Economists have developed a new way of measuring income inequality. And according to this new benchmark, our little country is doing exceptionally well.

From the 1980s onwards, increasing income inequality led to heated debates. Calls for better redistribution, however, are often refuted by economists, who argue that a degree of inequality is needed to drive people to work harder. Moreover, this would reflect the natural outcome of a market economy. Researchers in a new study argue, however, that current economic metrics to measure income inequality are inadequate. And so they propose a new way that better determines when inequality is fair or unfair.

(Un)fair inequality

In general, a distinction is made between fair (justified) and unfair income inequality. Inequality would be unfair if it is rooted in factors beyond one’s control, the ‘circumstance’. “Think of race, gender and parental wealth,” researcher Andreas Peichl sums up in conversation with Scientias.nl on. People are more willing to accept income differences if they are not the result of these external circumstances, but of ‘efforts’. “These are factors that a person can influence and then influence income,” Peichl says. For example, it is justified that people who work long hours earn more than those who only work the occasional day, for example. In short, “when variation in income can be attributed to circumstances, we call it ‘inequality of opportunity’ or ‘unfair inequality’,” Peichl said. “Equal opportunity – or a level playing field – can only be achieved if monetization conditions do not matter.”

When is inequality unfair?

Still, the difference between fair and unfair inequality is not so easy to identify. “The divide between circumstance and effort in delineating fair and unfair income distribution may seem very clear,” Peichl says. “But it’s not the only moral factor that plays a role. Imagine handing out soup to the poor. As they come to you one by one and hand you the soup, you’re told that the person before you had a “good start” in life, but then “blew it” because of their own choices. Would you then withdraw your hand and not give the soup? If not, another moral factor clearly cuts through the equal opportunity argument: namely, that of breaking through poverty.”

Two ideals

According to the researchers, the norm distribution of income should include both fundamental moral factors. “On the one hand, people must be held accountable for decisions that are within their control,” Peichl says. “On the other hand, there has to be a limit for extreme cases.” And so he proposes a new yardstick to measure unfair inequality—one that reconciles the two ideals of economic equality: equality of opportunity and freedom from poverty. The study is thus the first to combine generally accepted principles of justice into a common measure of inequality.

Income inequality

What the new measure shows is that income inequality per se is not necessarily bad. “Instead, we propose to analyze the causes of inequality and break it down into fair and unfair components,” explains Peichl. “In this work, we view inequality as unfair when people have unequal opportunities or insufficient resources to make ends meet.”

The Netherlands least unfair country

In the study, the researchers decided to measure the unfair income inequality in different countries according to the new measure. “We analyzed the unfair inequality in 31 European countries,” Peichl says. “We came to the conclusion that 17.6 percent of total inequality is unfair. This means that inequality can be explained by violations of equal opportunities and the breakdown of poverty.” The Netherlands is doing very well, by the way. “According to our measure, income is most equitably distributed in the Netherlands (7.0 percent), Finland (9.3 percent) and Norway (12.5 percent). This makes the Netherlands the least unfair country according to our research.”

Unfair inequality is most prevalent in Lithuania, Italy and Romania, with values ​​around 30 percent. According to the researchers, the main cause of income inequality in Europe is the impact of the European sovereign debt crisis of 2010.

United States

The United States is also one of the most unequal places in the western world. Only Greece scores higher. In addition, the results show that both total inequality and unfair inequality in the United States more than doubled between 1980 and 2014. The share of unfair inequality rose from 15.2 percent to 18.9 percent. This trend was mainly driven by increasing inequality between groups from different socio-economic backgrounds. The increasing unfairness in the United States is therefore mainly caused by the violation of equal opportunities.

Level playing field

According to Peichl, it is very important that we do everything we can to tackle the unfair income inequality. “All unfair inequality is morally reprehensible and should be reduced to zero,” he says. How should we do that? “The best way to level the playing field is through free public education, better estate taxes and progressive income taxes,” Peichl said.

The researchers hope their new measure can be informative for the policy debate about inequality. “Every society has income inequality,” Peichl says. “But how much of this is a legitimate target for policy? The answer clearly depends on the normative principles underlying our notions of an ethically acceptable income distribution. We therefore hope that our new benchmark will guide the policy debate on income inequality and redistribution.”