5. Implications for policy

The COVID-19 crisis has exposed the wide-ranging inequality that characterises OECD societies (OECD, 2020[1]). Indeed, the shocks to the labour market that it has caused have had highly asymmetric effects across the income distribution. Preliminary evidence suggests that, without the swift intervention of ad-hoc state action, the shocks would have seriously worsened existing disparities (Brewer and Gardiner, 2020[2]; Chetty et al., 2020[3]; Almeida et al., 2020[4]; Clark, D’Ambrosio and Lepinteur, 2020[5]; European Commission, 2020[6]; Carta and De Philippis, 2021[7]).

The planned recovery packages are a tremendous chance to introduce reforms that address structural disparities and widespread lack of opportunity(Boone et al., 2020[8]; OECD, 2020[1]; OECD, 2020[9]). Such reforms require public support wide enough to guarantee their sustainability over time and help them achieve their long-term objectives. However, and often to the surprise of policy makers, support for redistributive government intervention has not risen significantly over the last three decades (Section 3.4). Yet income and earnings disparities have risen considerably, particularly between the 1990s and early 2000s (OECD, 2011[10]), and current levels of inequality and intergenerational persistence remain high (OECD, 2018[11]).

One recurrent interpretation of the limited increase in demand for redistribution over the last decades is that people are “unaware” of the true levels of inequality around them, or are unable to process the information to that effect from researchers and the media. The evidence presented in this report does not lend support to that view. OECD-wide, most people do express strong concern about the scale of income disparities. Indeed, average levels of concern have increased over time, particularly where conventional indicators of inequality, such as the Gini index, have also increased (Section 2.1). Perceived earnings disparities have also risen significantly over time (Section 2.2). Recent data from the Risks that Matter survey show that people perceive high income inequality and low social mobility, particularly if they have experienced hardship during the COVID-19 crisis.

Taken together, all this evidence does not square with the claim of widespread unawareness. On the contrary, it shows that people have incorporated into their concern and perceptions rising inequality and low social mobility. And most people in most countries are strenuously calling for greater equality of economic outcome and opportunity.

Measuring and interpreting people’s perceptions of and their concern about inequality is critical if policy makers are to build sustainable reforms. Perceived disparities and the concern over inequality are important drivers of demand for redistributive policies, overshadowing in some instances the importance of socio-economic characteristics like own income (Section 3.1). Growth in actual inequality – as measured by conventional indicators – leads to an increase in redistributive preferences only insofar as people’s concern also increases accordingly (Section 3.2). Collecting information about perceptions and concern is therefore crucial to designing and implementing reforms to reduce inequality.

However, the evidence presented in the previous chapters also shows that strong demand for equality does not always translate into country-wide support for redistributive policies (Section 3.4). Understanding why not is necessary if policy design is to take people’s concern about inequality into consideration. Against that background, four key policy issues emerge:

  • The interconnectedness between income inequality and intergenerational persistence.

  • How policy design can respond to the heterogeneous nature of perceptions of inequality and demand for redistribution.

  • How policy effectiveness matters to people.

  • How a divided public opinion complicates policy action and how information can help.

Long-term policies to tackle inequalities are often designed on the assumption that there is a simple trade-off between inequality of resources and intergenerational persistence, so that greater equal opportunity at birth would make current inequality more acceptable. Previous evidence and policy analysis argued that such trade-off is not straightforward. Indeed, as inequality in economic and social outcomes today shapes access to opportunities in education and the labour market, it produces unfair advantages and disadvantages that are passed on to the next generation (OECD, 2015[12]; Atkinson, 2015[13]).

The evidence provided in this report shows that also individuals do not imply a simple trade-off. They view intergenerational persistence and income inequality as closely bound up, perceiving one when they perceive the other (Section 2.2). Moreover, perceived income inequality drives demand for more redistribution even when intergenerational persistence is perceived to be low, and vice-versa (Section 3.1). Although the importance accorded to income inequality and intergenerational persistence differs from one society to the other, policy makers need to consider that people want inequality-reducing action that addresses both outcomes and opportunities.

Although people care about inequality of both outcomes and opportunities, concern over and perceptions of economic inequality are highly heterogeneous along different aspects. There are wide differences between countries and people about which side of income disparities is more relevant (whether bottom incomes are too low or top incomes are too high), which obstacles to intergenerational mobility (e.g. parental education or wealth) are more challenging (Chapters 2 and 4), and what are the sources of disparities (e.g. the role of hard work in getting ahead in life). Perceptions of income inequality and intergenerational immobility may combine differently, so calling for different policy mixes, which could give either more weight to policies that directly affect outcomes, like unemployment benefits, or to those that promote opportunity, such as educational policies (Section 3.4). People in different countries also associate redistribution with different interventions, ranging from progressive taxation and income support to housing and healthcare policies. Neglecting the many diverse factors in designing reform packages might lead to a puzzling situation in which, despite high demand for more equality, reforms fail to gather sufficient public support.

