Questions and answers about
the economy.

What different ways can policy-makers address inequality?

Longstanding economic fractures have been widened by the pandemic. In response, a range of policy actions are needed across the income distribution and at all stages of the economic process.

Economic and social inequalities take many forms: many have been widened by Covid-19. Across the income distribution, consumption, savings, job losses and the opportunities for remote work have evolved very differently. Across genders and between parents and those without children, the toll of school closures, lack of childcare and additional housework has been uneven. And across regions, sectors and occupations, the pandemic has brought vastly different burdens.

These challenges are daunting and need to be tackled at a variety of levels. Rather than thinking about policies in isolation—education or work or redistribution from higher to lower incomes—policies should be considered jointly. Redistribution is key but it needs to be combined with appropriate ‘pre-redistribution’—interventions to improve economic opportunities.

Such packages of policies are important not only for reducing inequality, but also for improving productivity. Without more equal access and opportunities, technologies and resources remain bottled up in a few companies and among a few ‘elite’ groups of employees, mainly in urban metropolitan areas, and do not trickle down to others. Workers left using old technology or limited by resource availability see their output hampered. Many are left behind.

A useful way to think of potential policy interventions is with a three-by-three matrix. On one side are the income groups mainly targeted by a policy: the bottom of the income distribution, the middle classes, and the very top.

On the other side are the three stages at which interventions can take place: pre-production policies, which shape the endowments that people bring to the labour market, and their opportunities; production policies, which influence firms’ decisions and how the labour market functions; and post-production policies, which are redistributive measures, such as government transfers and progressive taxation.

Many traditional welfare states in Europe rely heavily on the first and third columns of the matrix: on the one hand, fostering education and training to prepare people for the world of work; and on the other, progressive taxes and transfers, as well as social insurance against unemployment, illness or disability.

Table 1: Policy matrix, economic stage of policy intervention and income segment

Pre-Production StageProduction StagePost-Production Stage
Bottom incomesPrimary education & early-childhood programmes; vocational trainingMinimum wage; apprenticeships; reduced social security contributions by firms; in-work benefitsSocial transfers (housing, family child benefits); guaranteed minimum income
Middle incomesPublic higher education; adult retraining programmesCluster policies; SME support programmes; EU Structural and Investment Funds; occupational licensing; on-the-job training; collective bargaining & work councils; EU trade policiesUnemployment insurance; pensions
Top incomesInheritance & estate taxesR&D tax credits; EU competition policiesTop income tax rates; wealth taxes

Production stage policies are not systematically geared towards reducing inequality and creating better jobs. There are some exceptions—the minimum wage, collective bargaining regulations and labour protection —but in general this stage targets market competition, physical investment and innovation, reflecting a traditional divide between ‘social policies’ that focus on inequality and economic policies to improve productivity.

But such traditional welfare systems are built on the assumption that (almost) everyone who wants a good job can find one. The pandemic has revealed the stark inequalities in the quality of jobs accessible to different groups.

It is not possible to define what a ‘good job’ is in the absolute, as it depends on local circumstances and people’s preferences (for example, for flexibility). Nevertheless, some clear criteria include safe and reasonable work conditions, sufficient pay that enables good living standards and access to benefits such as healthcare, childcare and pensions in the future, as well as adequate social insurance and some share of career opportunities and progress. These kinds of jobs have been disappearing.

In a world in which good jobs are becoming scarce due to longer-run trends such as technological change and globalisation—and where shocks such as Covid-19 deepen the cleavages—there is a need to act on all three columns in a coordinated and comprehensive way.

Where can I find out more?

Who are experts on this question?

Author: Stefanie Stantcheva
Note: A full paper will be published in Economic Policy.
This article first appeared in the first issue of ECO magazine, available here.
Photo by Thomas de LUZE on Unsplash
Related Articles
View all articles
Do you have a question surrounding any of these topics? Or are you an economist and have an answer?
Ask a Question
Submit Evidence