Income Inequality and Social Preferences for Redistribution and Compensation Differentials

48 Pages Posted: 25 Dec 2011 Last revised: 14 Jan 2012

See all articles by William Kerr

William Kerr

Harvard University - Entrepreneurial Management Unit

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Date Written: December 2011

Abstract

In cross-sectional studies, countries with greater income inequality typically exhibit less support for government-led redistribution and greater acceptance of wage inequality (e.g., United States versus Western Europe). If individual nations evolve along this pattern, a vicious cycle could form with reduced social concern amplifying primal increases in inequality due to forces like skill-biased technical change. Exploring movements around these long-term levels, however, this study finds mixed evidence regarding the vicious cycle hypothesis. On one hand, larger compensation differentials are accepted as inequality grows. This growth in differentials is of a smaller magnitude than the actual increase in inequality, but it is nonetheless positive and substantial in size. Weighing against this, growth in inequality is met with greater support for government-led redistribution to the poor. These patterns suggest that short-run inequality shocks can be reinforced in the labor market but do not result in weaker political preferences for redistribution.

Suggested Citation

Kerr, William R., Income Inequality and Social Preferences for Redistribution and Compensation Differentials (December 2011). NBER Working Paper No. w17701. Available at SSRN: https://ssrn.com/abstract=1976516

William R. Kerr (Contact Author)

Harvard University - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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