Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades?

90 Pages Posted: 23 Oct 2011  

Herwig Immervoll

World Bank, Europe and Central Asia; Organization for Economic Co-Operation and Development (OECD) - Social Policy Division; IZA Institute of Labor Economics; ISER Institute for Social and Economic Research; University of Canberra - National Centre for Social and Economic Modelling (NATSEM); United Nations - European Centre for Social Welfare Policy and Research

Linda Richardson

affiliation not provided to SSRN

Abstract

We use a range of data sources to assess if, and to what extent, government redistribution policies have slowed or accelerated the trend towards greater income disparities in the past 20-25 years. In most countries, inequality among "non-elderly" households has widened during most phases of the economic cycle and any episodes of narrowing income differentials have usually not lasted long enough to close the gap between high and low incomes that had opened up previously. With progressive redistribution systems in place, greater inequality automatically leads to more redistribution, even if no policy action is taken. We find that, in the context of rising market-income inequality, tax-benefit systems have indeed become more redistributive since the 1980s but that this did not stop income inequality from rising: market-income inequality grew by twice as much as redistribution. Between the mid-1990s and the mid-2000s, the redistributive strength of tax-benefit systems then weakened in many countries. While growing market-income disparities were the main driver of inequality trends between the mid-1980s and mid-1990s, reduced redistribution was often the main reason why inequality rose in the ten years that followed. Benefits had a much stronger impact on inequality than social contributions or taxes, despite the much bigger aggregate size of direct taxes. As a result, redistribution policies were often less successful at counteracting growing income gaps in the upper parts of the income distribution.

Keywords: income inequality, redistribution, working age, OECD

JEL Classification: D31, H22, H55, C81

Suggested Citation

Immervoll, Herwig and Richardson, Linda, Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades?. IZA Discussion Paper No. 6030. Available at SSRN: https://ssrn.com/abstract=1948026

Herwig Immervoll (Contact Author)

World Bank, Europe and Central Asia ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Organization for Economic Co-Operation and Development (OECD) - Social Policy Division ( email )

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Paris Cedex 16, 75775
France
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IZA Institute of Labor Economics ( email )

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Germany

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ISER Institute for Social and Economic Research ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

HOME PAGE: http://www.iser.essex.ac.uk/people/research-associates

University of Canberra - National Centre for Social and Economic Modelling (NATSEM) ( email )

Canberra, ACT 2601
AUSTRALIA

HOME PAGE: http://www.canberra.edu.au/centres/natsem/people/associates/herwig-immervoll

United Nations - European Centre for Social Welfare Policy and Research ( email )

Berggasse 17
Vienna, A1010
Austria

HOME PAGE: http://www.euro.centre.org

Linda Richardson

affiliation not provided to SSRN

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