Wednesday 11 December 2019

Dan O'Brien: 'Inequality is not on the rise everywhere - we're not the US'

Despite constant claims that only the rich are getting richer, the truth is much more nuanced, writes Dan O'Brien

(stock photo)
(stock photo)
Dan O'Brien

Dan O'Brien

'Because the idea of soaring inequality has become an almost universally held belief, it receives too little scrutiny." So says an editorial in this week's The Economist magazine. Articles in the current issue set out hard evidence and new research on the issue. Some of the grey areas in the study of the vast and complex subject are also discussed.

The contribution is a welcome corrective. The narrative of soaring inequality is not just based an over-interpretation of evidence from one case - the United States - it also ignores big and important facts on the issue. For instance, how money is spread among the world's seven billion people has become more equal. That is for the simple reason that most poorer countries, from east Asia to sub-Saharan Africa, have been growing more rapidly than richer countries in the 21st Century. This fact is rarely heard, yet the inaccurate claim that inequality is soaring everywhere is made constantly.

Nor is it the case that inequalities are on the rise everywhere in the rich world, another frequently heard claim, even if most countries have registered some increases in recent decades. Though you wouldn't know it from tuning into Britain's general election debates, but neither income nor wealth inequality have risen in that country over the past quarter of a century.

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As it happens, the once-a-year publication of Ireland's official figures on income equality came out on the same day as The Economist's "Inequality illusions" issue. Those figures showed that inequality in Ireland last year was at its second lowest level on record. Only in 2009, the worst year of the crash, was inequality lower, most probably because so many of those who made fortunes in the property bubble lost their shirts at the time.

That the equality numbers show 2009 as the year in which incomes in Ireland were most evenly distributed says a lot, including that bad things, as well as good things, can make societies more equal. Economic crashes make most people worse off, but it is the high rollers who tend to see the biggest proportionate falls in incomes. A billionaire who goes bust could see her income fall by 99.9pc. A worker on the minimum wage who loses his job and has to depend on benefits will see a much small percentage decline. A society in which both of these things happen will become more equal, but also more miserable.

Despite the enormous range of factors that influence income distribution in all societies, one of the most interesting patterns in Irish equality has been how stable it has been over the decades. And that is despite Ireland's economy being among the most volatile in the developed world over that period, with booms and busts of a kind experienced by few peer countries.

So what exactly do last week's inequality figures show? The State's statisticians have been measuring income distribution each year since 2004. Back then, those in the highest earning fifth of the population made 4.9 times more than those in the bottom fifth. Last year the difference was 4.4 times. Over the decade and half, the ratio between top and bottom earners at any given time has ranged between 4.3 and 5.1. Earlier, less regular, statistical surveys going back to the 1980s show a similarly stable pattern in Irish income equality.

Such stability is unusual internationally. Because so many factors affect incomes and their distribution across millions of people, including the performance of the economy and government policies, one might reasonably expect more movement over time. One might also expect, as a highly globalised economy with a big, high-paying multinational sector, that Ireland would have followed the general, if exaggerated, trend towards higher inequality.

One reason Irish inequality has stayed low is education. The widening of third-level access over decades has resulted in half of the adult population now having some form of tertiary education, the highest among the 28 members of the EU. The sharp falling in early school leaving over recent years has also been important in maintaining Ireland's high level of equality. Recent figures show that only one in 20 18-24-year-olds had dropped out of school early, the joint third lowest among the 28.

Ireland is also unusual in that while it is among the most equal countries on a global basis, incomes before tax and social welfare are more unequal than other rich countries. Despite a lot of research in the field of equality, the reasons for this remain unclear.

One likely reason is a wider dispersion of wages and salaries than the rich world average - those high-paying multinational jobs co-exist with a big, generally low-paying hospitality sector. Another likely explanation of Ireland's high pre-redistribution income inequality is the large share of households in which nobody works. Last year 13pc of the non-pensioner population lived in jobless households. In the EU, only depression-racked Greece had a higher share.

Whatever the reasons for Ireland's unusually high pre-redistribution inequality among its peers, the State's tax and welfare systems do more than any in the rich world to balance things out. Such strong redistributive mechanisms are one reason why inequality in take-home income has not risen.

So why is it so often claimed that inequality is rising both here and elsewhere? The answer is likely to be the country which remains the most observed in the world, the US. Inequality in incomes and wealth in America have always been higher than other developed countries. This has been the subject of an intensifying discussion there, and because the rest of the world tunes in to those debates, and sees the US as a trend-setter, there is a tendency to believe that what happens in America is happening elsewhere. That is a big mistake.

The US is an outlier among other rich countries in many ways. From taxation and social welfare to healthcare, the cost of going to university and the chances of being locked up - the US prison population is almost 10 times higher than the European average - America is different.

Ireland is closer to Berlin than Boston in most ways. It is certainly closer to the continent of which it forms a part when in comes to inequality, and that is showing no signs of changing.

Sunday Independent

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