Friday 23 February 2018

Growth of Irish income disparity is a fallacy

In Ireland, income inequality has changed little for as long as it’s been measured
In Ireland, income inequality has changed little for as long as it’s been measured

Dan O’Brien

Who benefits from the fruits of economic growth? This question is posed increasingly often in developed countries where the gap between the richest and the poorest is widening. Where the trend is most marked – in the US in particular – it is being posed most frequently. There is a lively discussion among economists and other observers of societies' goings-on about the causes of this trend.

The combined impact of technology and trade is among the most frequently cited factors. Many decently paid jobs in the manufacturing sector, which those with fewer years of schooling have traditionally done, are now being done either by machines or by workers in low-wage economies.

As technology advances and machines are capable of doing evermore skilled jobs, there are fears of a "hollowing out" of economies, with more jobs disappearing and more of the wealth that is created going to the owners of technology and machines.

Another possible culprit is declining equality of opportunity, which, in turn, causes equality of outcomes to widen. This is being debated furiously in the US. There, wealth has become much more markedly concentrated as, for instance, CEOs pay themselves ever more inflated salaries while earnings down the income scale have been stagnating for decades.

One way equality of opportunity is narrowing is access to the best education. The fees charged by top American universities, degrees from which all but guarantee very juicy life-long salaries, have been rising fast.

As those on modest incomes can't afford enormous college fees, they are excluded from the best education and only the kids of the already-wealthy get to Ivy League colleges, thereby keeping the rich, rich and the poor, poor.

There is no small amount of worrying going on about the consequences of a continued widening of the rich-poor gap where it is happening.

Could a big and permanent increase in inequality lock the majority out of the wealth-creating process, thereby eventually reducing the rate of economic growth, or even killing it off? If the opportunities to get rich become fewer, will countries revert to how they were in the past when ability and hard work mattered less than where one started in life? Could frustrated low earners and the "squeezed middle" start giving up on capitalism and/or lose faith in democracy if their incomes keep stagnating or falling?

Though these are issues we in Ireland should watch closely, the discussion of income distribution has been less intense here, probably because this is not one of the countries in which income inequality has been growing (despite frequent inaccurate claims to the contrary). This was shown yet again on Wednesday when new figures on the gap between the richest and poorest in Ireland were published.

In 2012, the spread across the income spectrum remained unchanged on 2011. This is in line with the longer-term trend (but unlike the two English-speaking countries to our east and west). In Ireland, income inequality has changed surprisingly little for as long as it has been measured.

One way of measuring income distribution is to compare how the much bigger incomes of the richest compare to those of the poorest.

According to Wednesday's figures, in 2012 the 20pc of the population on the highest incomes had five times more money coming in annually than the bottom fifth.

When statisticians started calculating this number in 2004, the ratio was the same, although it did narrow briefly after the crash. In 2009, the earnings of the richest fifth of households dipped to four times their counterparts on the other end of spectrum.

The most likely explanation for this dip was the wiping out of some high rollers, such as property developers, and the reduction of bonuses and commissions for high earners as the wider economy slumped.

The role of the State is also likely to have contributed. In 2009, when the Government first began addressing the huge hole in its finances, it hiked taxes sharply and in a manner which hit higher earners hardest. In more recent years, by contrast, deficit-closing measures have focused more on cutting spending than raising new taxes. As the less well-off are more likely to be dependent on state spending, the shift to expenditure reduction has almost certainly contributed to pushing income inequality back towards the average over the past decade

Another measure on inequality is the "Gini coefficient", which ranges on a scale from 0 to 100. In a society in which everyone has an equal income, the Gini score is zero. In a society in which one person earns all the income (and all the others get nothing), the score is 100.

This measure, too, shows that there was no statistically significant change in Irish income equality in 2012 compared to 2011. And, as illustrated in the first chart, the same pattern as already discussed can be seen, with a small dip in inequality at the depth of the slump, before a return to the pre-crash norm in more recent times.

So, if Ireland over time has not become more or less equal in how income is distributed, how do we compare to other countries in the equality stakes? By global standards, Ireland has one of the most equal distributions of income of the 200-odd states in the world. That is mostly because it is a developed economy. Industrialised economies are, almost without exception, more equal than less developed economies for a whole host of reasons including greater meritocracy and social mobility, higher levels of education, more money-making opportunities and more redistribution by government.

Among peer rich countries, Ireland is on the more equal end of the spectrum. The most recent figures from across the developed world come from the Organisation for Economic Cooperation and Development and are illustrated in the second chart. Although somewhat dated, it shows how much more the richest 10pc have in income compared to the bottom 10pc, also known as a "decile".

With the richest decile in Ireland enjoying incomes 7.5 times bigger than the bottom decile, Ireland is and well below the OECD average income disparity of 9.4 times.

Indeed, and contrary to the obsessive repetition of a certain late-night chatshow host, Ireland is much closer to the egalitarian Nordics, where the richest are five times better off than the poorest, than it is to the US, where their incomes are 16 times greater.

It is a pity that there has been so many false claims about the trends in Ireland. If what has been happening in the US were to start happening here, it might get as much attention as the boy who cried wolf.

Irish Independent

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