We know too little about Polish inequality

(©Stelios Lazakis, CC BY-NC-ND 2.0)

Obserwator Finansowy: In Poland, in the years 2015-2018, the Gini coefficient fell by 0.7 points annually. That’s a rather high rate compared to the previous four-year period so it’s not a surprise that the government likes to refer to these data. This is supposed to show that an income inequality is declining rapidly. Is the Gini coefficient really a good measure?

Michał Brzeziński: There are many measures of inequality and, unfortunately, the Gini shares the weaknesses of all the others. Because what is actually measured is just as important as how it is measured. And the Gini measures income based on survey data, at least for Poland. And the data is more reliable for low incomes than high incomes. People with high incomes, or those earning their income in the shadow economy, might lower or hide their income in the surveys. That is why the scale of inequality in Poland as measured by the Gini coefficient could be heavily under-stated.

We often see the comparison of Gini coefficient from different countries. Does it make any sense?

In a limited way. In the Nordic or west European countries data on income is collected from more reliable sources, such as the tax administration or the social insurance institution. Unfortunately, in many countries, including Poland, it’s less reliable survey data. The methodology of data collection for international comparisons is therefore not standardized. Which is why I don’t really trust the data that show a fall in inequality in Poland. Particularly since studies published a year ago by Paweł Bukowski, a researcher at the London School of Economics, and Filip Novokomet. It took into account data from tax declarations. Tax data are more reliable for high incomes, but only the transparent ones. They still do not cover the shadow economy, for example Polish farmers, who do not pay income tax. However, you can, as Paweł Bukowski does, combine tax declarations with surveys.

And what is the result then?

The result is that the Gini coefficient for Poland is not 0.32, but at least 0.36, and could even be 0.4. That would mean the research alone underestimates Polish inequality by as much as 25 per cent. And yet these estimates also require further processing. The data that is collected for the estimates is not cohesive, because, for example, in taxes we have gross income but in the surveys it’s after tax. Models allowing the standardization of data are rather complex. Paweł Bukowski also tries to collect data from the national accounts, because they contain household income, and on that basis he estimates the inequality. This measure shows that the inequality in Poland is even higher. Applying the methodology borrowed from Thomas Picketty, Mr. Bukowski wants to combine all three sources of data: taxes, surveys and national accounts. The results of this research are not yet known.

Is the inequality a new, fashionable subject among Polish economists?

The inequality is one of the main issues in world economics, but not in Poland. Our discussion on this subject is at early stage. So far, we are unable to keep up with the world.

And the world is indeed racing ahead. Not long ago “The Economist” announced on its cover that the discussion about inequality has gone in the wrong direction, that the problem has been overestimated.

Everything is possible. The debate on this issue is very lively and we have successive stages of revolution and counterrevolution as far as the economic mainstream’s approach to the inequality is concerned. The important thing is that they are based on concrete data and research, i.e. exactly what Poland is missing. And there are few economists who deal seriously with the inequality.

Since there’s still a lack of reliable data about Polish inequality, I understand that one should treat with caution both the argument that it is a serious problem here in Poland and that there is no problem?

Unfortunately, yes. However, you should remember that something is rarely 100 per cent certain in economics, and in the case of inequality it may be that we will never be certain about its true level.

And yet, despite this uncertainty, many people use the inequality as a key to explaining all social problems. For example, the wave of anti-government protests that exploded in around the world in the second half of last year is explained by the inequality.

And in this way the problem is simplified, regardless of whether it’s the left or the right wing of the ideological barricade. After all, the yellow vests protests in France, where the inequality is not high, are quite different from the protests in Chile, where it is at the US level.

Apart from gauging the scale of inequality, the problem is also estimating when it is harmful and when it serves economic growth. A certain level of inequality must exist under capitalism, right?

There is empirical research that allows us to estimate the optimal level of inequality in relation to the objective that we have set, for example, GDP growth. This isn’t simple research, since the relation between the inequality and GDP are not of a linear nature. I’m not a supporter of this type of research, because it is based on incomplete and unreliable batch input data. Someone takes raw data from 150 countries and draws conclusions on this basis. The results will not be very good, they will be rather circumstantial in nature. I also think that instead of searching for the threshold for the optimal inequality, it is better to focus on thinking in terms of “intervals”, i.e. identify the range of levels in which inequality is relatively safe and when it becomes harmful. When speaking of the inequality, it is also worth taking into account its ethical aspect.

Too much inequality is immoral?

That depends where it originates. If, for example, it originates from discrimination or corruption, then the answer is yes, it is. In normative economics, the part that deals with the inequality adopts ethical assumptions that are acceptable to the majority of people, regardless of their views. The aim is to be acceptable to both social democrats and liberals. This is where, for example, the concept of equal opportunities comes from. Probably everyone will agree that success should depend on real effort and endeavor, and not by chance. In other words, for example, sex or a birth place should not matter. While chances cannot be completely eliminated, because we don’t have any influence on where we are born, they can be minimized.

