The Many Hues of Inclusive Growth

No pathway toward inclusive growth is like any other, as countries enjoy specific growth profiles that allow them to reach the same goal in different ways, but research by Zachary Parolin (Bocconi) and Janet Gornick (City University of New York), just published in the American Sociological Review, found meaningful similarities across eight high-income countries. Shared features are the role of transfers in sustaining the low-income population, the role of taxes in moderating the rise of top-earners income, and the contribution of rising educational attainment to widespread, but less inclusive, growth.

Parolin and Gornick define inclusive income growth as a measure of two components of changes in income distribution: rising levels of income and equality in the change of income across the distribution.

"As competing accounts exist regarding the mechanisms most amenable to achieving inclusive growth, our study incorporates each of these perspectives to measure the relative contribution of changes in taxes, transfers, demographic and employment composition, and other factors, such as market institutions, to changes in the income distribution in high-income countries," says Professor Parolin. The unique combination of these contributions constitutes a country's growth profile.

In their study, the authors analyzed national growth profiles in eight high-income countries from the 1980s to the 2010s. These countries include the United States, Australia, Canada, Germany, France, the Netherlands, Denmark, and Finland.

All eight countries experienced income growth during this time period, with the slight exception of the bottom of the German income distribution, but featured vastly different trends in the inclusivity of that income growth.

Countries with an already high level of inequality (Australia, Canada, US) recorded stronger income growth and a lower relative increase in inequality than Germany and France in the time period, but their distributions remain much less inclusive than those of Continental Europe. Denmark, Finland and the Netherlands display flatter (more egalitarian) income distributions in both years, with particularly large increases in levels of income growth for Finland, which, however, also saw notable increases in inequality.

The authors found that policy-driven changes in taxes and transfers are the dominant drivers of inclusive growth only at the extremities of the income distributions, as changes in transfers generally affect low-income individuals and rising tax rates reduce net incomes of high earners. Taxes and transfers had little effect on the rest of the distribution, however.

The authors also introduce a method to distinguish how changes in policy and changes in composition (such as rising levels of employment or educational attainment) differentially affect the distribution of taxes and transfers. In doing so, they find that as transfers become more generous, the number of households eligible to receive them generally does not increase. "We don't observe a moral hazard effect here," Prof. Parolin says. "Put differently: more generous public transfers don't generally induce people to become lazy and stop searching for a job."

On the contrary, the rise in educational attainment spurs growth across the whole distribution, but it seems to promote less inclusive growth, both when taken in isolation and when combined with the growing returns to higher education.

Changes in other factors, including market institutions, increased inequality in some countries such as the US, but less so in others, such as France and Germany, where collective bargaining – for example - is more widespread.

"The main takeaway here is that rising income inequality is not an inevitable consequence of market forces," Prof. Parolin concludes. "In a counterfactual analysis, we show, for example, that had the U.S. seen the change in market institutions of France rather than its own, top incomes would have declined, and had it mimicked changes in tax policy of the Netherlands or the changes in transfer policies of the Danish, the U.S. would have experienced far more inclusive income growth."

Zachary Parolin, Janet C. Gornick, "Pathways toward Inclusive Income Growth: A Comparative Decomposition of National Growth Profiles.", American Sociological Review. Issue, etc, DOI: