Inequality rose from above, so it shall fall again : Income skewness trends in 16 OECD countries as evidence for a second Kuznets cycle

Abstract

Advanced industrial democracies experience increasing inequalities or at least a new trade-off between equality and growth: liberal welfare states opted for growth and accepted rising inequality, while conservative welfare states tried to hold back inequality, thereby accepting lower growth. The rise in inequality is widely interpreted with regard to globalization and technological change. This article contrasts this interpretation with an alternative based on the argumentation of Kuznets’s inverted U-turn which is individually reformulated as some diffusion process of some qualification. While threats such as globalization can be reformulated as a ‘negative diffusion process’, a positive diffusion process is also possible. The two alternative mechanisms are identical regarding inequality measures as the Gini coefficient, but they are differentiated in their trend expectations with regard to income distributions’ skewness. In the globalization model, increasing inequality is accompanied first by a fall and later by a rise in skewness, while the qualification diffusion model shows the opposite sequence: rising to a maximum and falling back later on. Due to their different position in the inequality—growth trade-off, liberal and social democratic welfare states are assumed to be ahead in this evolution, while conservative welfare states lag behind. Based on the Luxembourg Income Study, skewness estimations of logged monetary income distributions form an unbalanced panel with 69 observations from 16 OECD countries. A fixed effects regression for the skewness time trend in conservative welfare states and the trend difference for the two other welfare state groups shows strong support for the positive diffusion model, giving rise to the expectation that inequality can and will decrease again.