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Income inequality and social preferences for redistribution and compensation differentials

William Kerr ()

No 31/2013, Research Discussion Papers from Bank of Finland

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.

JEL-codes: D31 D33 D61 D63 D64 D72 H23 H53 I38 J31 R11 (search for similar items in EconPapers)
Date: 2013-12-10
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Published in Published in Journal of Monetary Economics, Volume 66, September 2014: 62-78

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Journal Article: Income inequality and social preferences for redistribution and compensation differentials (2014) Downloads
Working Paper: Income Inequality and Social Preferences for Redistribution and Compensation Differentials (2011) Downloads
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