Income inequality and social preferences for redistribution and compensation differentials

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Title: Income inequality and social preferences for redistribution and compensation differentials
ISBN: 978-952-6699-52-3
Author: Kerr, William R.
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2013
Series number: 31/2013
Year of publication: 2013
Publication date: 10.12.2013
Published in: Published in Journal of Monetary Economics, Volume 66, September 2014: 62-78
DOI: 10.1016/j.jmoneco.2014.03.002
Pages: 48 s.
Keywords: tulonjako; USA; palkat; kansainvälinen;
JEL: D31; D33; D61; D63; D64; D72; H23; H53; I38; J31; R11
Abstract: In cross-sectional studies, countries with greater income inequality typically exhibit less support for government-led redistribution and greater acceptance of wage inequality (e.g., United States versus Western Europe). If individual nations evolve along this pattern, a vicious cycle could form with reduced social concern amplifying primal increases in inequality due to forces like skill-biased technical change. Exploring movements around these long-term levels, however, this study finds mixed evidence regarding the vicious cycle hypothesis. On one hand, larger compensation differentials are accepted as inequality grows. This growth in differentials is of a smaller magnitude than the actual increase in inequality, but it is nonetheless positive and substantial in size. Weighing against this, growth in inequality is met with greater support for government-led redistribution to the poor. These patterns suggest that short-run inequality shocks can be reinforced in the labor market but do not result in weaker political preferences for redistribution. JEL Classification: D31, D33, D61, D63, D64, D72, H23, H53, I38, J31, R11. Key Words: Inequality, Social Preferences, Social Norms, Redistribution, Welfare, Class Warfare.

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