Cross-Country Differences in Perceptions of Inequality

Perceived rather than actual inequality is what drives a nation to support redistributive measures, according to research by #LindauEcon14 participant Judith Niehues.

Whereas Americans are not very concerned about the large income inequalities in their country, Germans view considerably smaller differences much more critically. Our newly developed indicator of perceived inequality – the ‘subjective Gini coefficient’ – can explain up to two-thirds of such cross-country differences in concerns about inequality and willingness to support policies to do something about it.

For example, more than half of Germans strongly agree that differences in income are too large, according to the module on Social Inequality of the 2009 International Social Survey Programme. This helps to explain why debates about social justice and redistribution are recurring topics on the political agenda in Germany, reflected in the current introduction of redistributive policies such as a minimum wage and additional pension benefits for mothers.

A banner made by German unions protesting for minimum wage and equal payment between genders. Credit: Uwe Hiksch @ FlickR (licensed under Creative Commons).

A banner made by German unions protesting for minimum wage and equal payment between genders in 2013. Credit: Uwe Hiksch @ FlickR (licensed under Creative Commons).

The French worry even more about their inequalities: 69% of the population regards income differences as far too large and, correspondingly, the country has one of the largest minimum wages in Europe and has discussed some striking increases in income taxes recently. In Switzerland, in contrast, people are not so concerned about income differences: accordingly, initiatives to restrict managerial salaries or increase the minimum wage have failed.

But it is striking to note that these three countries have one thing in common: they share more or less exactly the same degree of measured income inequality. On the other hand, in the United States – which is characterised by far higher income inequality – people do not see any reason for redistributive state intervention.

Street Art in Toronto. Credit: Toban Black @ FlickR (licensed under Creative Commons).

Street Art in Toronto. Credit: Toban Black @ FlickR (licensed under Creative Commons).

The missing link between inequality and its assessment is not specific to this set of countries. In a larger sample of 24 countries, there is virtually no empirical relationship between the actual size of inequality within a country and how concerned people are about income differences. Of course, there are a number of other individual and national factors that may explain cross-country differences in critical views on income differences and related redistributive preferences. For example, formerly socialist countries may view already small income differences much more critically, while Americans may just accept certain inequalities.

But we argue that it is not the actual but the perceived size of inequality within a country that matters for the formation of redistributive preferences. By summarising subjective views on the type of society into a new measure of ‘perceived inequality’, we reveal that misperceived inequality can explain a large fraction of the missing link between actual inequality and critical views on income differences.

A view on Chowpatty Beach, Mumbai. Credit: Shreyans Bhansall @ FlickR (licensed under Creative Commons).

A view on Chowpatty Beach, Mumbai. Credit: Shreyans Bhansall @ FlickR (licensed under Creative Commons).

In most countries, the population exaggerates the degree of inequality. This is particularly true for formerly socialist countries such as Hungary, Slovenia and the Czech and Slovak Republics. In Hungary, the ‘subjective Gini coefficient’ exceeds the regular Gini coefficient of income inequality by almost 80%. Thus, the population is just not aware of their small level of inequality.

There is a misperception in the same direction in Germany and France, but less in Switzerland, where the people are significantly more realistic about their inequality levels. The Scandinavians are also comparatively aware of their small levels of inequality. But the United States reveals a completely different picture: Americans substantially underestimate the extent of inequality in their country. This rosy view of inequality is not new – but it is new to find that in European countries it is rather the other way round.

Is there a gap between the perception and reality of inequality in the USA? Credit: Toban Black @ FlickR (licensed under Creative Commons).

Is there a gap between the perception and reality of inequality in the USA? Credit: Toban Black @ FlickR (licensed under Creative Commons).

Our results provide an explanation of why redistributive policies are more successful in some countries than in others – and why we regularly observe debates on social justice in European countries and not in the United States.

You can find another report on this study which includes a graphic visualization tool here: Financial Times.


Image used in slider graphic is credited to Emiliano @ FlickR (licensed under Creative Commons).

 

Judith Niehues

About Judith Niehues

Dr. Judith Niehues is working at the Cologne Institute for Economic Research and specializes in empirical public economics. She is participant of the 5th Lindau Meeting on Economic Sciences.

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5 comments on “Cross-Country Differences in Perceptions of Inequality

  • Zhou Fang says:

    If the FT report represents the analysis of the survey results used, the analysis is highly problematic. The situation is that you are presenting respondents with survey options that are in fact mathematically impossible. For example, the multiple choice option labelled as “a small elite at the top, very few people in the middle and the great mass of people at the bottom”, when translated to population shares of income, is associated with an excess of 50% of the population on below-median income. All societies will look nothing like that.

    If the right-hand chart for e.g. Hungary is scaled to proportions of *mean* income, then the public perceptions of income for Hungary is in fact bang on. 30-59.3% of Hungarians earn below 60% of the mean income, just as 40% are perceived to be in the lowest class of society. Hungarian society would look very pyramidal.

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  • Judith Niehues says:

    Thank you for this insightful comment.

    I decided to demarcate the society on the basis of median income because this is most commonly used in studies about income classes. However, I think the general findings are very robust with respect to any reasonable division into income classes – which I only contrasted for illustrative reasons (and which I will rethink when revising the paper).

    According to the ISSP 2009 results on the perceived type of society, Hungarians perceive the society to be rather unequal (regarding conventional inequality measurement, Typ A represents a more unequal society than Typ D). In contrast, Hungary is characterized by one of the most equal distributions of disposable incomes among the observed European countries. Correspondingly, the mean-median ratio is (with 1.09) also comparatively low in Hungary. Therefore the share of population with less than 60% percent of mean income will be only slightly larger than the share of population with less than 60% of median income.

    In fact, I would expect the observed cross-country differences even to increase if I took mean incomes instead of median incomes. For example, the mean-median income ratio in the US is equal to 1.29. Thus, the US lower income classes would increase dramatically – although according to the ISSP results, the US-Americans are far more likely to perceive their society as a middle-class model than the Hungarians do.

    Admittedly, the ISSP question does not explicitly ask about a structuring of the society with respect to income. Of course, people might not only think about income when describing the structure of their society. Still, it is interesting to see that the perception reported in the ISSP does not correlate with the inequality of the income distribution of the observed countries. Thus, in any case, this observation raises the question of what actually explains the differences in perceived types of societies across countries – which are, in fact, significantly correlated with critical views on income differences in these countries.

    Reply

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