How did Europe do on SDG 10.1 - sustaining income growth of the bottom 40%?

23 May 2019
By Thomas Blanchet and Lucas Chancel and Amory Gethin

At the World Inequality Lab, Thomas Blanchet is the Statistical tools and methods coordinator; Lucas Chancel is the Co-Director; and Amory Gethin is a Research Fellow.

After a decade of economic stagnation and growing macroeconomic divergences, the challenges associated with trade globalisation, technological progress and rising job insecurity remain as real as they were before the 2007-2008 crisis. This throws into question the ability of the European social model to deliver inclusive growth. The adoption of the Sustainable Development Goals (SDGs) in 2015 under the aegis of the United Nations, as well as the European Pillar of Social Rights adopted in 2017 by European Union members, represent decisive movement towards a better monitoring of income disparities. Yet we still know little about these inequalities, especially at the European-wide level.

In a new study, the World Inequality Lab has brought together a wide array of data sources to analyse the evolution of income inequality in 38 European countries between 1980 and 2017. For the first time, it has become possible for researchers, policy-makers and citizens to get a precise picture of the distribution of national income growth over the past four decades. Our income comparator also allows anyone to find their position in the income distribution of their country, of Europe or even of the world as a whole.

The first result which emerges from these new series is that since 1980 income inequality increased nearly everywhere in Europe. The SDG inequality target, introduced in 2015, calls for income growth among the bottom 40 per cent of the population to rise more quickly than the national average. Yet this has only very rarely been the case in Europe since 1980. In nearly all countries, the bottom 40% of the population grew at a slower rate than the national average. Only two nations managed to generate a faster income growth for the bottom 40% than for the average (Norway and Spain) but in these countries, growth was not significantly faster than the average.

Conversely, top income earners have been the primary beneficiaries of development in Europe. In virtually all European countries for which high-quality data sources are available, growth was significantly higher among top earners – the top 1% or top 0.1% of citizens – than among the rest of the population. In Europe as a whole, the average income of the top 1% increased two times faster than that of the poorest half of the population and captured 17% of total national income growth, compared to only 15% for the entire bottom 50%. The rise in inequalities has been strongest in Eastern Europe, whose transition from communism to capitalism in the 1990s benefited an elite. Northern Europe has seen an increase too, but remains the least unequal European region.

A second important result is that European-wide inequalities are essentially driven by what happens within countries rather than by differences in average incomes between countries.

Looking between counties, the growth trajectories in European countries since 1980 have a mixed track record overall: Eastern European countries are still recovering from the large recessions in the beginning of the 1990s, while the subprime mortgage crisis has led to strong macroeconomic divergence, especially in Southern Europe.

Inequalities within countries, by contrast, have increased in a large majority of European countries since 1980, and remain much more substantial than those between countries. There are poor Europeans living in France, Germany and even Norway, just as there are rich Europeans living in Albania, Bosnia and Bulgaria. Macroeconomic convergence, which has been a key focus of many EU institutions since their inception, is not enough to truly promote inclusive growth across Europe. The European-wide poverty rate, for instance, would only decrease from 22% to 20% if all countries were to have the same average national incomes per adult.

Thirdly, while inequalities have risen, the European social model has been much more successful at promoting inclusive growth than the United States. In Europe, the bottom 50% of pre-tax incomes grew by close to 40% since 1980. They increased by a mere 3% in the United States over the same period. Accounting for taxes and transfers barely affects this picture, even if direct taxes and transfers in the US are in fact slightly more progressive than in Europe as a whole. Most importantly, Europe’s ability to prevent a stagnation of incomes at the bottom of the distribution can best be explained by “predistribution” policies, which allow a fairer distribution of market income gains. These include labor market regulations, as well as public provision of healthcare, free access to education. Financing such social services in a progressive way is one of the most pressing issues for European Member States: over the past decades, consumption taxes have become more regressive, while the progressivity of corporate income taxes has declined.

In order to enable peaceful democratic debate over such issues, economic data transparency remains critical. The World Inequality Lab is committed to provide sound and transparent data to citizens, policymakers, business and civil society.

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Photo: UN Photo/Jean-Marc Ferré