Both observational and experimental evidence (Section 3.4) show that people’s support for redistributive policies depends on whether they expect them to be effective. Demand is lower if people believe, correctly or incorrectly, that policies have only a limited impact on people’s economic conditions – because, for instance, most benefits do not go to those who really need them. Information campaigns about inequality-reducing policies increases support for them and can strengthen the link between perceived inequality and preferences for redistribution. Designing effective policies is, therefore, not only a concern for economists, policy makers and advisors, but key to public support. People do not only demand more redistributive policies, they want to see them actually reducing inequality and increasing opportunity.

Policy makers must also rise to the challenges of policy evaluation and communication. Governments need to collect data on policy outcomes and analyse them transparently, as recommended by the OECD’s Council on Open Government (OECD/LEGAL/0438). However, because of its independence from policy makers, the research community has a crucial role to play in scrutinizing the evidence and preventing non-rigorous results from sapping confidence in findings on which the experts agree.

Governments should also communicate robust evidence as to the effects of policies. Doing so requires gaining people’s trust and successfully conveying messages to a non-expert audience. Useful guidance on how to reach out to people may be drawn from this report’s analysis of how people form their perceptions.

Although people generally call for greater equality, public opinion is strongly divided in OECD countries, as shown by the widely divergent perceptions of inequality within most countries, which fuels disagreement between people from the same country. Such dispersion is an additional challenge to reform, as any proposal, even if supported by the majority, is likely to face strong opposition from some groups.

The dispersion of concern is due in part to the heterogeneous range of people’s preferences for equality (Chapter 4). However, much of it also stems from different perceptions of current levels of inequality and intergenerational persistence. Experimental evidence shows that providing people with factual information about inequality changes their perceptions (Section 2.2), even if it does have only a minor effect on redistributive preferences (Section 3.4). Facilitating communication and discussion of sound evidence on inequality could help provide meeting points in the national debate, even if it did not necessarily narrow differences of opinion about policies. A first important step would be to clear up the confusion between disagreement about what the level of inequality is – facts on which people should be able to agree – with disagreement about what it should be – which speaks to people’s preferences and principles.

Several initiatives seek to raise awareness of income distribution and inequality of opportunity in order to lay some common ground for public debate. For instance, the OECD’s Compare Your Income webtool allows people from OECD member countries to assess where they stand in their national income distribution according to the best available estimate from the OECD Income Distribution Database (IDD). People may also use it to compare their perception of the poverty line with a statistical estimate from the IDD. The Opportunity Atlas, built by the US Census Bureau together with Raj Chetty, Nathan Hendren and John Friedman, maps the economic outcomes of children born in different neighbourhoods across the United States. However, more information does not necessarily broaden agreement. Indeed, revealing the profound divide between rich and poor may actually reinforce differences of opinion across the income distribution. Furthermore, as there are many possible reasons why people’s perceptions differ from objective measures (Section 2.2), governments should be transparent and clear when communicating empirical evidence to avoid conflict between their, expert, view and people’s views. Contextualising evidence can help prevent such conflict and help individuals to take in information and, possibly, update their perceptions.

The discussion of subjective evaluations of economic inequality often starts with analysis of the extent to which perceptions are distorted views of reality. This report follows a different approach. Instead of identifying whether people’s estimates are fully comparable with conventional estimates, it seeks to understand what can be learnt about the way people form their perceptions and concerns, and how that influences their demand for redistributive policies.

The report finds that people’s perceptions of inequality are not an artificial construct. Although they may not correspond to statistical estimates, international differences in perceptions correlate well with international differences in conventional indicators (Section 2.2), which suggests that people incorporate evidence of economic inequality into their own views. Nevertheless, such perceptions vary from person to person and country to country beyond the differences in actual measures, so painting a complex picture. These perceptions matter for demand for redistribution (Section 3.1) and convey crucial information as to what matters to people, which policies need to take into account.

People’s concern about inequality should not be taken as their personal description of reality. As argued in Chapter 2, concern is a normative assessment that people build not only from their perceptions of the current level of inequality, but also from their preferences. Even if every member of a society perceived the same level of income inequality, concern would vary because different individuals have different views of what a fair level of inequality would be.1 In that respect, people’s concern cannot be taken as “right” or “wrong”, inasmuch as it reflects their preferences. Separating the two components – perceptions and preferences – is crucial for understanding how concern about inequality changes over time and across countries.

The report shows that preferred level of (earnings) inequality rose over time, but by less than perceived disparities (Section 2.3). The distinction between preference and perception is also relevant to any policy discussion that tries to find support for reform across different groups and people, as it is clearly fruitless to contend that perfect information would lead to perfect agreement.

