Income Inequality and Social Preferences for Redistribution and Compensation Differentials

William R. Kerr

Article | Journal of Monetary Economics | September 2014

Income Inequality and Social Preferences for Redistribution and Compensation Differentials

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.

Keywords: Equality and Inequality; Income; Government and Politics;

Format: Print

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Kerr, William R. "Income Inequality and Social Preferences for Redistribution and Compensation Differentials." Journal of Monetary Economics 66 (September 2014): 62–78.

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Income Inequality and Social Preferences for Redistribution and Compensation Differentials

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