infonet-economy

We use data from the Luxembourg Income Study to examine household market inequality, redistribution, and the relationship between market inequality and redistribution in affluent OECD countries in the 1980s and 1990s. We observe sizeable increases in market household inequality in most countries. This development appears to have been driven largely, though not exclusively, by changes in employment: in countries with better employment performance, low-earning households benefited relative to high- earning ones; in nations with poor employment performance, low-earning households fared worse. In contrast to widespread rhet- oric about the decline of the welfare state, redistribution increased in most countries during this period, as existing social-welfare programs compensated for the rise in market inequality. They did so in proportion to the degree of increase in inequality, producing a very strong positive association between changes in market inequality and changes in redistribution. We discuss the relevance of median-voter theory and power resources theory for understanding differences across countries and changes over time in the extent of compensatory redistribution.