Interpreting the available evidence on subjective views of inequality requires careful methodological consideration. The reports offers several insights into the definition and measurement of the different aspects that form these subjective views. However, their ambiguity requires further methodological discussion, given the multidisciplinary nature of the research into subjective views of inequality, which combines analysis from economics, political science, psychology and sociology. Developing clear guidelines is necessary for any systematic collection of data on perceptions of and concern about economic inequality. The OECD Expert Group on New Measures of the Public Acceptability of Reforms aims at contributing to this effort. The discussion from previous chapters highlights four important areas of further research:

  • More granular data on the entire distribution of perceptions and concern;

  • Preferences for concrete policy options;

  • Perceptions of the effectiveness and functioning of redistributive policies;

  • How perceptions and concern evolve over time.

It is important to analyse the entire distribution of perceptions and concern and to collect data that allow for more granular analysis. Going beyond the average level of concern and support for policies helps to understand how the policy debate can become divided and polarized, so predicting disagreement and tension over the introduction of redistributive reforms. As Chapter 4 shows, the dispersion of perceptions and concern increased in most OECD countries. Socio-economic divides, like income and education, explain only a slight share of the total dispersion of perceptions and concern, and a very small share of increased dispersion over time. Measuring and analysing the distribution of perceptions and concern among people in a country can prove valuable in understanding new forms of social conflict.

There is also limited knowledge about the variability of perceptions at a more granular level. Although the aggregate perceptions of different socio-economic groups do not differ strongly, little is known about their target-specific beliefs and their perceptions of certain patterns of inequality. For instance, drawing on a large dataset, Hviedberg, Kreiner and Stantcheva (2020[14]) find that Danish people view income disparities within their own educational or occupation reference group as the least fair.2 Furthermore, most current surveys are not representative at sub-national level and do not, therefore, allow proper analysis of differences in perceptions and concern in local areas. A more granular analysis would require considerable effort in collecting data on perceptions – through large-scale representative surveys, for example.

There is limited evidence as to people’s preferences for concrete policy options and their views of the role of other actors, such as trade unions and firms. Evidence from the previous chapters shows that people have different preferences for different policy mixes (Section 3.4), partly because their perceptions and concern vary so much from one aspect of inequality to another, such as top or bottom income inequality and intergenerational persistence. Yet, little is known about the relation between perceptions and demand for specific policies.

The evidence is also rather limited about preferences for predistribution policies that focus on market income disparities, such as minimum wage and gender quotas. Some national surveys, often carried out as part of informational experiments (Kuziemko et al., 2015[15]; Stantcheva, 2020[16]), focus on the relevance of analysing concrete policy options – which include predistributive action – both because people might favour specific policy mixes and because much of the disagreement might arise when it comes to discussing concrete options. However, most of the cross-country surveys focus on general “preferences for redistribution” questions, with the exception of the recent Inequality and Politics Survey conducted by Pontusson et al. (2020[17]). More comparative evidence can help shed light on what drives preferences for specific policies, including regulation and pre-distributive policies, and in what conditions different policy mixes have more chance of wide supported. The OECD Risks that Matter survey, and the new wave of Compare Your Income are concrete steps in this direction, as they collect people’s concerns on a wide range of different social and fiscal policies – from detailed tax rates to specific social benefits.

Following the literature on preferences for redistribution, this report has focused on people’s views about the role of government in tackling income inequality. However, concern about inequality might also increase demand for the intervention of other actors, such as trade unions, firms and civil society. Collecting people’s opinions about a wider range of alternative interventions might prove valuable in understanding the cases in which concern about income disparities does not translate into demand for redistribution.

There is still limited evidence as to people’s understanding of redistributive policies. The evidence discussed in Chapter 3 shows that people’s views of the functioning and effectiveness of policies play a key role in shaping support for redistribution as a response to rising inequality.

Recent work by Stantcheva (2020[16]) on the United States uses a combination of survey and experimental methods to consider people’s widely varying views of the government and the redistributive impact of tax policy. Following a similar approach in a comparative framework might prove useful both for understanding differences across countries and for guiding reform action within each country.

Chapter 2 shows that tracking how perceptions and concerns evolve over time affords important insights into how people form their views and respond to changes in inequality. Yet, few national surveys do any such tracking, re-interviewing respondents in multiple waves.3 Consequently, there is little analysis of whether people’s perceptions and preferences change or stay the same over time.

One exception is Fong, Kauppinen and Poutvaara (2021[18]), who use data from the German Socio-Economic Panel to show that people change their opinions about growing transfers to the poor and taxes on the rich. One way to fill the evidence gap would be to include questions about subjective factors of inequality in existing longitudinal household panel surveys, possibly co-ordinating the effort so as to have the same questions across different countries.

