An equality multiplier?

Why are some countries more equal than others? A new paper by Erling Barth and Karl Ove Moene has an explanation - the equality multiplier.

This consists of two mechanisms:

1. A wage equalizing effect. A generous welfare state - decent unemployment benefits - reduces the threat of the sack. It thus empowers the low paid to push for higher wages.

2. An equality magnifiying effect.Greater wage equality means higher incomes for those on below-average wages, and higher incomes increase people's willingness to pay the taxes that fund social insurance - especially to the extent that those on below-average incomes are more vulnerable to the shocks (such as unemployment) that the welfare state provides against.

These two mechanisms feed off each other, in such a way that equality multiplies. This helps explain an otherwise curious fact - that countries that have more pre-tax equality also have more generous welfare states; contrast Scandinavia with the UK or US.

If this is right, social democrats should rejoice, as it implies that quite a small move towards equality can generate moves to even more equality. For example, better unemployment benefits increase workers' bargaining power, which increases their wages, which in turn makes them more willing to fund a welfare state.

However, there are two dangers here. One is that the multiplier works both ways: it can magnify inequality too. Barth and Moene write: 

Higher inequality means lower incomes relative to the mean for a majority of voters. With a lower income each of them would like to allocate a larger share of it to immediate consumption rather than to tax-financed welfare programs with less direct benets. Thus, increasing wage inequality means a declining electoral support for a larger welfare state.

This passage, though, highlights a problem I have. Is it really true that, as the incomes of the relatively poor increase, they become more willing to pay tax and less desirous of higher personal consumption? Certainly, this can happen in some times and places. But isn't there instead the opposite danger? As the worse-off become better off, their support for a welfare state might decline, because they will have to pay for it themselves, rather than rely upon better-off others doing so. Similarly, if moderately well-off workers become better off, their willingness to support others might decline, as welfare benefits are seen to go to "scroungers" rather than neighbours. In cases like these, we moves towards equality actually backfire; as Nick says, a similar thing can be true for social equality too.

I only take one conclusion from this. It's that egalitarian policies, and the social basis of them, interact, perhaps in complex ways that are sensitive to initial conditions, (changing) social norms, cognitive biases and the precise distribution of income and perceptions thereof. In this sense, moves towards or away from egalitarianism have genuinely unforeseeable effects - which egalitarians might or might not like.

Comments

[Paolo Siciliani]

In a sense this is strongly reminiscent of Rawls’ ‘veil of ingnorance’, behind it there is a positive multiplier and, alas, vice versa. How do people choose which perspective to adopt? As you said, many factors, cultural, social norms, but also past experience. If people are risk averse, changing a system that works may be unpalatable, so I can see why Scandinavians are by and large happy to keep things as they are, whereas elsewhere the short-sighted opportunism from those getting better off might derail a reform process. In this sense there is a sort of critical mass that should be reached before the reforming process is self-sustaining.

[Alaric]

This paper is seriously flawed. They examine a model where the tax rate is flat. I seriously doubt their result generalizes to considerations of a progressive tax system.

To illustrate, consider two societies:

A) 51% earn £19K PA and 49% earn £21K
B) 80% earn 10K PA. and 20% earn £60K.

A is more equal than B and they both have approximately the same average income. It is obvious that if people vote according to their material interests (as in the case in the paper mentioned) that there will be a much larger demand in society B for progressive taxation than in society A.

While there may be an equality multiplier the Barth and Moene explanation is certainly not the right explanation.

[Andrew]

Lots of woolly thinking here.

As you point out, the multiplier is sign symmetric , ie direction-neutral.

"Why are some countries more equal than others? A new paper by Erling Barth and Karl Ove Moene has an explanation - the equality multiplier"

A multiplier can't explain international variation, can it? I mean, it is supposedly present in all countries, so how can it?

It might explain sensitivity to initial conditions.

Even then there is a huge hole in the logic, since the existence of an effective multiplier would predict ceteris paribus that all countries progress to becoming perfectly equal.

So there must be equality opposing mechanisms that balance the multiplier, even at the extremes. So the multiplier explains nothing.