Transcript Slide 1

Inequality and efficiency – a post crisis
view from European perspective
FES round table debate
Zagreb
7. April 2011
Béla Galgóczi
[email protected]
Equality and efficiency: the context
●
critical review of the equality-efficiency trade-off
assumption
● highlighting its limits > pointing to the different
manifestations and origins of inequality in various forms of
market economies.
● Some stylised facts on the development in income
inequality in Europe to show that the current crisis has
much more to do with the lack of equality, than with two
much of it.
● Lessons from the 2008-2010 crisis show us that decades
long accumulation of inequality backed by irresponsible
financial practices was one of the major causes of the
deepest economic crisis in the post Word War world and
led to an unprecedented loss of efficiency.
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Equality and efficiency: the context
The equality-efficiency trade-off assumption comes from
Arthur Okun (Okun, 1975):
● `Equality undermines incentives, pro-equality policies
distort market allocation and economic performance can
only be improved at the expense of a less equitable
distribution of income`.
● This interpretation looks at the relation of equality and
efficiency in a very narrow context and the generation of
inequality (before social transfers) is not addressed at all
● Polanyi (1957): `embedded markets perform better`;
Esping Andersen (1990): more equality through
`decommodification`
● Okun`s `trade-off` is partially true for free market
economies (if we assume, markets are perfect)
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Equality&efficiency
To avoid misunderstanding – this does not that mean full
equality in form of egalitarian societies would be desirable
● Inequality based on performance and skills-bonus is
needed as incentives
● Redistribution is needed to the extent of managing a
cohesive society
● Redistribution needs to be targeted and efficient
● Our point here is: recent history tells not about inefficiency
caused by too much equality, but about inefficiency caused
by excessive inequality
●
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Stylized facts on progressive inequality in Europe
and the world
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At the time of increased capital mobility and
globalisation, when cca. 1 billion workers got
integrated in the world economy (China, India,
eastern Europe) – the previous balance between
labour and capital has shifted
● Wage moderation is characteristic for most EU15
countries for the last 10 years
● Wage shares in GDP are falling
● Wage differentials are growing
● The danger of a downward spiral is real
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Trilemma: Different dimensions of sustainability have
also an equality dimension
Sustainability/
Equality
Economic
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Features of equality/efficiency/sustainability
In the basic scenario, one can pursue economic efficiency to
the detriment of social and environmental aspects
-
This is what happened in the last decades: balance
between capital and labour was shifted as the share of
labour within the accumulated wealth (GDP) has shrunk in
all major economies; depressed wages were substituted
either by credit based consumption (US, UK, IE, ES,
Baltics) or export driven growth (Germany) where exports
were largely financed by debt (exception: China).
- Environmental resources were seen as external factors
that are free and unlimited (irreversible climatic processes
with a catastrophy scenario, source for new inequality )
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Income inequality – the background
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Decent pay – as basic principle – make work pay – a basic
function of the European Social Model
BUT: increasing wage differentials
Background: large low pay sector in Europe (20 million
employees on law pay in Europe), precarious jobs
Segmented labour markets
lack of proper bargaining coverage in several
sectors/countries
Labour migration – migrant workers` wages and labour
conditions
Freedom of services (Vaxholm case)
Shrinking wage share – a long term perspective
73
71
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61
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57
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70
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82
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00
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03
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06
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Note: Compensation per employee as percentage of GDP at market prices per person employed.
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UK
US
EA-12
Inequality among employees: Average real annual pay growth in
the US (2003-2007)
Average annual growth in pay in the US, adjusted for inflation, 2003-07
600
12
10
9,7
400
8
6
4
200
3,5
2
0,7
0
0
CEO
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Average executive
Average employee
Inequality in Germany > Divergence /inequality/ in the Eurozone
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Inequality in Germany > Divergence /inequality/ in the Eurozone
25
20
15
Germany
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Price Stability line
5
0
2000
-5
12
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Wage moderation in Germany
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Germany is the model case of wage moderation in Europe
● Employees have a continuously sinking share in the wealth
produced
● Low wage sector expanding (7-8 Mn employees in
Germany)
● Result: low domestic demand > export offensive
● Sinking unit labour costs in Germany pushes the rest of the
Eurozone `into the corner` (Spain, Greece, Portugal, Italy)
● These countries have no other option then to cut wages, as
well
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Growing inequality in some EU countries and the US:
the Gini coefficient
Growing inequality – Gini coefficient in a number of countries (1985-2005)
Denmark
Germany
United Kingdom
United States
Source: OECD, 2008
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1985
0.221
0.257
0.325
0.338
1995
0.215
0.272
0.354
0.361
2005
0.232
0.298
0.335
0.381
Armut
in of
der
Arbeit
– Armutsrisiko
Inequality
income
distribution
2009 (80/20Alleinerziehender,
income quintile share 2008
ratio)
ratio 8
7
6
5
4
3
2
1
0
LV RO LT PT ES BG GR UK IT PL EE EU EA DE FR LU IE CY MT NL BE FI AT SE DK SK HU CZ SI
27 16
Data source: Eurostat (Labour Force Survey) 2010.
Note:Data
2008 Source:
data for DK,Eurostat
EA16, EU27Survey
and IT. of Income and Living Conditions. Notes: 2008 Figures except IE, IT, UK, and EU27
15
riskdie
of poverty
rate, 2009
Effekte der KriseAtauf
öffentlichen
Dienste
40%
after taxes
before taxes and transfers
35%
30%
25%
20%
15%
10%
5%
0%
LV RO BG LT GR EE ES IT PT UK PL EU CY EA DE MT IE LU BE FI SE FR HU AT DK SI NL SK CZ
27
16
Data source: Eurostat (Labour Force Survey) 2010.
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Note: 2008 figures for DK, EA16, EU27 and IT. Pensions are excluded from social transfers
Household debt-to-GDP ratio
Unsustainable economic growth: household debt and
income inequality
0.9
United States
0.8
Netherlands
United Kingdom
New Zealand
Republic of Korea
Portugal
0.7
Australia
Germany
0.6
Ireland
Sweden
0.5
0.4
Spain
Japan
Luxembourg
France
Austria
Finland
Belgium
0.3
Greece
Italy
0.2
Hungary
0.1
0.0
0.20
Czech Republic
0.25
Slovak Republic
0.30
0.35
0.40
Gini Coefficient
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Conclusions
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While inequality justified by performance and skills is not
being questioned, limits of inequality appear within the
concept of a `cohesive society`
Redistribution definitely needs to be targeted and efficient
with some scope for efficiency – equity trade-off
What we are facing in the current world is too much
inequality that also detrimentally effects efficiency
This is even more true for South-East Europe (and
transformation economies in general)
There are additional factors of inequality (corruption, in
certain regions even criminal economy) and the inequal
participation at the reallocation of resources during
transformation (e.g. privatization and its transparency).