Inequality Policies – Predistribution vs Redistribution

One of the main areas of concern from the COVID-19 is the increasing level of inequality. Low-skilled workers have lost jobs as the pandemic has been the catalyst for rapid automation which could make jobs obsolete. Policies need to focus not just on redistribution but also predistribution – see image.

Predistribution – government policies aimed at narrowing differences in market incomes at their source, e.g. education, health
Redistribution – public intervention through transfer payments and taxes related to unemployment, disability, sickness etc.

Source: IMF – Tackling Inequality on all fronts. March 2022

In order to tackle inequality a mix of these two policies is required to try and achieve a level playing field before people enter the labour market. Countries that spend more on social security an have a more redistributive tax system tend to be more successful on average in reducing inequality. Fiscal policy seems to be the most effective policy instrument to achieve this.

In many developing and developed countries there are big differences between income groups and their access to quality education. Also government spending can compensate lower income groups with better infrastructure – clean water, sanitation and basic health services. These policies can increase intergenerational mobility. Progressive taxation has potential to reduce inequality if countries have relatively low rates in terms of its overall burden. However, no government will have enough money to throw at the inequality problem and invariably there will be an opportunity cost – more money spent on education means less on healthcare etc. While fiscal policy has helped reduce inequality in countries it has come at the cost of very high debt levels which now need to be addressed by policies to bring deficits to sustainable levels.

Social Mobility and Education
Education is generally seen as one of the vehicles for increasing social mobility. Research has shown that public expenditure on school education is strongly linked to the degree of income equality. Norway – 97.8% of money spent on school education is part of public expenditure USA – 68.2% of money spent on school education is part of public expenditure. This is likely to have a substantial impact on social differences in access to higher education. America now has lower social mobility than Denmark, France and Germany – see graph below with spending on education, health, and social protection.

In unequal societies, young people from poor families are more likely to drop out of school. More parents struggle with mental health problems, long working hours and debt. Income inequality in the USA is 39 (100 is complete inequality – 1 person owns all the income of the country) Denmark is 25. New Zealand Gini Index is 35 with spending on education, health etc lower than Denmark as a % of GDP.

Source: IMF – Tackling Inequality on all fronts. March 2022

What does Denmark do?

  • University education is free and childcare is well funded
  • The biggest boost to social mobility is wealth distribution. The Personal Income Tax Rate in Denmark stands at 55.8%. It averaged 60.66 percent from 1995 until 201

Across the West rising inequality hampers innovation and entrepreneurship. A study of 21 countries showed that as inequality rose the number of patents fell. Reducing inequality is one of 17 of the United Nations Sustainable Development Goals.

Source: IMF – Tackling Inequality on all fronts. March 2022

For more on Inequality view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

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