Addressing the Core Cause of Inequality

Ireland has the highest level of market inequality in Europe. However, this is alleviated by our tax and welfare system. Market inequality arises because of the distribution of income and wealth in the market between firms and workers. The share of national income going to workers and self-employed has been declining for decades in many countries. Conversely, the share of national income going to the small number of owners of capital has greatly increased. Artificial Intelligence will add to market inequality because, owned by capital, the increased profits will go to it.

There is now much goodwill in addressing inequality amongst all political parties and even amongst the international institutions, such as the OECD, which are now pressing for more equal and inclusive economies. Ignored by economists for so long, it is now realised that inequality is distorting economies and societies as well as hurting many.

However in Ireland, there is a certain satisfaction with the status quo by many policy makers. A recent Central Bank research paper found “helped by welfare transfers, those in the lowest income fifth of the population" factoring in inflation, gained more than those in the top one fifth. Similarly an ESRI study in 2020 also found that no other tax system in Europe does more to reduce household income inequality than Ireland’s. This demonstrates that the system is working well. However, the core issue is not being addressed. It is the high level of underlying market inequality. A recession would quickly reduce the impact of tax and welfare on inequality until it is fixed.

TASC is good in this area

This core issue of market inequality should become the priority. TASC is one Irish body which has addressed it and has done so for some years. However, few political parties have the reduction of core or market inequality as a priority. Yet this reduction should be one of the key priorities in Irish politics because it is at the heart of inequality before remedial actions are taken to alleviate it and because it is so high here. In 2022, with the top 20pc Irish has 15.5 times more market income than the bottom 20pc, according to Eurostat data. Then after, it is reduced by the actions of the tax and welfare system. But the core issue is not addressed probably because to do so will demand radical change.

What is Market Inequality

There are a number of factors at work in understanding market inequality. First is the distribution of national income between capital and labour. Sweeney has shown how over three decades, the share of national income in many countries has been declining. Conversely the share going to the small number of wealthy people who are the owners of capital has been increasing. This is at the core of market inequality.

Another key features of market inequality is the unequal earnings between those of the top of the labour market and those at the bottom. Some people in Ireland are very well-paid working eg in banking and tech and some professionals, whereas those in retail and hospitality are low paid. Wages are the most important component of market income, and so income inequality between individuals (as opposed to households, (which is what is done in most studies of inequality) helps us to understand more fully market inequality in Ireland. While wealth inequality is high in Ireland, the income from capital is only 8 to 10% and so it's not significant in an analysis of market inequality. The level of unemployment in a country and also the level of participation in the labour market are also important in determining market inequality. The level of unemployment in Ireland is low and level of labour market participation (the proportion of working population in the age group of 16-64 in the economy employed or seeking employment) is low at 65% compared to an EU average of 75.3%. It is as high as 79.8% in Germany (but low in some states like Moldova at 45% or Greece at 52%). For a much more detailed examination of market inequality, see TASC, Chapters 3 and 4.

The TASC report found that "that Ireland is one of the most market unequal countries in the EU in the distribution of individual income". There is an unequal distribution of earnings, but low attachment to the labour market more reinforces rather than drives inequality. The distribution of earnings and low pay are related, especially in Ireland. Ireland’s comparatively high rate of low pay is also driving market inequality.

Inequality is Destabilising the Economic System.

Levels of global inequality have reached dangerous levels with a minority controlling so much that they are incapable of ever spending a fraction of their wealth and incomes. The circulation of money is slowing because wage earners have a much reduced share. Those with capital are spending less and less. This is illustrated by private equity firms globally being awash with cash - having a staggering $2.59tn for buyouts at the end of 2023. Corporations too are buying back their own shares, instead of investing their capital in goods and services. $6.3tn was spent in share buybacks by US companies between 2010 and 2019. Companies with booming profits buy back shares, instead of investing partly because more and more consumers cannot afford to buy their output of goods and services. This is because consumers' incomes have declined relatively, as the share of national income flowing to capital continues to rise.

There is agreement that the tax and welfare system has reduced Irish market inequality to the average levels of inequality in the EU. But the real challenge is to address market inequality. The core cause of inequality - in the marketplace - has to be addressed by strong policies, or it will lead to more extremism and populism, particularly when the next recession undermines what is a temporary, albeit effective, tax and welfare fix.

If market inequality is reduced, it can lead to other positive outcomes, such as people being able to better afford housing; to address the labour market challenges of AI; with higher incomes enabling people to pay more taxes to fund the health, education and public investment programs that Ireland needs and will continue to need, particularly as we age. Market inequality can be addressed with political will, because inequality is a political choice.

The next blog will examine how to address Ireland's high market inequality by re-setting the unfair balance of power between corporations and workers.

Posted in: Inequality

Paul Sweeney     @paulsweeneyman

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.