By a social policy?

Yes. By the well-designed social policy. In Sweden it has succeeded.

Could the child benefit program be a tool to increase equal opportunities?

Even if yes, it would be to a limited extent, and this is because of the universality of the program. Because it also includes the first child and there is no income threshold, so it has become redistribution to the middle class, and not, above all, to the disadvantaged.

What could be improved in the program?

For example, an income criterion could be introduced so that the benefit diminishes along with growing income. However, more effective methods of creating equal opportunities include a different type of policy, for example, increasing access to education and health care.

But in Poland both education and health care are universal and “free”.

That’s not entirely true as far as the universality is concerned. On average, village schools offer lower quality education than schools in towns, which puts children from rural areas at a disadvantage. And there are still a lot of these children because in Poland the percentage of people living in urban areas is lower than in rural ones. Even a substantial rise in the salaries of teachers in village schools will not change this. Some kind of systemic change is needed, supplementing general education with some kind of program aimed at these less privileged groups, but I’m not certain whether the Polish state is capable of doing this.

Will the planned significant increase in the minimum wage reduce the inequality?

Raising the minimum wage could reduce poverty and wage inequality. Empirical research confirms this. At one time in Poland we had really big wage inequality, which was invisible statistically because it was compensated for by the relatively small inequality among a large group of pensioners. The policy of raising the minimum wage has begun to change this. The question is how it will affect labor supply.

Today the level of the minimum wage already discourages full-time employment.

That’s why we shouldn’t exaggerate when raising the minimum wage. If the government’s announcements are implemented, we will have one of the highest minimum wage rates in the OECD. I’m not sure whether such a move would not be too bold. Instead, we should aim to stay close to the OECD average, especially since we have to accept additional supply of labor from abroad. Too high minimum wage could send bad signals and attract, for example, too many people, or the opposite — it could mean that Polish companies won’t be able to afford to employ them. In that case the labor shortage would deepen.

So far we’ve talked about the income inequality. What about the wealth inequality? In Sweden there is a billionaire for every 250,000 inhabitants. In Poland we have one for every four million. Doesn’t a large concentration of wealth in the hands of the richest disturb the idyllic picture of Sweden as a haven of equality?

Small income inequality doesn’t exclude large wealth inequality. If someone earns relatively little but saves a lot, they accumulate wealth. Another person with similar earnings could spend everything on consumption and even have negative wealth, in other words, debts. Research shows that large wealth inequality weakens economic growth, but only such wealth inequalities that result from political factors, for example, cronyism. Sweden is a country of extreme honesty, so such factors are minimized there.

Is that why Swedes accept the rich?

Exactly. However, acceptance of people with large wealth could result from a lack of knowledge about how large these fortunes really are. People who are conscious of the real scale of wealth inequality could begin to perceive it as unfair. A certain clue that indicates such a possibility was the Norwegian experiment in which taxpayers were allowed to view the tax declarations of their neighbors. The level of declared satisfaction with life then declined. Finally, every country has different circumstances and social perception of inequality depends on the universally accepted mindset.

However, isn’t making people conscious about the level of inequality socially harmful? It could arouse envy.

Well, it’s difficult to refuse access to research results and knowledge. You can’t dispense information about the inequality in small doses only because they might misinterpret it. What economists should do is try to obtain and communicate the data in a reliable way.

Some think that we should be focusing non on the inequality, but social mobility. If it’s possible to climb the ladder, then everything is okay.

Only there’s no reliable data on this issue in Poland. We don’t know how inter-generational mobility is developing, in other words, whether children are doing better than their parents. For many western countries the data is available even up to the third generation or more. I think that over the last few years social mobility in Poland has changed and evolved rapidly and radically. At the beginning of the 1990s it was definitely very large and certainly greater than during the communist Poland. An indicator, or piece of circumstantial evidence of mobility, is also the number of university students. In the communist Poland it was a few per cent, today it is several dozen per cent.

You are saying that Poland is an economic wilderness, as far as verified data on equality is concerned. So, is there a sense to fight it?

As I have said, we will probably never reach a consensus concerning the inequality. However, I think that it isn’t a good enough argument to support doing nothing. For example, some people argue that the inequality can lead to a serious social turmoil. There is research showing that it led, for example, to the outbreak of the Bolshevik revolution. What if that is true? If this research is correct, then refraining from reducing the inequality could turn out to be very harmful in the long term.

Michał Brzeziński, PhD, is an economist at the Warsaw University.

(©Stelios Lazakis, CC BY-NC-ND 2.0)

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