Income stratification, calculated before taking into account taxes and social transfers decreased the most in Poland – as data for OECD countries over the period 2007-2011 indicates. After taking into account redistribution, Poland ranks behind the Netherlands and Portugal. – With these changes, income stratification in Poland is already lower than the average for OECD countries, including for example France – says Damian Olko, expert for research and analysis of the Employers of Poland.
The effects of financial crisis in 2007-2008 are still visible in many developed economies, including Western Europe countries. High unemployment, wage stagnation or decline in some industries and the problem of the so-called dual labour market led to a strong increase in income inequality. This is an effect of not just wrong policies of governments as regulators of the labour market and the social transfer system, but also erroneous macroeconomic policy. Before 2007 many politicians in Europe believed that fiscal or credit expansion can replace structural reforms.
As a result, over the period 2004-2011 the highest increase in income inequality before taking into account social transfers and taxes occurred in Spain, Ireland, Greece, and France. Perhaps this process resulted not only from policies before the crisis and the existing socio-economic model in these countries, but also from omissions and delays in fighting the crisis.
Some governments was able to curb growth in income inequality with high tax burden and social transfers. Examples of these are Greece and Ireland, where – according to data from the OECD – after taking into account redistribution there has been no increase in disposable income inequality.
Figure 1. Changes in income inequality in 2007-2011
Source: The OECD (2014). Blue bars illustrate the change in the Gini index before considering redistribution (market income), orange dots – after taking into account taxes and transfers (disposable income). Gini index has a value in the range of 0-1, where 1 is the extreme stratification of income (all income goes to one person).
One should bear in mind, however, that high redistribution inhibits economic growth in the long term, due to the negative impact of taxes and transfers, among others, on the labour market and the accumulation of capital. Contrary to popular belief, there is no strong empirical evidence to support the hypothesis that higher stratification of income (measured in Gini index) has negative impact on economic growth. Furthermore, it is still too early to estimate the effects of changes in the distributions of income after the crisis.
Examining the relationship between these two variables we should still consider the opposite relationship – the impact of economic growth on income inequality. In the years 2004-2011 Poles and Slovaks were getting richer at the fastest pace among OECD nations (in terms of cumulative growth in GDP per capita at purchasing power parity). At the other extreme were the peripheral countries of the euro zone, where the level of redistribution after 2004 increased significantly – which also contributed to the crisis.
As the graph 2 shows, the scale of redistribution in Poland and Slovakia has decreased since 2004 (the difference between the value of the Gini index for market income and disposable income decreased). In Poland’s southern neighbours, however, income stratification increased (Figure 1).
Figure 2. Correlation of cumulative growth of GDP per capita in purchasing power parity in the years 2004-2011 (vertical axis) and the change of scale redistribution (horizontal axis)
Source: Own calculations based on data from the OECD and the IMF. Redistribution is measured by the difference between the value of the Gini index for market income and disposable income in the years 2004-2011.
In 2004 the Gini index calculated for the market salary in Poland was 0.38, whereas in 2011 only 0.304 (with the average for the 30 OECD countries at the level of 0.308). A strong decline in income inequality, however, was caused by both the favourable and unfavourable processes. The first group includes: a significant increase in the employment rate in Poland – from 51.7 percent in 2004 to 60 per cent now – and internal migration to large cities, where productivity and wages are higher.
On the other hand, a strong decline in the Gini index came right after joining the EU in 2004, which may be linked with a wave of emigration, which involved mostly unemployed or low-paid workers. In addition, some emigrants send money to Poland, which also alleviates the existing income differences. Quantitative verification of these hypotheses requires separate research.
Good news for supporters of greater egalitarianism is that there are such actions (policies), which positively affect both economic growth and social cohesion. OECD gives the following examples of those: investment in education and science, reducing discrimination in the labour market, and improving the quality of institutions and regulation. Certainly, however, the data collected by OECD do not provide arguments for increasing tax rate progression in the Polish tax system or for increasing the burden on businesses.
Damian Olko, expert for research and analysis of the Employers of Poland