Inequality and efficiency a post crisis view from European
perspective FES round table debate Zagreb 7. April 2011 Bla Galgczi
[email protected]
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2 Equality and efficiency: the context critical review of the
equality-efficiency trade-off assumption highlighting its limits
> pointing to the different manifestations and origins of
inequality in various forms of market economies. Some stylised
facts on the development in income inequality in Europe to show
that the current crisis has much more to do with the lack of
equality, than with two much of it. Lessons from the 2008-2010
crisis show us that decades long accumulation of inequality backed
by irresponsible financial practices was one of the major causes of
the deepest economic crisis in the post Word War world and led to
an unprecedented loss of efficiency.
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3 Equality and efficiency: the context The equality-efficiency
trade-off assumption comes from Arthur Okun (Okun, 1975): `Equality
undermines incentives, pro-equality policies distort market
allocation and economic performance can only be improved at the
expense of a less equitable distribution of income`. This
interpretation looks at the relation of equality and efficiency in
a very narrow context and the generation of inequality (before
social transfers) is not addressed at all Polanyi (1957): `embedded
markets perform better`; Esping Andersen (1990): more equality
through `decommodification` Okun`s `trade-off` is partially true
for free market economies (if we assume, markets are perfect)
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4 Equality&efficiency To avoid misunderstanding this does
not that mean full equality in form of egalitarian societies would
be desirable Inequality based on performance and skills-bonus is
needed as incentives Redistribution is needed to the extent of
managing a cohesive society Redistribution needs to be targeted and
efficient Our point here is: recent history tells not about
inefficiency caused by too much equality, but about inefficiency
caused by excessive inequality
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5 Stylized facts on progressive inequality in Europe and the
world At the time of increased capital mobility and globalisation,
when cca. 1 billion workers got integrated in the world economy
(China, India, eastern Europe) the previous balance between labour
and capital has shifted Wage moderation is characteristic for most
EU15 countries for the last 10 years Wage shares in GDP are falling
Wage differentials are growing The danger of a downward spiral is
real
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6 Sustainability/ Equality Economic Social Environmental
Trilemma: Different dimensions of sustainability have also an
equality dimension
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7 Features of equality/efficiency/sustainability In the basic
scenario, one can pursue economic efficiency to the detriment of
social and environmental aspects - This is what happened in the
last decades: balance between capital and labour was shifted as the
share of labour within the accumulated wealth (GDP) has shrunk in
all major economies; depressed wages were substituted either by
credit based consumption (US, UK, IE, ES, Baltics) or export driven
growth (Germany) where exports were largely financed by debt
(exception: China). - Environmental resources were seen as external
factors that are free and unlimited (irreversible climatic
processes with a catastrophy scenario, source for new inequality
)
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8 Income inequality the background Decent pay as basic
principle make work pay a basic function of the European Social
Model BUT: increasing wage differentials Background: large low pay
sector in Europe (20 million employees on law pay in Europe),
precarious jobs Segmented labour markets lack of proper bargaining
coverage in several sectors/countries Labour migration migrant
workers` wages and labour conditions Freedom of services (Vaxholm
case)
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9 Shrinking wage share a long term perspective Note:
Compensation per employee as percentage of GDP at market prices per
person employed.
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10 Inequality among employees: Average real annual pay growth
in the US (2003-2007)
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11 Inequality in Germany > Divergence /inequality/ in the
Eurozone
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12 Inequality in Germany > Divergence /inequality/ in the
Eurozone
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13 Wage moderation in Germany Germany is the model case of wage
moderation in Europe Employees have a continuously sinking share in
the wealth produced Low wage sector expanding (7-8 Mn employees in
Germany) Result: low domestic demand > export offensive Sinking
unit labour costs in Germany pushes the rest of the Eurozone `into
the corner` (Spain, Greece, Portugal, Italy) These countries have
no other option then to cut wages, as well
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14 Growing inequality in some EU countries and the US: the Gini
coefficient
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15 Armut in der Arbeit Armutsrisiko Alleinerziehender, 2008
Data Source: Eurostat Survey of Income and Living Conditions.
Notes: 2008 Figures except IE, IT, UK, and EU27
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16 Effekte der Krise auf die ffentlichen Dienste
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17 Unsustainable economic growth: household debt and income
inequality
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18 Conclusions While inequality justified by performance and
skills is not being questioned, limits of inequality appear within
the concept of a `cohesive society` Redistribution definitely needs
to be targeted and efficient with some scope for efficiency equity
trade-off What we are facing in the current world is too much
inequality that also detrimentally effects efficiency This is even
more true for South-East Europe (and transformation economies in
general) There are additional factors of inequality (corruption, in
certain regions even criminal economy) and the inequal
participation at the reallocation of resources during
transformation (e.g. privatization and its transparency).