time series data for Portugal between 1973 and 2016, this paper examines to what extent, inward FDI contributes to income inequality and poverty in the long-run. It was found that increased flows of inward FDI are associated with a less unequal income distribution and lower poverty rates. The results further suggest that, in the Portuguese case there is mutual causality between inward FDI and poverty in the long run, i.e., FDI significantly reduces poverty, and lower levels of poverty lead to higher inward FDI flows. In the case of inequality, the evidence shows that FDI does not contribute to higher (or lower) income inequality. Instead, more unequal income distributions significantly and negatively impact on inward FDI in the long run. Finally, human capital emerged as a key determinant to mitigate income inequality and circumvent poverty, contributing, indirectly, to fostering additional FDI inflows. Such results call for integrated public policy interventions that emphasize social and institutional dimensions.

The Great Divide: Regional Inequality and Fiscal Policy

Growing regional inequality within countries has raised the perception that 'someplaces and people' are left behind. This has prompted a shift toward inward-looking policies andaway from pro-growth reforms. This paper presents novel stylized facts on regional inequality forOECD countries. It shows that regional disparity in per-capita GDP is large (even after adjustingfor regional price differences), persistent, and widening over time. The paper also finds thatrising nationwide income inequality is associated with both rising within-region incomeinequality and widening average income across regions. The rise in inequality is related todeclining incentives for interregional labor mobility, especially for poor households in laggingregions, which are estimated to reduce by as much as one-third in the United States. Againstthese facts, the paper proposes a framework to identify whether, how and by whom fiscal policiescan be used to tackle regional inequality. It outlines conditions under which those policies shouldbe spatially-targeted and illustrates how they can be complementary to conventional means-testingmethods in mitigating income inequality.

The impact of fiscal decentralization on growth, inflation and inequality in the Americas

This paper analyses the impact of fiscal decentralization on economic growth, inflation and Gini coefficients in 12 countries of the Americas. The findings suggest that the positive impact of this process has been more modest than anticipated, with revenue decentralization having a detrimental effect on economic growth and expenditure decentralization a positive one in developing nations of the Americas. Regarding the impact on income inequality, the results indicate that fiscal decentralization can play an important role in reducing this, particularly on the revenue side, but when decentralization is analysed in developing nations of the Americas only, fiscal decentralization is shown to accentuate rather than mitigate income inequality, which highlights the significant amount of work that is yet to be done before this process delivers on expectations. The findings for the impact of fiscal decentralization on price stability are inconclusive.

Social Transfers and Income Inequality in Bulgaria

AbstractThe paper analyzes the distributional effects of social transfers in Bulgaria in the period 2000-2014, using income inequality decomposition by factor components. The results suggest that social transfers mitigate income inequality, but this effect varies depending on the type of transfer. Pensions exert the strongest influence due to their significant share in total income, which also rises over time. Family allowances are pro-poor in nature, but because of their small share in beneficiaries’ total income, their impact on overall inequality is much weaker. “Other social benefits” have the weakest inequality-reducing effect, which is due to their higher concentration towards the richest decile and increasing share in total income. Despite the inequality-decreasing impact of social transfers, we argue that they should not be regarded as the sole remedy for the sharp income disparities in the country, but need to be accompanied by relevant active labor market policies.

Social Capital, Race, and Income Inequality in the United States

Since the 1980s, the United States has witnessed increasing wealth concentration in the hands of the ultra-rich. Measured at the state level, the top 10 percent of income earners amassed roughly 43% of total income, and economic growth only enhanced this inequality between the ultrarich and the rest of citizens. This paper examines whether social capital plays a positive role in mitigating income inequality at the state level, with an emphasis on racial diversity and its relation to church attendance. The empirical findings demonstrate that social capital, whether measured by Robert Putnam’s state-level social capital index (SCI), or a new measure that improves SCI’s original measurement, fails to improve income equality. In comparison, racial diversity is found to be a consistent contributor of income inequality. In states with a greater proportion of minority population, the ultra-rich tend to share more wealth and social capital potentially facilitates the ultra-rich to enjoy the benefit of economic growth.

Distributive Impact of Low-Income Support Measures in Japan

Population decline together with rapid aging has a strong cost push pressure on social security systems in Japan. Effective measures to support low-income families are quite important to mitigate income inequality and to overcome low fertility in Japan. Using the micro-data of the Basic Household Survey 2010, we analyse various measures to support low income families through various simulations concerning child allowance, social security contributions, and income taxes. Based on the simulation results, we discussed distributive impact of such measures and their policy implications.

THE ROLE OF TAXES IN MITIGATING INCOME INEQUALITY ACROSS THE U.S. STATES

This paper examines the role that federal and especially state tax policies play in mitigating income inequality. The results show that the tax code reduces income inequality considerably in all states. All of this income compression is attributable to federal taxes, as state taxes, on average, widen the after-tax income distribution slightly. Nevertheless, there is very substantial cross-state variation in the impact of state tax policies. The paper further documents that the mitigating influence of taxes on income inequality has risen since the early 1980s, with the increase at the state level due mostly to changes to the tax code.

