Cross-country differences in perceptions of inequality

Judith Niehues

Income inequality is high in the US, but the support of social welfare programmes is low. In Europe, income inequality is low and the welfare states are generous. This column argues that this paradox is largely due to perceived inequality. Many Europeans believe that there is high inequality in their countries, justifying the need for redistributive policies. Americans, however, are less concerned with income differences and with respective redistributive state intervention.

The well-known and frequently tested median voter theorem predicts a positive relationship between income inequality and state redistribution; if the decisive median voter’s income is below the social average, he votes for more welfare redistribution because he expects to benefit from progressively financed welfare programmes. However, this theory does not perform very well when confronted with data. Although income inequality is high in the US, support for welfare state programmes is relatively low. In contrast, income differences in European countries are substantially lower. Still, the European welfare states tend to be far more generous. Obviously, there might be a row of other individual and national factors which may explain the US-European differences in redistributive preferences (Alesina et al. 2001). For example, Americans may just accept certain inequalities because they see them as a reward for effort and believe in the chance of upward mobility (‘American exceptionalism’). On the other hand, Europeans may view income positions rather as the result of luck and other exogenous circumstances and, therefore, demand more state redistribution. However, as the current research on mobility reveals, countries with higher inequality are also associated with less income mobility (e.g. Corak 2012).

Given this puzzling evidence, it is not surprising that economists have become increasingly interested in the importance of attitudinal data when explaining redistributive preferences. In this regard, in a study on the UK, Georgiadis and Manning (2012) find that beyond the standard political economy model, beliefs and attitudes are especially important explanatory factors of the individual demand for redistribution. Looking at perceived and desired pay differentials, they provide some evidence that inequality aversion is a relevant determinant -- those who perceive more pay inequality are in favour of more redistribution. Inequality aversion with respect to pay differentials is very similar between Europe and the US (Osberg and Smeeding 2006), thus failing to explain ‘the paradox of redistribution’ between them. However, the concept of perceived pay inequality does not include any information about the respondent’s estimate of the frequency of each occupation in the population. It may well be the case that people underestimate the extent of pay inequality, while simultaneously overestimating the fraction of the population affected by it.

Table 1. Perceived types of society

Notes: ISSP, 2009, Question 14a: These five diagrams show different types of society. Please read the descriptions and look at the diagrams and decide which you think best describes [country].

Source: A truncated table from Niehues (2014), based on ISSP 2009

Perceived inequality in Europe and the US

In my study (Niehues 2014), I look at perceived types of societies based on a questionnaire item of the International Social Survey Programme (ISSP) of 2009, which involves some imagination of the respondents about the distribution of population shares across societal classes (Table 1). According to this item, 54.2 % of Germans believe that the bulk of the German population lives rather at the bottom of society (Type A or Type B). This corresponds surprisingly well to 52.4% of Germans who strongly agree that differences in income are too large. To what extent does the perceived type of society accord with the actual income distribution? Although there are different ways of demarcating the society into a ‘bottom’, ‘middle’, and ‘top’, studies generally come to the result that the middle class represents by far the largest group of the German society. In particular, independent from the chosen definition of income groups, people with middle incomes are far more numerous than those at the bottom of the income distribution. To support this, Figure 1 presents an illustration of the income distribution in Germany, which is based on a slightly different definition of the middle class than the one I used in my paper.

Figure 1. Income stratification in Germany

Relative income position based on the median of equivalent net household income of the previous year (including imputed rents). Shaded area = middle class (70-150% of median income).

Source: Translated from Burkhardt et al. (2013), based on SOEP v27 (survey year 2010)

This rather pessimistic view on equality is not specific to Germany but is typical to the observed European countries. Most respondents view their society as a pyramid (Type B), although the income distribution in the majority of European welfare states resembles an onion -- with some people at the bottom, the majority in the middle class, and a small but long tail of rich people.

Views on inequality are particularly pessimistic in former socialist countries such as Hungary, Slovenia, the Czech Republic, and Slovakia. In Hungary, for example, 56.6% of the population views their society as “a small elite at the top, very few people in the middle and the great mass of people at the bottom” (see ‘HU’ in Table 1), although the country is characterised by one of the lowest income inequalities in the EU. Thus, it is not that former socialist countries view already small income differences much more critically, but rather that the population is just not aware of the low level of income inequality. Accordingly, 77.5% of Hungarians strongly agree that differences in income are too large, as also reported in the ISSP. It is different in Scandinavian countries, such as Norway. There, the survey respondents are much more realistic about the small levels of inequality and truly identify their society as a ‘typical middle class model’ (see ‘NO’ in Table 1).

Figure 2. Evaluation of income differences and perceived inequality

Source: Niehues (2014), based on ISSP 2009.

In contrast to the European countries, the US reveals a completely different picture. US citizens substantially underestimate the extent of inequality in their country. Although income distribution is significantly worse, Americans are more likely to believe that they live in a middle-class society than are many Europeans. This varnished view on inequality in the US is not new. What is new is that in many European countries it is rather the other way round. In fact, the newly developed measure of ‘(mis-)perceived inequality’ can explain up to two thirds of the cross-country differences in critical views on income differences (Figure 2), and 56% of the variation in redistributive preferences.

Concluding remarks

The results may provide a further explanation why redistributive policies find more support in some countries than in others. Regarding the largely critical views on inequality, debates on social justice and redistribution are ever-recurring topics in the political agenda in Germany – reflected in the current introduction of redistributive policies, such as a minimum wage and additional pension benefits for mothers. On the other hand, in the US – which is characterised by a far higher degree of actual income inequality – people are less concerned about income differences and they do not see any reason for redistributive state intervention. Thus, it may not be surprising that social security and anti-poverty programmes are much harder to implement in the US.

In addition, the overestimation of inequality is adversely related to the absolute levels of living standards across countries. Thus, it might also be the case that the perceived structuring of the society is more associated with absolute levels of living standards than commonly suggested. So far, my research does not give causal answers to why the perception reported in the ISSP does not correlate with the inequality of the income distribution of the observed countries. Why are Americans more likely to perceive their society as a middle-class model than are many Europeans? This puzzling observation raises the question of what actually explains the differences in the perceived types of societies across countries – which are, in fact, significantly correlated with critical views on income differences and redistributive preferences.

References

Alesina, A, E Glaeser and B Sacerdote (2001), “Why Doesn’t the United States Have a European-style Welfare State?”, Brookings Papers on Economic Activity, 2001, 187-254.

Burkhardt, C, M M Grabka, O Groh-Samberg, Y Lott, S Mau (2013), “Mittelschicht unter Druck?”, Bertelsmann Stiftung (ed.), Gütersloh.

Corak, M (2013), “Inequality from Generation to Generation: The United States in Comparison”, in: Robert Rycroft (ed.), The Economics of Inequality, Poverty, and Discrimination in the 21st Century, ABC-CLIO-

Georgiadis, Andreas / Manning, Alan, 2012, Spend it like Beckham? Inequality and redistribution in the UK,1983–2004, Public Choice, 151, 537–563.

Niehues, J (2014), “Subjective Perceptions of Inequality and Redistributive Preferences: An International Comparison”, Discussion Paper.

Osberg, L and T Smeeding (2006), “‘Fair’ Inequality? Attitudes toward Pay Differentials: The United States in Comparative Perspective”, American Sociological Review, 71, 450-473.