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October 27, 2022

Predistribution vs redistribution

Why is income inequality higher in the United States than in Europe?

Tyler Smith

Source: seikachujo

Income inequality has increased in nearly all advanced economies over the last four decades. And many economists point to the forces of globalization and technological progress to explain this growing gap between the haves and have-nots.

But the gap has grown much less in Europe than in the United States, suggesting that domestic policies still play an important role.

In a paper in the American Economic Journal: Applied Economics, authors Thomas Blanchet, Lucas Chancel, and Amory Gethin find—contrary to widespread belief—that Europe’s lower inequality levels cannot be explained by differences in income redistribution policies. Rather, they conclude that Europe has been much more successful than the United States at ensuring that low-income groups benefit from relatively good-paying jobs.

Addressing many methodological issues raised by comparing a diverse group of economies, the authors carefully constructed distributional national accounts for 26 European countries from 1980 to 2017. Figure 8 from their paper compares the pretax and posttax growth in inequality in Europe and the United States.

Figure 8 from Blanchet et al. (2022)

The chart represents the evolution of the top 10 percent (red lines) and bottom 50 percent (blue lines) shares of national income in the United States and Europe from 1980 to 2017. The darker-colored lines indicate the pretax income share—income received after accounting for social insurance systems but before other types of redistribution. And the lighter-colored lines indicate the posttax income share—income after all taxes and public transfers.

The gap between the darker-colored lines and lighter-colored lines shows that the United States redistributed more income than Europe, contrary to popular opinion. For instance, in 1980, the bottom 50 percent pretax income share stood at about 20 percent in both regions, while the bottom 50 percent posttax income share was significantly higher in the United States (26 percent) than in Europe (22 percent). However, the United States’s bottom 50 percent has seen a significant decrease in their share of pretax income, which fell to nearly 10 percent in 2017. 

The pattern suggests that policies impacting worker pretax income—such as access to education and health care or labor market regulations—are far more important than redistribution policies in explaining the United States’ larger increase in income inequality in recent years.