European Commission, "Are our society working fairly ? Recent changes in income inequality", in Employment and Social Developments in Europe 2011, November 2011.
The economic crisis has put inequalities high on the political agenda, and made this an issue of serious public concern. It is recognised that inequalities are a fact of life and unavoidable and that while they have increased in many countries, some countries have managed to reduce them, and there has been an overall decline in inequalities between countries since 1990.
There is an increasing recognition that social policy can reduce inequality and poverty while simultaneously improving the economic functioning of the country as reflected in the idea of inclusive growth in the EU’s Europe 2020 strategy, with references to “a high-employment economy delivering economic, social, and territorial cohesion” in which “benefits of growth and jobs are widely shared”.
This review summarises current income inequalities in the EU and supports the goal of inclusive growth. It is part of a research agenda that will also cover both the social and economic impact of inequalities and the impact of different policies on those inequalities.
Some inequality is inevitable. Inequality can be both the result and originator of better individual and social performance. To some extent they reflect productivity, the value added created for society, and this is inherently unequal. The possibility of doing better in terms of living standards can create a good performance incentive, while in the extreme case if all the possible gains are taken and redistributed, one would only voluntarily make an extra effort. In the end, policies aimed at reducing inequalities may also lead to welfare losses. (Okun, 1975)
However, the importance of these factors are often overstated. Pay differences reflect many factors beyond productivity differences – for example, belonging to a certain occupation. (Kampelmann, 2011) Also, disadvantages seem sticky, there is a low wage mobility among the low wage earners and higher wage mobility among the higher wage earners. Differences in wealth are much greater than differences in income (see Box 4), and much less related to individual performance. In the end, even if differences are inevitable, the question is, whether the currently observable big differences are justified and socially desirable – whether there is a performance difference of a million times. There are a number of reasons why a high level of inequalities, or rapidly increasing inequalities, may be detrimental both economically and socially.
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Social Developments in Europe 2011, European Commission, November 2011.