Creating More Equal Societies in the context of the European Pillar of Social Rights findings from evidence reviews

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1 Creating More Equal Societies in the context of the European Pillar of Social Rights findings from evidence reviews Abigail McKnight Work, Welfare and Inequalities in Europe the research perspective Brussels, 10 October 2016

2 Background General upward trend in inequality across EU/OECD countries but variation suggests that policy intervention has a key role to play. Unprecedented consensus on the need to tackle economic inequality alongside tackling poverty, and generate the conditions favourable for inclusive growth. Lack of any strong evidence that inequality reduction harms growth or that growth per se leads to a reduction in economic inequality (in mature marketbased economies). As EU economies recover from the aftermath of the 2007/08 crisis (the causes of which many have argued relate to economic inequality), the time is right to shift attention to identifying which policies are likely to be most effective at ensuring that the returns from future growth are shared more equally.

3 Three policy areas: Education (SRP - Equal opportunities and access to the labour market) Attainment, expenditure and inequality Schooling systems Equity Labour Market Institutions (SRP Fair working conditions) Collective wage bargaining Minimum wages Top executives pay Welfare States (Adequate and sustainable social protection) Welfare state regimes Cash transfers Active labour market programmes

4 Education - Introduction Education inequality a driver of economic inequality Education is a key determinant of wages inequality in educational attainment -> income inequality; improving educational attainment among women has narrowed the gender pay gap (but has not eradicated it); in broad terms, education inequality has narrowed even where economic inequality trends upwards. The Race between education and technology Jan Tinbergen introduced the notion of a race between increasing demand for educated workers and the expansion of the educated population. While both recognise the over simplification of this general theory, Atkinson and Piketty acknowledge its value for understanding inequality dynamics in relation to education. Education and social mobility Education plays a key role in the reproduction of inequality across generations. The relationship between family income background and children s educational attainment varies across countries but higher levels of income inequality are associated with lower levels of social mobility (in general).

5 Education inequality and the role of public expenditure Patterns of public expenditure on education help to explain cross-country differences or similarities in income and educational inequality (Rodriguez-Pose and Tselios, 2009) access and quality; Spending on primary and secondary education is most beneficial to lower income households with inequality often driven by tertiary education; Public expenditure on tertiary education most variable across countries (OECD, 2008). Inequitable access and attendance to higher education is highly correlated with income inequality (Piketty, 2014); Considerable variation in access to, and quality within tertiary education holds the key to understanding one of the main determinants of economic inequality and identifying policy pointers. Screening and signalling: inequality and the quest for more education. How can the state compete with wealthy families?

6 Labour Market Institutions and Pay Determination Wage setting systems contribute towards differential rates of pay and therefore have a direct impact on earnings inequality; These systems can be limited to setting the lowest wages (minimum wages) or more generally through collective bargaining or setting the highest wages; To a considerable degree the market outcome (pay) is currently the result of the bargaining power of different participants (Atkinson, 2015).

7 Wage bargaining and wage setting Unions redress the imbalance of power that exists between a single employee and an employer; union presence and collective wage bargaining is associated with lower overall wage inequality; In some countries unions became a source of rigidity and thus of labour market inefficiency (Stiglitz, 2012). Some were slow to adapt to sectoral change and increasing female participation but in other countries unions have been more successful at adapting to change and remaining relevant; Stiglitz suggests that strengthening unions is important for tackling inequality but no blueprint exists. Atkinson suggests the establishment of a Social and Economic Council to agree a national pay policy.

8 Minimum wages and wage floors Erosion or absence of collective wage bargaining is associated with an increase in the incidence of low pay and an increase in the dispersion of pay in the lower half of the distribution. Governments have turned to minimum wage policies; Most impact assessments have focused on estimating employment effects. The evidence suggests that minimum wages have been successfully introduced in many countries; Strong support for minimum wages but for them to have a positive impact on reducing inequality they must: (1) be set high enough; (2) must benefit sufficient number of workers; (3) result in spill-over effects; (4) not have a large impact on unemployment; (5) need to be considered alongside in-work benefit system.

