What is the argument for income inequality

Fratzscher's distribution issues / income inequality: Redistribution alone does not help


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Income inequality in Germany is as high today as it was 100 years ago, and higher than ever in the post-war period. That is one of the results of the World Inequality Reports, a new study on global inequality by 100 international researchers led by the French economist Thomas Piketty, in which DIW Berlin was also involved. The results show that politicians urgently need to rethink in order to limit inequality to a healthy level and thereby improve opportunities for all citizens to participate.

The facts speak for themselves: it is true that inequality between states has decreased. Emerging economies like China caught up, closing the gap to rich countries in Europe and North America. But within societies, inequality of income and wealth has grown massively almost everywhere since the 1960s. Since then, the incomes of the lower half have decreased rather than increased compared to the upper half.

Charlotte Bartels

is a research associate at DIW Berlin and has worked for the World Inequality Report wrote the Germany chapter.

It is the same in Germany. The share of market incomes of the lower 50 percent, i.e. the half with the lowest incomes, has almost halved compared to the higher-earning half of the population since the 1960s: from over 30 percent to 17 percent of total income in Germany today. The top ten percent, on the other hand, were able to increase their share to 40 percent.

The study gives various reasons for the sharp increase in inequality in almost all countries. One explanation lies in the privatization of public assets such as real estate, land and state-owned companies. Such privatization is not bad per se, since private companies are often better, more efficient and more innovative than a state-planned economy. But after privatization it is usually not ensured that the public sector, and thus the citizens, will have a share in the success of private companies.

Technological change also played a major role in the past two decades. Because people with good qualifications and networks were more likely to take advantage of this change in an increasingly global world with increasing world trade than the poorly qualified and networked.

Deniers in Germany

These inequality facts are accepted in almost all countries. In Germany, however, some, including the Council of Economic Experts, deny the increase in income inequality. One of the objections is that income inequality in Germany has remained stable since 2005 and has not increased any further. In fact, this is not wrong, but it is not very meaningful and a highly selective point of view, since 2005 was a year of crisis for Germany with a record unemployment of over five million unemployed. Choosing it as a reference point distorts the point of view. However, the inclusion of this crisis year does not change the long-term trend of increasing income inequality.

A second objection is that this study looks at market income and not disposable income, i.e. including taxes and transfers. The fact is, however, that even the inequality of disposable income has increased in recent decades, although the German state has provided an ever higher share of economic output for transfer payments from the social systems over the decades.

In other words: although the state tries to reduce income inequality through taxes and transfers, it does not succeed in doing so in the long term. That is precisely why it is so important not only to analyze disposable income, but also the inequality of market incomes, such as the one World Inequality Report has made. Inequality in market income is a measure of equality of opportunity, whereas inequality in disposable income is more of a measure of the size of the welfare state.