Inštitut za ekonomsko demokracijo

Is Employee Ownership the Answer to Deepening Inequality in Europe?

Author: Erika Funa

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The distribution of wealth and income in society to a large extent determines individuals’ access to goods and services. Typically, high wealth and income inequality lead to social instability and economic stagnation. Looking at the situation in Europe, a report by World Inequality Database offers a valuable insight into the inequality trends and driving forces behind it in the last four decades. The main finding is that Europe today is more unequal than it was about 40 years ago.

In the period 1980-2000 especially, inequalities (pre-tax per-adult national income distribution) have increased in most of the 38 European countries observed. In 1980-2017, the incomes of the top 1 % earners in Europe grew more than twice as fast and captured as much growth as the bottom half of the population. Interestingly, in 2017, the value of per adult net national income in Eastern Europe was the same as before the fall of the USSR in the early 1980s, i.e. approximately 35 % lower than the European average. Per adult incomes in Southern Europe decreased since the 1990s compared to the continental average – in 2017, they were 10 % lower. Meanwhile, Northern Europe was 50 % richer in 2017 than the European average, while in the mid-1990s, that figure was at 25 %.

Inequalities in Europe have largely been driven by higher income concentration at the very top of the distribution. Between 1980 and 2017, the share of national income captured by the richest 10 % European residents rose from 29 % to 34 %, and increased in nearly all European countries, albeit with noticeable differences in national trajectories. At the same time, the top 1 % grew its national income share from under 8 % to almost 11 %. In contrast, the level of the regional income captured by the bottom half of earners in Europe dropped from 24 % of the total regional income in 1980 to 20 % in 2017. Notably, the earnings of the top 0.1 % in that period more than doubled, while those of the 0.001 % tripled. Meanwhile, the incomes of the bottom half in Europe only increased by 30-40 %, and those of the middle class only ca. 10 % more than that. Between 1980 and 2017, the average income of the top 10 % European residents grew from 8 times to 10 times higher than that of the bottom half of the population.

While inequalities between European countries decreased slightly between 1950 and the early 1980s, they remained broadly stable since. Both in 1980 and 2017, the national per adult income of the poorest European countries was over 50 % lower than the European average, while the richest European countries remained 75 % wealthier than the average. According to the Lisbon Treaty, ‘the EU shall promote economic, social and territorial cohesion, and solidarity among the Member States.’ However, the period of European integration has so far in fact seen the opposite: a gradual increase in income differences between EU states.

In terms of comparing the trajectories of the top 10 % to the bottom 50 % of earners, no country in Europe has managed to achieve inclusive growth – the UN Sustainable Development Goals inequality target that aims to ensure that the bottom 40 % of the population grows faster than the average, was missed by virtually all European countries. While in the early 1980s, approximately two-thirds of income inequalities in Europe could be explained by inequalities within countries, that share increased to over 75 % in 2017. Thus, eradicating differences in countries’ average national incomes would not have brought about major changes. However, if all European residents had actually earned the average national income of their countries, the differences in their living standards would have been reduced dramatically – bottom 50 % earners would have received more than a third of total income, while the earnings of top 10 % would have stagnated at about ca. 15 %.

Between 1980 and 2017, relative poverty in Europe increased from 20 % to 22 %, remaining stable or increasing in most European countries. It is true that between 2007 and 2017, the average earnings of the top 1 % in Europe decreased, while those of the bottom 50 % grew, however, the income of the top 0.001 % grew much faster. In 2017, perfect macroeconomic convergence in Europe would have only lifted 4 % of the population out of poverty. Thus, to achieve equitable growth, reducing inequalities within countries is crucial. Economic democracy in the form of employee ownership and democratic governance of businesses and its other variants offers untapped potential and should be considered as one of the promising ways to help achieve this.

 

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