References

[4] Almeida, V. et al. (2020), “Households´ income and the cushioning effect of fiscal policy measures during the Great Lockdown”, JRC Working Papers on Taxation and Structural Reforms, No. 06/2020, European Commission, Joint Research Centre, Seville, https://ec.europa.eu/jrc/sites/default/files/jrc121598.pdf.

[13] Atkinson, A. (2015), Inequality: What can be done?, Harvard University Press, Cambridge, MA, https://www.tony-atkinson.com/new-book-inequality-what-can-be-done (accessed on 2021 October).

[8] Boone, L. et al. (2020), Building back better: enhancing equal access to opportunities for all, https://oecdecoscope.blog/2020/07/21/building-back-better-enhancing-equal-access-to-opportunities-for-all/.

[2] Brewer, M. and L. Gardiner (2020), “The initial impact of COVID-19 and policy responses on household incomes”, Oxford Review of Economic Policy, Vol. 36/Supplement_1, pp. S187-S199, http://dx.doi.org/10.1093/oxrep/graa024.

[7] Carta, F. and M. De Philippis (2021), “The impact of the COVID-19 shock on labour income inequality: Evidence from Italy”, Occasional Papers (Questioni di Economia e Finanza), No. 606, Bank of Italy, https://www.bancaditalia.it/pubblicazioni/qef/2021-0606/QEF_606_21.pdf?language_id=1.

[3] Chetty, R. et al. (2020), The Economic Impacts of COVID-19: Evidence from a New Public Database Built Using Private Sector Data, National Bureau of Economic Research, Cambridge, MA, http://dx.doi.org/10.3386/w27431.

[5] Clark, A., C. D’Ambrosio and A. Lepinteur (2020), “The Fall in Income Inequality during COVID-19 in Five European Countries”, ECINEQ Working Papers Series, No. 565, Society for the Study of Economic Inequality, http://www.ecineq.org/milano/WP/ECINEQ2020-565.pdf.

[6] European Commission (2020), Employment and Social Developments in Europe 2020, Luxembourg: Publications Office of the European Union, http://dx.doi.org/10.2767/478772.

[18] Fong, C., I. Kauppinen and P. Poutvaara (2021), “Economic Experiences, Target-specific Beliefs and Demands for Redistribution”, mimeo.

[14] Hvidberg, K., C. Kreiner and S. Stantcheva (2020), Social Position and Fairness Views, National Bureau of Economic Research, Cambridge, MA, http://dx.doi.org/10.3386/w28099.

[20] Kolm, S. (1976), “Unequal inequalities. I”, Journal of Economic Theory, Vol. 12/3, pp. 416-442, http://dx.doi.org/10.1016/0022-0531(76)90037-5.

[15] Kuziemko, I. et al. (2015), “How Elastic Are Preferences for Redistribution? Evidence from Randomized Survey Experiments”, American Economic Review, Vol. 105/4, pp. 1478-1508, https://www.jstor.org/stable/43495425.

[9] OECD (2020), Building back better: A sustainable, resilient recovery after COVID-19, https://www.oecd.org/coronavirus/policy-responses/building-back-better-a-sustainable-resilient-recovery-after-covid-19-52b869f5/#section-d1e45.

[1] OECD (2020), Enhancing equal access to opportunities for all in G20 countries, OECD Publishing, http://www.oecd.org/economy/enhancing-equal-access-to-opportunities-G20/.

[11] OECD (2018), A Broken Social Elevator? How to Promote Social Mobility, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264301085-en.

[12] OECD (2015), In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264235120-en.

[10] OECD (2011), Divided We Stand: Why Inequality Keeps Rising, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264119536-en.

[17] Pontusson, J. et al. (2020), Introducing the Inequality and Politics Survey: Preliminary Findings, https://archive-ouverte.unige.ch/unige:135683.

[19] Rueda, D. and D. Stegmueller (2019), Who Wants What?, Cambridge University Press, http://dx.doi.org/10.1017/9781108681339.

[16] Stantcheva, S. (2020), Understanding Tax Policy: How Do People Reason?, National Bureau of Economic Research, Cambridge, MA, http://dx.doi.org/10.3386/w27699.

Notes

← 1. The same, in fact, is also true of the experts’ view. As put by Kolm (1976, p. 416[20]): “I can take (…) any two countries and prove that inequality is higher in the one or in the other, by choosing different inequality measures.” To take this into account, the Atkinson index explicitly incorporates a parameter that captures aversion towards inequality, and therefore its value changes with the level of aversion.

← 2. The authors use a sample of 9 415 respondents aged 45-49. This sample size is more than 9 times the usual sample in surveys like ISSP or Risks that Matter.

← 3. The German Socio-Economic Panel and the British Household Panel Survey collect people’s preferences with respect to some redistributive policies (see Rueda and Stegmueller (2019[19]) for a discussion).

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