Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

Why Inequality Matters

Thorvaldur Gylfason 26th November 2018

Thorvaldur Gylfason

Thorvaldur Gylfason

There was a time, not long ago, when most economists did not consider inequality in the distribution of income and wealth all that important. True, in Scandinavia and Austria, for example, distributional issues were embedded in economic policy through “social partnership” from the 1950s onward on the conviction that an equitable income distribution would help to promote social peace. Elsewhere, it was commonplace to view inequality as the gratuitous preoccupation of bleeding hearts that did not really merit the serious attention of policy makers seeking to promote rapid economic growth without inflation.

Redistribution was widely considered to be detrimental to rapid growth. National statistical offices and international organizations, with the notable exception of the World Bank, hardly bothered to compile internationally comparable statistics on distribution. When they did, the estimates were incomplete in that they covered only wage income plus interest income, leaving out capital gains.

Insult was added to injury when it became widely known that vast amounts of wealth – and the income from that wealth! – have been kept, and remain, hidden in tax havens.

Squirrelled away

Recently, the French economist Gabriel Zucman reported nearly $6 trillion of hidden global household financial wealth, at the time (2008) equivalent roughly to ten percent of the world´s total gross domestic product. These numbers reduce the reliability of official distribution statistics, suggesting that these may significantly understate inequality.

Since the early 1970s, the share of national income paid to workers in advanced economies has fallen from 55 to 40 percent. A declining labour share goes along with increased inequality in the distribution of income and wealth as well as health. Medical researchers report that the wealthiest one percent of American men live 15 years longer than the poorest one percent and that the wealthiest one percent of American women can expect to live ten years longer than their poorer counterparts. The gap is widening. Life expectancy in the US declined in 2015 and 2016 and may have done so again in 2017. If so, this will be the first time since WWI that US life expectancy has declined three years in a row. In the UK, life expectancy was the same in 2016 as in 2011. Iceland is not far behind, with life expectancy unchanged from 2012 to 2016.


Become part of our Community of Thought Leaders


Get fresh perspectives delivered straight to your inbox. Sign up for our newsletter to receive thought-provoking opinion articles and expert analysis on the most pressing political, economic and social issues of our time. Join our community of engaged readers and be a part of the conversation.

Sign up here

Concerns about inequality have recently been thrust to the forefront of political discourse around the world. An important part of the explanation for the surprise victory of Donald Trump in the 2016 US presidential election is that he did well among those voters who felt they had been left behind with stagnant real wages for decades while CEO compensation rose from 20 times the typical worker’s compensation in 1965 to 270 in 2008. What could workers do? As film maker Michael Moore puts it, they could throw Molotov cocktails at the powers that be. Trump was their Molotov. Similarly, in the 2016 referendum in the UK, those who felt left behind tended to vote for Brexit.

Union power

In centralized labour markets, disgruntled workers have an additional outlet for their frustration. United, they can demand wage hikes in an attempt to increase their share of national income. If employers do not accede to the unions´ demands, strikes will ensue. When peace is restored in labour relations, inflation will have taken its toll as was common in the UK as well as on the European continent in the past.

Iceland today is a case in point. Its labour market legislation has remained unchanged since 1938. Labour unions retain an undiminished ability to dictate wage increases in the belief that the government will come to the employers’ rescue if necessary by allowing the currency to depreciate. In the past, the unions used this power frequently, which helps to explain why Iceland has had the second highest average rate of inflation in the OECD region since 1960, after Turkey. Under new leadership, the unions may want to throw their weight about the political arena. They can be heard saying: It´s our turn to eat.

Side by side, the political class and the business community in Iceland have jeopardized the economic recovery from the 2008 financial crash by granting themselves excessive wage hikes, thus triggering competing wage claims that threaten to reignite inflation. Wage earners who bore the brunt of Iceland´s painful recovery were not amused when the salaries of MPs were increased by 111 percent from 2011 to 2018. Ordinary wage earners, now instructed to reconcile themselves to a four percent increase in upcoming wage negotiations so as ‘not to endanger macroeconomic stability’, are not about to cave in. They hear John F. Kennedy saying: “You cannot negotiate with people who say what’s mine is mine and what’s yours is negotiable.”

The employers and the government defend their position by claiming that Iceland’s earlier equality of after-tax incomes and wealth as reported by the OECD has been more or less restored since the crash. This line of defense is weak because capital gains are still excluded from the OECD’s Gini index. Moreover, Iceland´s disproportionate presence in the Panama Papers suggests that large amounts of Icelandic wealth are still likely to be hidden. Last but not least, no one claims to know what became of the loot from the 2008 crash, an issue that is not confined to Iceland. Increased inequality, especially when amplified by graft, can have serious consequences.

Thorvaldur Gylfason
Thorvaldur Gylfason

Thorvaldur Gylfason is professor emeritus of economics at the University of Iceland and a former member of Iceland´s Constitutional Council.

You are here: Home / Economy / Why Inequality Matters

Most Popular Posts

Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter
retirement,Finland,ageing,pension,reform Late retirement: possible for many, not for allKati Kuitto

Most Recent Posts

Nagorno-Karabakh,European Union,EU,Azerbaijan,Armenia Azerbaijan exploits vacuum on Nagorno-KarabakhGeorge Meneshian
Abuse,work,workplace,violence Abuse at work: who bears the brunt?Agnès Parent-Thirion and Viginta Ivaskaite-Tamosiune
Ukraine,fatigue Ukraine’s cause: momentum is diminishingStefan Wolff and Tetyana Malyarenko
Vienna,social housing Vienna social-housing model: celebrated but misusedGabu Heindl
social democracy,nation-state Social democracy versus the nativist rightJan Zielonka

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

Eurofound advertisement

Eurofound Talks: does Europe have the skills it needs for a changing economy?

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s research manager, Tina Weber, its senior research manager, Gijs van Houten, and Giovanni Russo, senior expert at CEDEFOP (The European Centre for the Development of Vocational Training), about Europe’s skills challenges and what can be done to help workers and businesses adapt to future skills demands.

Listen where you get your podcasts, or for free, by clicking on the link below


LISTEN HERE

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube