NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Income Inequality and Social Preferences for Redistribution and Compensation Differentials

William R. Kerr

NBER Working Paper No. 17701
Issued in December 2011
NBER Program(s):   EFG   LS   PE   POL   PR

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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Document Object Identifier (DOI): 10.3386/w17701

Kerr, William R. "Income Inequality and Social Preferences for Redistribution and Compensation Differentials." Journal of Monetary Economics (forthcoming).

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