Inequality Calls for the Proper Diagnosis

05.02.2019 2 min
Read my opinion piece in the 10 April 2019 edition of Les Echos.

LE CERCLE – France has one of the lowest levels of income inequality, observes Olivier Klein, professor of economics at HEC. But inequality of opportunity in France is much higher than in other OECD countries.

Inequality is a central issue in many countries. In order to know how to take effective action and to avoid exacerbating the situation with inappropriate policies, the proper diagnosis needs to be made.

France has a high rate of income inequality compared to comparable countries. However, owing to a redistribution policy that is among the most extensive of OECD countries, France ranks, after redistribution, among the countries with the lowest income inequality.

This finding is confirmed if we analyse the share of national income received by the richest 1%. While it has tended to rise a little over the years (rising from 9% to 10.5% in 20 years), this increase nevertheless remains far more limited than in neighbouring countries. Over the same period, it has increased from 9% to 13% in Germany, while in the United States it has risen from 15% to 20%. Likewise, the percentage of the French population that lives below the poverty level is not only less than that of most European countries, but it has also been decreasing for 20 years.

Inequality of opportunity

However, while France ranks among the countries with the lowest income inequality, inequality of opportunity is higher in France than in similar countries. According to the OECD, it takes on average six generations for a family at the bottom of the income scale in France to reach the average income, while it takes only two generations in Denmark, three in Sweden, four in Spain and five in the United States.

We can draw two thought-provoking conclusions about the current social environment from these statistics. Against a backdrop of globalisation and digital revolution, innovation appears to be a critical competitive factor for developed countries. As such, knowledge and innovation are directly associated with reduced inequality of opportunity, because innovation is a growth factor and therefore helps to combats poverty. It is also disruptive and shakes up the status quo, which enables the most talented to progress and improves their social mobility, thereby providing better social fluidity.

Vicious Circle

Secondly, while redistribution is very honourable as a collective choice, at that level, it creates a vicious circle. A level of social security contributions much greater than the European average impedes competition. In France, this situation contributes to a low employment rate which, in turn, causes higher income inequality before redistribution, which leads to very high levels of redistribution, over and over again. And the low employment rate and the levels of long-term unemployment lead to greater inequality of opportunity.

Affiliate Professor of Economics and Finance at HEC