Unequal countries did worst – some stats on inequality and economic performance « Real-World Economics Review Blog

I have been wondering about the correlation - if there is any (and I believe there is!) - between macroeconomic performance and wealth/income inequality. My theorem is that high and increasing levels of inequality lead to economic difficulties and eventually Minsky moment instabilities - asset bubbles, for instance.

Recently, I stumbled across some empirical evidence that I am on to something:

Unequal countries did worst – some stats on inequality and economic performance « Real-World Economics Review Blog: "Unequal countries did worst – some stats on inequality and economic performance
October 4, 2010 merijnknibbe

from Merijn Knibbe

Do western countries with an unequal distribution of income do better, economically?

One might think so when he or she listens to neo-classical economists. Welfare has to be cut, shareholder value has to increase, and managers should get more power to sack employees.

But what do the statistics tell us? Are these economists right? Well, they do have something to explain. Below, I have lumped (in a quick and dirty way) some western countries together in regional groups. As inter group variability is low (except for unemployment in Spain and Belgium), the ‘quick and dirty way’ is acceptable when we compare different groups. It can be argued that of these countries the most Anglo-Saxon ones, the United States and Great-Britain, at least tried to be the most neo-liberal ones. And they do not do well. The next questions can be asked:

1. Were Anglo-Saxon countries more unequal? Yes they were. Also, according to the LIS Gini indices, inequality increased fastest in these countries after about 1980.

Table 1. Gini indices, LIS data, latest figure.

Anglo-Saxon 0.37

European offshoots 0.32

Northern Europe 0.27

Southern Europe 0.31

2. Did high and increasing inequality lead to a more efficient economy, characterized by a positive current account? No, it did not. Especially countries with relatively low inequality had positive current accounts.

Table 2. Current account, % of GDP

Anglo-Saxon - 2.9

European offshoots – 2.8

Northern Europe + 5.2

Southern Europe – 3.2

3. Neo-liberal theory emphasizes low budget deficits. Did unequal countries have a low budget deficit? The opposite was the case!

Table 3. Government deficit, % of GDP

Anglo-Saxon – 9.2

European offshoots - 3.9

Northern Europe – 3.6

Southern Europe – 7.6

4. Neo-classical theory emphasizes flexible labor markets which increase productivity: the right man or woman on the right job. Did this have happened? Yes, on one hand it might: Total Factor Productivity increased fast. When we look at (un)employment there however seems to be a somewhat one sided flexibility: out: yes, in again: no. Remember also that neither the USA or Great Britain have, at the moment, any kind of ‘super productivity’ which is clearly higher than that of any of the other countries.

Table 4. Growth of factor productivity, compound growth rate, 1995-1997

Anglo-Saxon 1.4

European offshoots 0.9

Northern Europe 1.1

Southern Europe 0.3

5. Neo-liberal ideas emphasize a win-win situation: productivity growth leads to increased production and employment. Did this happen? No, it did not. In fact: historically the most remarkable phenomenon of the 2000 – 2010 period. Indeed, somewhat longer than the data from the tabel is the dismal growth of jobs in the USA (compared with other countries as well as other periods in the USA post 1939 history). An absolutely alarming fact.

Table 5. Total employment growth, 2000 – 2009 (%)

Anglo-Saxon 0.1

European offshoots 16.0

Northern Europe 6.2

Southern Europe 11.2

6. Did low growth of jobs lead to high unemployment? Demographics or a changing culture can lead to a low growth of the labor force. Might this be a reason for a low increase in employment? No, it is not. Unemployment has increased, there is plenty of labor, surely when we add ‘discouraged’ workers to unemployment. Remarkably, southern European countries had a high increase in employment and have, despite this high unemployment. Fortunately, productivity did not increase too much, which meant that many more people could be employed in these countries!

Table 6. Unemployment rates

Anglo-Saxon 9.3

European offshoots 7.1

Northern Europe 7.0

Southern Europe 12.1

Summarized: it seems that countries like the USA and the U.K. have embarked upon a path of intensive growth, where more extensive growth still is needed. In this perspective, neo-liberal ideology (and its economic counterpart: neo classical economics) might overrate the economies of ‘The west’. Also, the ‘neo-liberal’ experiment does not seem to be very downturn proof. Also, it might literally pay off to regard labor as a valuable resource again, instead of as a disposable factor of production.

Sources: Current account, government deficit en unemployment: latest data according to The Economist, Gini index latest data according to the Luxemburg Income Study, Productivity growth according to the OESO, employment growth according to OESO, CBS, Eurostat.

Anglo Saxon: Great Britain, USA. European offshoots: Canada, Australia. Northern Europe: Germany, Netherlands, Belgium, Sweden, Norway, Austria, Denmark. Southern Europe: France, Italy, Spain, Greece

Things make you go "Hmmm..."