Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 31/2013:
Income inequality and social preferences for redistribution and compensation differentials

William R. Kerr ()

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: inequality; social preferences; social norms; redistribution; welfare; class warfare; (follow links to similar papers)

JEL-Codes: D31; D33; D61; D63; D64; D72; H23; H53; I38; J31; R11; (follow links to similar papers)

48 pages, December 11, 2013

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This paper is published as:
Kerr, William R., (2014), 'Income inequality and social preferences for redistribution and compensation differentials', Journal of Monetary Economics, Vol. 66, September, pages 62-78

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