9 Top wages, CEO pay and bankers bonuses Supersalaries largely a phenomenon prevalent in Anglo-Saxon countries (institutional factors and social norms). Linked to increases in income concentration at the top; Explanations barriers to entry/non-competitive wage setting practices/reputational factors/executive share options schemes/erosion of corporate governance; Policy options increase tax; pay code (multiples); composition of pay review bodies; curbs on bankers bonuses; EU January 2014 CRD IV (capped ratio on the fixed and variable component; share of variable remuneration deferred; disclosure); US Dodd-Frank Act (disclosure; Say-on-Pay (only advisory).

10 Welfare states and redistribution - introduction The welfare state and in particular cash transfers play a key role in determining the extent to which inequality in the labour market translates to household-level income inequality; A new purpose of the modern-day welfare state seems to be emerging in policy discussions reducing not just poverty, but also tackling rising inequality; Empirical research concludes that welfare states are successful at redistribution in an egalitarian direction but different welfare states achieve this differently and vary in their degree of equalisation (Esping-Andersen and Myles, 2009).

11 Welfare state regimes Typology of welfare state regimes (Esping-Andersen, 1990; Esping- Andersen and Myles, 2009) has been used extensively to compare and contrast the effectiveness of different types in terms of their ability to reduce poverty and produce more equitable distributions of resources; The evidence suggests that welfare regimes that are characterised by more universal benefits use their social spending more effectively in alleviating income inequality and poverty. Conversely, welfare regimes that rely on means-testing and/or highly fragmented social transfers are less effective.

12 Evolution of welfare states Atkinson (2015) sees the initial expansion of welfare states post-ww II with increases in social provision financed by progressive income tax as an explanation for falls in inequality in many countries; He attributes the eventual rise in inequality to several important factors: changes in state pension policies; decline in union participation; less labour-friendly legislation; and a heavy reliance on means-testing for public benefits; The relationship between political power, particularly of vested interest groups, and welfare reform needs close attention to avoid harming the democratic fabric of our societies.

13 Cash transfers and active labour market programmes Generosity and coverage of social security payments are critical to reducing inequality; greater concentration of net cash transfers is less effective at reducing poverty and inequality; Differential indexation between pensions and working age benefits has created inter-generational economic inequality; Getting the balance right between income support, activation and enabling support to meet short and long term objectives; The need to expand training programmes beyond the long term unemployed to those cycling between unemployment and low pay.

14 Conclusions If the rich nations of the world are going to rise to the challenge of creating the right conditions for fairer societies then national level policies need to be combined with a co-operative international approach. The recent financial crisis demonstrated only too clearly how entwined and interconnected are the fortunes of different nations and the economic well-being of their populations. We examined three key areas where governments can actively help to shape more equitable outcomes: education, wage determination, welfare states. Although there remain some gaps in the evidence and it is not always clear the extent to which policy success in one country can be replicated in another, the evidence review highlighted a number of promising policies and approaches. One clear message: there is no one single policy response that will meet the overall objective on its own.

15 Three evidence reviews for DG EMPL McKnight, A., Duque, M., and Rucci, M. (2016). Creating More Equal Societies What Works? Evidence Review prepared for DG Employment, Social Affairs and Inclusion. ISBN: doi: / McKnight, A., Stewart, K., Himmelweit, S. M., and Palillo, M. (2016) Low pay and in-work poverty: preventative measures and preventative approaches. Evidence Review prepared for DG for Employment, Social Affairs and Inclusion. ISBN: doi: / McKnight, A., and Vaganay, A. (2016). The Strength of the Link between Income Support and Activation. Evidence Review for DG Employment, Social Affairs and Inclusion. ISBN: doi: /