Does Inequality Signal the Failure of the Welfare State?

Even if the Occupy movements and protests have faded from the media and public attention, concerns about increased inequality of wealth and income have remained a public preoccupation in many countries. On Dec. 4, 2013, President Obama addressed the issue in what reads as a classic articulation of challenges to social policy in a global, market-driven economy.

… that is a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain that if you work hard, you have a chance to get ahead. I believe this is the defining challenge of our time: making sure our economy works for every working American. …

Since 1979, when I graduated from high school, our productivity is up by more than 90 percent, but the income of the typical family has increased by less than 8 percent. Since 1979 our economy has more than doubled in size, but most of the growth has flowed to a fortunate few. The top 10 percent no longer takes in one-third of our income; it now takes half. Whereas in the past, the average CEO made about 20 to 30 times the income of the average worker, today’s CEO now makes 273 times more….

And meanwhile, a family in the top 1 percent has a net worth 288 times higher than the typical family, which is a record for this country.


Obama does not have to look far for information to back up his concerns.

Research reported in the Luxembourg Income Studies ( working paper series, shows the degree to which wealth (net worth) has accumulated among rich households in the USA and other societies. Inequality tends to be highest in the USA, but many countries are close behind. Frank Cowell, Eleni Karagiannaki and Abigail McKnight of the London School of Economics, point out that:

In the US the wealthiest 1% of households hold nearly 30 per cent of total positive net worth, the wealthiest top 5% hold around half of all positive net worth and the wealthiest half of all households hold around 95 per cent of all positive net worth. (P 14)

The research indicates that national averages can be misleading when resources are concentrated at the top. Being halfway up the population scale (the median, or 50th percentile) does not mean you have the average amount of wealth. In the USA, a household with “average wealth” would be around the 75th percentile (p54-55 reference below). They also point out that except for the wealthier households, most net wealth is in the form of housing equity. In contrast to the other countries in the study, the UK experienced a significant decrease in wealth inequality during the study period because of housing value increases. In the USA, inequality increased because of the drop in housing values, and much housing equity is offset by housing debt.

Source: LWS Working Paper Series No. 12 Luxembourg Income Study (LIS),

Mapping and Measuring the Distribution of Household Wealth: A Cross-Country Analysis, Frank Cowell, Eleni Karagiannaki and Abigail McKnight October 2012

Wealth distribution tends to be more skewed than income because of accumulation, ability to avoid taxes, to invest, and intergenerational transfers. The rich are getting ostentatiously richer, but changes affecting the middle class, the (to use Obama’s term)  typical earner or typical family, are less clear.

Even less clear is the explanation for increased inequality. Is it due to reduced taxes on the affluent? Concentration of power among corporate executives? The stacking of the deck through global competition, against the earnings of the worker? The technological revolution and knowledge work? What about demographic changes such as overabundance of labour created by the baby boom and two-earner families? Assortative mating? (Marrying someone in the same earning category) What about population ageing and retirement? Is the middle class –  the target market of many politicians  – being “hollowed out?” And what is the middle class anyway?

We will look at the current research on these questions in future issues, as well as the social policy measures which are being advanced.  We will also follow Obama’s stated mission of change.


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