Structures and Financing Means of Local Government's Social Policy in Greece. A Case Study of Thessaloniki's Municipalities

Greece's residual type of welfare model is facing the past six years an intense pressure caused by the economic crisis (2008) and the emergence of new social risks. Restrictive policies and internal devaluation process adopted to restructure economy, underestimated the social impact. The State, choosing a different welfare model with emphasis on commodification and selective services, gradually withdraws from the implementation of social policy, seeking, through administrative reforms, to transfer responsibilities to local government, without, however, the necessary funding. At the same time, European Union's social policy, despite its rhetoric and some initially ambitious efforts, particularly with the Treaty of Lisbon, shows inability to create a “community acquis”, which would contribute decisively to the Europeanization of the southern countries. By applying “soft law” measures and always based on the principle of subsidiarity, European strategy is confined, almost entirely, to an application of employment support measures, primarily seeking to improve competitiveness and meet the financial objectives of Monetary Union. The study of basic economic and social EU-28 indices for the period 2008-2012, confirms that diversification of welfare models has a crucial effect in mitigating income inequality and reducing the risk of poverty, enhancing therefore, the dispute over theoretical approaches that support the adequacy of policies related to economic growth. This paper attempts, given the aforementioned conditions, to present the current situation in local government organizations, both from the structures and the financing means perspective, based on a primary research, conducted for this purpose using a structured questionnaire filled by competent executives of all municipalities in the Prefecture (now regional unit) of Thessaloniki. Research findings, though highlighting the efforts to substitute central government's role in an institutional context, constantly under reform, indicate that municipalities are facing significant efficiency problems. Social policy is exercised by different organizational units without integrated strategic planning, new structures which were created primarily to address poverty are inadequate to meet the actual needs and funding is limited in an effort to replace the reduced own resources through European programs, without seeking future alternative sources. The acute lack of human resources and coordination, adversely affects evaluation of local government's social policy. The findings also intensify the concern about structures sustainability and the capacity of municipalities’ overall support, but at the same time detect needed interventions in order to implement an efficient decentralized policy, which will become an essential factor of social cohesion and prevent escalation of social exclusion.

Can Fiscal Policy Mitigate Income Inequality and Poverty?

This paper provides fresh evidence on the distributional effects of fiscal policy using data on a panel of OECD economies spanning the last four decades. We evaluate how four alternative measures of income inequality and poverty respond to several stock and flow variables accounting for fiscal actions. We find that increases in government debt and expenditure promote a less unequal distribution of income. We detect a significant distributional impact of education and social spending, as well as of government consumption expenditure. We also investigate potential redistributive implications of large fiscal expansion and consolidation episodes, without finding any evidence of additional effects besides those associated with the above mentioned fiscal variables.

Is Income Inequality Endogenous In Regional Growth?

This study focuses on testing the relationship between income inequality and economic growth within counties in the United States, and the channels through which the effects of a relationship are observed. Based on a system of equations estimation, the empirical results confirm the hypotheses that income inequality has a growth-dampening effect, that income inequality is endogenous to regional growth, and that the channels through which income inequality determines growth are adjustments at the regional level, such as migration and changes in employment and incomes. The results have numerous policy implications. The noted forces can be utilized as policy instruments to mitigate income inequality and its growth dampening effects, because a) as income inequality is endogenous, its equilibrium level can be internally determined within a regional growth process, b) since traditional income inequality mitigating policies have an indirect effect on overall regional growth, they may have unintended indirect effects on income inequality, and c) regional growth adjustment also equilibrates income inequality.

Polarization, politics and property rights: Links between inequality and growth *

Most efforts to trace the effects of income inequality on growth have focused on redistribution. However, empirical investigation has not substantiated either the positive association of income inequality with redistribution or the negative association of redistribution with economic growth. The authors analyze the effects of inequality in the broader context of social polarization. They argue that social polarization, whether rooted in income inequality or in ethnic tension, makes large changes in current policies (including those guaranteeing the security of contract and property rights) more likely under a wide range of institutional arrangements. The resulting uncertainties in the policy and contractual environment hinder growth. They find strong empirical support for both parts of this argument. The policy implications of their argument are quite distinct from those of arguments that inequality reduces growth by increasing pressures for redistribution. If redistributive policies per se were to blame for the low growth resulting from inequality, governments that seek to mitigate income inequality must inevitably confront a tradeoff between equity and growth. If, on the other hand, the insecurity of property rights slows growth in unequal or otherwise polarized societies, governments that commit over the long run to particular redistributive policies incur less risk of slowing economic growth. Fiscal redistribution that reduces inequality may actually increase growth by reducing the risks of political uncertainty.