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Monday, April 20, 2009

Why does Europe have a More Equal Income Distribution than the USA.

Warning I teach a course on this. Some quick notes in response to a question in comments.

That aside, the basic reason IMHO income is more distributed in Europe is not taxation. It's that their systems make it harder for speculators and CEOs etc. to skim off so much money to begin with. Am I right?

# posted by Neil' :


It's real complicated. First it is definitely true that European pre tax and transfer incomes are more equally distributed than US pre tax and transfer incomes.

However, US inequality is not of the form of a few super rich people and the lower 99% having income distributed as it is in Europe. The income of the lower 99% is less equally distributed in the USA too. This is probably due to differences in wage setting institutions. In continental Europe there are legally binding minimum wages by industry occupation seniority etc. This means that wages for similar workers in high wage firms and in low wage firms are much more similar than in the USA.

The left blogosphere has been focusing on the very upper tail in the USA, because that is where the dramatic change in the past 20 years has been concentrated. Even there it is not CEOs. CEOs of large firms have huge compensation in the USA, but there aren't many of them.

I read somewhere a summary of fairly recent data whihc gave total compensation of fortune 500 CEOs is about 6 billion -- an insignificant sum compared to the income of the top 1% in the USA. Total compensation of the top 5 officers of the top 2000 corporations is about $ 28 billion.

The compensation of officers of large corporations is obscene, has increased enormously, and is more or less open theft from shareholders, but it is *not* the main explanation of the huge income of the richest 1% in the USA.

Instead you have to look at the speculators -- people in finance. That's where the money went. I think the main cite for this claim is the Kaplan-Rauh paper noted here

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