Call for rethink on redistribution policies

Governments in Europe and the US need to re-examine the effectiveness of tax and benefit systems in redistributing income among the working-age population, says a research paper from the OECD in Paris. Redistribution measures have in the past cut income inequalities by more in Europe than in the US: but governments on both sides of the Atlantic need to look closely at how well these measures function over the whole economic cycle.

Key findings

  • Analysis of historical household income data confirms the common finding that redistribution reduces income inequalities by much less in the US than in much of Europe. In the mid-2000s, taxes and social transfers (combined) reduced the Gini index by 18 per cent in the US and 23 per cent in the UK – but by around 30 per cent in Germany and Poland, and around 40 per cent in Nordic countries.
  • Recent discretionary and automatic policy changes in the US have significantly narrowed the gap between the equalising capacities of US and European redistribution measures. These include a much extended duration for unemployment benefit, and making out-of-work support more generous and more readily available for the increasing number of long-term unemployed people.
  • However, this recent trend is unlikely to signify any longer-term convergence, since it appears to relate only to one phase in the economic cycle. Comparisons between Europe and the US need to take into account how well redistribution measures respond and adapt to evolving social and fiscal challenges at different points in the economic cycle.
  • Out-of-work income support provisions in many European countries are not very responsive to changing labour market conditions – resulting in high and sometimes poorly targeted spending even before the global recession, and pressures for far-reaching benefit cuts now when support is most needed. With less generous income support measures, by contrast, the US responded more readily to the heightened demand for support after 2007: but largely pro-cyclical tax reductions during the boom years have eroded the capacity for maintaining credible and adequate income support throughout the economic cycle.

Source: Herwig Immervoll and Linda Richardson, Redistribution Policy in Europe and the United States: Is the Great Recession a 'Game Changer' for Working-Age Families?, Employment and Migration Working Paper 150, Organisation for Economic Co-operation and Development
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Publication date: 
Jun 18 2013