Varieties of Capitalism (VoC) and Varieties of Distributions (VoD): How Welfare Regimes Affect the Pre and Post Transfer Shapes of Inequalities?

The socioeconomic literature underlines the international differences in post-tax and transfers shapes of inequalities (due to differences in social policies of income distribution) but generally fails to identify clear obvious contrasts between welfare regimes types. In our paper, we study how welfare policies change the shape of “local inequalities” within different countries and succeed in the identification of specific shapes of market incomes, redistributive profiles and post-transfer level of living (‘varieties of distributions’ VoD) relating to specific VoC. By “Local inequalities” we mean that we can detect more or less inequality at the top, middle or bottom of income distributions, a trait that traditional indices of inequality such as the Gini fail to detect. Since social/fiscal policies can affect specifically the poor, the median or the upper classes, such analysis of welfare policies can improve our knowledge of VoC. Using the new Isograph method (Chauvel in press 2015) and its pre and post transfer generalization, we are able to decompose inequality by income level. We distinguish between eight different types of capitalist regimes and explore within classes inequalities before and after tax and transfers.

The difference in the shape of local inequalities before and after tax and transfer is attributed to the welfare system and enables us to identify which class gains or losses from it. Policies that are aimed on specific class (for example the lowest class) might reduce inequality among this class, but also change the pattern of inequality among other classes. 

Special attention is given to the local inequality around the middle income. Most of the studies dealing with pre and post redistribution focused on the poorest or on the overall inequality. Other studies focus on the targeting of the transfers, measuring whether the transfer system includes transfers for the middle class and only to the lower classes. However, the effect of redistribution might not be only due to transfers, but also due to taxation (especially in relation to other classes). Therefore, the difference in local inequalities around the middle income before and after tax and transfers might be substantial, even if the welfare policy is not specifically targeted toward the middle class.

We estimate local inequalities of household market income and of disposable income, and the gap between. Using Luxembourg Income Study data on 25 countries we show how the patterns of inequality confirm typologies of varieties of capitalism (VoC) – social democratic, conservative, neo-liberal, post-socialist, Asian and developing countries.

Our results suggest that different VoC countries produce different strategies for reducing (or not) income inequality. These strategies generate different general levels of inequality but also of local inequality among different classes. Southern European countries welfare fails in reducing inequality via transfers. In contrast, both Neo-Liberal and Nordic countries massively target transfers on the bottom, even though the Scandinavian regime is more intense and thus effective. The latter are also better in reducing inequalities around the middle income, achieving relative equality among the middle class through tax and transfer system. Conservative countries are also effective in reducing inequalities among the middle class, but with less efficiency regarding the lower classes.

Post-socialist and Asian countries did not present any effective tax-and-transfers policy of reducing local and global inequalities. However, the post-socialist countries introduced a relatively low level of inequality before redistribution, suggesting other types of welfare policies that are not directly related to tax and transfers.

Our study draws different patterns of welfare policies, along the common distinguish between VoC. We suggest that these patterns affect not only the overall level of inequality, but also local inequalities within and between classes. These policies are reflected in the differences between pre and post distribution. Our findings suggest that while other alternative exist, the social democratic approach to redistribution is the most effective in reducing inequalities in regard to both lower and middle classes.

Keywords

Income inequalities; transfers; social classes; comparative research