Income Disparity in Developed Countries: Article Review

Abstract

Current paper is intended to analyze an article “Income Inequality and Demand for Redistribution: A Multilevel Analysis of European Public Opinion”, published in Scandinavian Political Studies in 2009. The research presented in the article employs multilevel, logit regression models and Monte Carlo simulation methods to evaluate the relationship between the level of income disparity and demand for redistribution policies measured at the individual level. The findings demonstrate robust positive correlation between the level of income disparity, and demand for redistribution in European countries, and sensitivity of the majority of voters (median income level) to the level of income disparity.

Income Disparity in Developed Countries: Article Review

In all social systems, people are rewarded differently for their work according to their productivity, skills, training, experience, level of risk, and types of work they do. But income disparity, taken to an extreme, can lead to disastrous social consequences, such as diminishing democracy, market inefficiency and public distrust to governmental institutions. State policymakers can affect the extent of income disparity and redistribute wealth by making transfers to low-income individuals, mitigating negative externalities or taxing wealthy citizens more. However, in developed democracies income redistribution cannot occur without demand for redistribution perceived by the majority of voters at the individual level. The article “Income Inequality and Demand for Redistribution: A Multilevel Analysis of European Public Opinion” written by Henning Finseraas (2009) focuses on the impact of existing income disparity in European countries on the demand for redistribution policies and governmental intervention into wealth distribution. Following the results of this study, the demand for redistribution policies is positively associated with the level of income disparity, and the medium income individuals are susceptible to the level of income disparity.

The study is grounded on the Meltzer-Richard model for redistribution, which postulates that adoption of redistribution policies in state depends on the disparity between mean income and the income of the majority of voters, or median income. This model assumes relevance of the following limitations: “majority rule, universal suffrage and a linear tax rate” (Finseraas, 2009, p. 96). Median income level is supposed to be less than the mean level due to significant skewness of the income distribution to the right in developed countries, thus the median income person will receive more if redistribution measures are adopted. But considering a potential trade-off between efficiency and equality (disincentive effects), individuals are more likely to demand not full redistribution, but instead have preferences for the optimal level of redistribution. The Meltzer-Richard model determines that existing level if income disparity affects the demand for redistribution policies, which in its turn affects implementation of redistribution through the majority rule and public opinion bargaining power.

Number of studies criticized the Meltzer-Richard model, and significant evidence exists showing negative correlation between income disparity and actual redistribution (Finseraas, 2009). Research study conducted by Henning Finseraas focuses on testing the first chain of the Meltzer-Richard model, namely relationship between income disparity and demand for redistribution policies. Particularly, the study tests the impact of the GINI coefficient (income disparity index) on the individual level of redistribution support as estimated during the European Social Survey in 2002. Multilevel regression modeling employed in this study shows that level of income disparity is positively associated with the redistribution support, and the marginal effect of income disparity is statistically significant for the median income level respondents (Finseraas, 2009, p. 113). The author explicitly conveyed mathematical methods employed, independent and dependent variables, sources of the input data and results obtained, robustness testing and control variables. The study raises important considerations on the impact of political-institutional differences on actual wealth redistribution across countries, and can be incorporated into my research essay as indicating importance of how redistribution support is being transformed into redistribution policies (political environment and institutional structures).

Previous studies concerned with the subject have failed to find the relationship between income disparity and support for redistribution policies, though maintaining substantial limitations in research design such as: aggregating the demand for redistribution among the respondents of a particular country, failing to take into account current level of income of respondents (the higher level of income, the more unlikely an individual will support redistribution, and vice versa), and absence of robustness test against the impact of country-level externalities. Finseraas overcomes these limitations, and presents therefore more reliable and robust result in determining the impact of income disparity on support for redistribution measured at the individual level.

Important shortcoming of his study is that income disparity is estimated based on disposable income data instead of pre-transfer income (as it is required in the Meltzer-Richard model) due to limitations in the data availability. On the other hand, disposable income is strongly correlated with pre-transfer data and is directly observed by the respondents in their daily lives, and therefore can be more relevant for the redistribution support. Nevertheless, usage of disposable income data (instead of pre-transfer income) represents an important violation of the Meltzer-Richard model, and the author can significantly improve reliability of his findings by replicating the research using the pre-transfer income data.

Conclusion

The study conducted by Henning Finseraas (2009) represents an important contribution to the academic literature dedicated to the investigation of the relationship between income disparity and support for redistribution efforts. Key methods used by the author include multilevel, logit regression analysis and Monte Carlo modeling. Research findings have been tested for robustness against the impact of country-level externalities and control variables, and take into account limitations of the previous studies. As a result, it was identified that income disparity is positively associated with the demand for redistribution policies, and therefore the first chain of the Meltzer-Richard model was confirmed in this study. Importantly, this study raises the questions on credibility of the second chain of the Meltzer-Richard model, namely the relationship between the redistribution demand and actual redistribution efforts.

References

Finseraas, H. (2009). Income inequality and demand for redistribution: a multilevel analysis of European public opinion. Papersdude.com – free essays. Scandinavian Political Studies, 32(1), 94-119.

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