"Fair" Inequality ? An International Comparison of Attitudes to Pay Differentials

1. "Fair" Inequality ? An International Comparison of Attitudes to Pay Differentials Lars Osberg Dalhousie University Tim Smeeding Syracuse University July 2, 2005 Society for the Advancement of Socio-Economics Budapest

2. Inequality & Public Policy • Greater inequality in market incomes implies more people would benefit from redistribution • Democracy + self-interest of Median voter implies • higher taxes & more redistribution when market incomes are more unequal ?? • USA is important counter example • More inequality & poverty than in other affluent OECD nations • Governments do less about it

3. Why is US policy different ? • Policy outcomes depend on public preferences + institutional structure • H0: American “preferences” different • Greater emphasis on = opportunity ?? • More acceptance of mobility/change ?? • economics literature emphasizes POUM (Prospect Of Upward Mobility) • Alesina, di Tella and MacCulloch (2001), Alesina and la Ferrara (2001), Alesina and Angeletos (2003), Benabou and Ok (1998) and Piketty (1995)

4. But are US attitudes different? • “Preferences” for redistribution mingle: • Perceptions of actual outcomes • Perceptions of possibility & costs of change • Values about desirable outcomes • Values about legitimate process & agents of change • HA: USA not particularly different in values • Large & subtle sociological & survey literature - ignored in economics literature • Examples: Kelly and Evans (1993), Kluegel et al (1995) Svallfors (1997) Suhrcke (2001). • USA not an outlier in international survey data • except perhaps in average attitudes to government as agent of change ?

5. Are attitudes different ? Plan: • So why not just ask people ? • Average answers not so different • Distribution of attitudes may be key for political economy • What do the answers mean ? • Many issues mingled in “inequality” or “redistribution” • “Should earn” / “Do earn” data in ISSP • Preferences for aggregate inequality • Leveling up or down ? Max/mean & Mean/min • Distribution of preferences for leveling • Determinants ?? • USA is different in % religious fundamentalism • Conclusion

6. & the bottom line will be ……?? • Hard to find big cross-national differences in attitudes – on average • General preference for “less inequality” even given underestimation of extent of actual inequality • Polarization in US attitudes is different from elsewhere – especially Europe • Similar preferences across nations for “leveling down” at top of distribution • + massive under-estimation of actual top end inequality • Anglo countries have less concern for social minima

7. Are Income Differences “Too Large”? • Most people, in all countries agree or agree strongly • Tiny minority everywhere “disagree” • USA is not particularly “different” • USA also not an outlier when asked to agree/disagree: • “Inequality continues to exist because it benefits the rich and powerful” • “Large income differences are necessary for a country’s prosperity” • Importance of “Knowing the right people”, “Well-educated parents” , Education/Ambition/Ability/Hard Work

9. What do such questions mean ? • To fix ideas, suppose that we lived in a just society, then: “should get” income = “do get” income (1)Yi * = YiA (2)YiA > Y*min Y*min  0 (3) YiA < Y*max Y*max  • If society is not just, then some may get “too much” while others get “too little” Yi * = b0 + b1 YiA • If an individual believes society is fair, then • b0 = 0 b1 = 1Y*max > YiA > Y*min

10. Figure I Equity in Earnings c Y*max Y* = YA “Should Earn” Y* A e Y*min a d YJ Y2 Y1 “Do Earn” YA

11. 3 dimensions of Pay Norms • (1) the ethical floor to minimum earnings (Y*min ); • (2) the ethical ceiling to maximum earnings (Y*max); • (3) the desired degree of levelling, relative to the current income distribution, among “acceptable” incomes (b1 ). • Note: Jasso ratio = ln (Yi A / Yi *) • implicitly sets b0= 0

12. Inequality – an issue of “comparing two frequency distributions f(y)”??Atkinson JET 1970 • “Inequality” has two meanings • Differences between individuals/groups in rewards • Relative income ratio is only necessary information • Dispersion of rewards in a population • Estimate of population densities needed • Gini/Theil/Atkinson – all need to know f(yi) • Subjective perceptions of income frequencies based on biased, self-selected small samples • Population densities estimated with great error • Most respondents place selves in “middle” regardless of actual level of income • Are ethical attitudes driven by $ differentials or population frequencies? • E.g. Black/white, male/female, skilled/unskilled differentials • – how relevant is the number of each to equity norms ?

13. “Do Earn” & “Should Earn” Inequality • ISSP 1999, 1992, 1987 • what salaries do people actually make ? • what salaries should they make ? • skilled factory worker, doctor in general practice, chairman of a large national company, lawyer, shop assistant, owner/manager of a large factory, judge in the country’s highest court, unskilled worker & federal cabinet minister. • + Bus driver, secretary, brick layer, bank clerk in 1987 • “should earn” is conditional on “do earn” • For political economy, subjective reality is key • “Should earn” implicitly controls for estimation errors, process, family “need”, hours work, etc.

14. Preferences for Aggregate Inequality • For each person - calculate subjective inequality index (CV,Gini, Theil) • Actual Inequality (CVA, GiniA) • “Ethical Inequality” (CVE, GiniE) • Ratio – “tension” ? • Is “Ethical inequality” = 0 ? (nowhere) • What is tension between actual & fair inequality ? (constant)

17. Actual & Ethical Inequality • All nation averages - GiniA~.46; GiniE ~.34 • Trend & Level of actual earnings inequality not reflected in subjective estimates of actual inequality • All countries accept some earnings inequality • USA not particularly different from others • “Should Earn” inequality is less than “Do Earn” inequality in all countries (Ratio ~ .75)

18. Two Distributional Problems • A summary statistic (Gini, Theil, CV)cannotreveal where the concern with inequality lies • max, min or leveling in between ? • The Distribution of attitudes & estimates may matter crucially for political economy

19. What is the socially acceptable range of incomes? How much inequality is perceived ? • ISSP queries span the range • very top (chairman of a large national company) • very bottom (unskilled worker) • Do nations differ in acceptable range ? • Between middle & top ? • Not very much - & desired range is approx 2:1 • Between middle & most disadvantaged ? • Significantly – Anglo countries especially • Actual extent of salary differences is massively underestimated

26. In all countries, survey respondents estimate there to be far smaller income differentials than actual data indicates • Across countries, little variation in average respondents’ acceptable “Top End “ inequality • Max/Mean “Should Earn” ratio is approximately 2 • USA in middle of pack • US, UK Canada show larger acceptable bottom end inequality • Mean/Min “Should Earn” approx 3.2 • Distribution of Preferences for leveling: b1 in Yi * = b0 + b1 YiA

33. Implications & Explanations ?? • Current actual trends are for widening inequality – particularly at top end • But is extent & trend of inequality perceived ? • USA – leveling preferences are bimodal • Levelers & status quo defenders split • Hardening of American attitudes against large differentials at top • Erosion of consensus on minimum standards • Polarization of attitudes - not a recipe for political stability • “Bi-causal” perceptions are highly susceptible to “framing” and salience – possibly unstable ?