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Income inequality and social preferences for redistribution and compensation differentials

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.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1331.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 31/2013.

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Length: 48 pages
Date of creation: 11 Dec 2013
Date of revision:
Publication status: Published as Kerr, William R., 'Income inequality and social preferences for redistribution and compensation differentials' in Journal of Monetary Economics , 2014, pages 62-78.
Handle: RePEc:hhs:bofrdp:2013_031
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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