The Economics of Inequality by Thomas Piketty: Putting inequality back on agenda

The Economics of Inequality

Author: Thomas Piketty

ISBN-13: 978-0674504806

Publisher: Harvard University Press

Guideline Price: £16.95

After an interlude the idea of economic inequality is back on the agenda. A combination of events, observable trends and, more recently, the published works of economists such as Thomas Piketty, Tony Atkinson and Richard Wilkinson have helped put the spotlight on the question of social inequality. That inequality matters is becoming less controversial among commentators and politicians. That we can do something about it is another issue.

Piketty's The Economics of Inequality, which acts as a primer, provides a useful starting point for a wide audience. That said, it is a dense read and is quite technical in parts. The book is not new and, as Piketty acknowledges, has dated since he originally wrote it, in French, in 1997. It is a short book compared with the 580-page Capital in the 21st Century, which appeared in 2013.

Many of the big ideas and key themes of that book are already signalled or hinted at in The Economics of Inequality. The pressure of demographics, technological change and the big shifts in public policy, not least in taxation, give rise to very significant long-term changes in inequality. There is no inexorable law of increasing or decreasing inequality, Piketty claims. But it is clear that a period of falling inequality, such as occurred in most advanced economies between 1945 and 1975, was very likely a historical aberration related to political and social factors, as well as reflecting the direct consequence of war and its destruction of capital before 1945.

Piketty draws attention to two important trends or facts that are often overlooked, rarely discussed and poorly measured in Ireland:

The degree of inequality in wages (as distinct from incomes) at any point in time and over time.

The split between income to labour and income to capital at any point in time and over time.

And add to this a third found in Capital in the 21st Century:

The distribution of the stock of capital wealth as distinct from the distribution of incomes.

The relative neglect of these three facts in Irish public debate is linked to a policy preoccupation with households as recipients of income, whether by way of wages, pensions, social transfers or revenue from ownership of capital (dividends, rent and interest payments received) but not on the role of wages in bringing about greater or less inequality.

It is as if the distribution of wages – or for that matter the share of labour in national income – does not matter, as government is pretty efficient (so it is suggested) at redistributing income through taxes and wages. If wages are to be increased at the bottom, as recommended recently by the Low Pay Commission, then the Government is likely to offer some inducement by way of lower social charges on employers.

Unlike in many other European countries, many lower-paid workers do not pay any income tax, while the universal social charge is (incorrectly) referred to as an emergency tax.

The deal is that workers get a pretty lousy social wage in return for paying less tax on income. At the same time, companies are spared most of the social charges that employers in other European states pay, especially in countries such as France. Piketty illustrates differences in the “social wage” in a US-France comparison.

He also emphasis the role of education and training in determining the level and distribution of income – a topic that was popular in the 1990s when demand for higher skills seemed to be driving wage inequality in some OECD countries.

He concedes that the changing pattern of educational completion in the population could increase inequality during some historical periods, as changes in demography coupled with advances in educational completion might increase the “premium” to better-educated workers over less well educated workers.

In his discussion of labour-income inequality, Piketty considers the redistribution of labour income through taxes and transfers. He wonders if there is a case for cutting the social charges that employers pay for lower-paid jobs, to boost demand for lower-skilled workers and help lead to greater equality.

What would be wrong with this, compensated for, as some Irish trade unions have advocated, by higher social charges on higher-income workers? Employer PRSI, for example, could initially be increased from its very low rate for any employee paid more than, say, €100,000.

The problem with such a strategy is that it requires all the parts to work together coherently: differentiated employer costs, adequate social-insurance contributions from both employers and employees, and management of wage increases for different sectors and groups of workers. It is far from clear that the political will and shared understanding exist in Ireland to arrive at such a social bargain.

Piketty discusses, at some length, the role of taxes, including a system of credits introduced in the US in the 1970s to assist low-paid workers. He claims that such tax credits help to improve equality as well as lower the effective marginal tax rate for low-paid workers, and that this measure has a bigger impact than attempts to lower the marginal tax rate for highly paid workers. (Michael Noonan please note.) But what would be even more useful would be an analysis of how the “pre-distribution” of income could be altered, today, through pay negotiations that shifted the labour-income-to-GDP ratio upwards and gave higher percentage increases to the lower-paid.

Tom Healy is director of the Nevin Economic Research Institute