Biased Perceptions of Inequality and Redistribution Carina Engelhardt and Andreas Wagener Institute of Social Policy, School of Economics and Management, Leibniz University of Hannover, Germany 1. Idea and Punch Line • The public holds biased perceptions of the income distribution: it perceives the distribution as “too symmetric” and “too rich”. • Research question: do such biased perceptions affect the political economy of redistribution in democracies? • Relevance: standard approaches hypothesize that redistribution is more intense in democracies the more unequal the income distribution  but these models do not perform well empirically when estimated with the actual income distribution. • Our approach: to estimate the MR approach (and its POUM extension) using the perceived income inequality (and perceived social mobility). • Result: this works much better; clear positive association between perceived inequality and redistribution. 2. Conceptual Framework: MR Model Mean-to-Median Ratios (selection) Meltzer and Richard (1981, MR): with majority-voting, the volume of redistribution increases when inequality rises. Actual (OECD) Perceived Weighted Relevant inequality measure: ratio of mean income to median income Canada 1.141 1.022 0.895 • Mean income separates “winners” from “losers” from redistribution; median income: politically decisive in majority voting France 1.159 1.003 0.865 Germany 1.131 1.039 0.919 Italy 1.138 1.003 0.881 Japan 1.144 0.985 0.861 Mexico 1.526 0.912 0.598 The Netherlands 1.156 0.966 0.836 New Zealand 1.178 1.010 0.857 Poland 1.171 1.036 0.885 South Korea 1.105 0.912 0.825 Spain 1.137 1.046 0.920 Sweden 1.078 1.023 0.949 Turkey 1.411 0.847 0.600 UK 1.210 1.141 0.944 US 1.192 1.043 0.875 Problem with MR hypothesis: empirically not confirmed. Potential reason: all studies are based on actual income inequality – but what matters in politics are perceptions, not facts. 3. Perceived Income Distributions We study the answers in 29 countries to the following ISSP question: “In our society there are groups which tend to be towards the top and groups which tend to be toward the bottom. Below is a scale that runs from top to bottom (10 top – 1 bottom). Where would you put yourself now on this scale?” Distributions emerging from the answers: Austria Germany Denmark Ireland Canada Spain Israel Switzerland Finland Italy Chile Czech Republic France United Kingdom Japan South Korea • The same pattern holds in all 29 sampled countries • Perceived inequality is everywhere lower than factual inequality • More unequal countries tend to underestimate inequality more. Density Hungary Belgium 4. Inequality and Redistribution Mexico Netherlands Norway New Zealand Poland Portugal • OLS regressions of social quota on (perceived) inequality • Various controls included/omitted; results are robust • Data: ISSP for 1992, 1999, 2006-2009; controls from OECD data base; crosssectional data are used. Russia Sweden Slovenia Turkey United States Dependent Variable: Social Expenditures (in % of GDP) Actual inequality -22.40** Self-Positioning on a Top to Bottom Scale Perceived inequality -  All distributions derived from self-categorizations are “too symmetric” and “too rich” Weighted inequality - Two measures of perceived inequality in a country • Ratio of average to median value of these self-categorizations  “perceived inequality” • Ratio of “perceived inequality” to actual mean-median ratio  “weighted ratio” (motivation: some countries are generally more (un)equal than others which might influence citizens’ perceptions of inequality) - - 21.40 - 36.73*** Social expenditures 80ies 0.646*** 0.716*** 0.621*** Log GDP -3.988** -0.082 -5.259** Trade openness -0.0095 -0.0061 -0.0103 Dependency ratio 0.518 -0.051 0.530 Note: * p < 0.10, ** p< 0.05, *** p< 0.01; N=26 5. Main Results • Using actual inequality, MR model is rejected: negative correlation between inequality and redistribution. • Using perceived or weighted inequality, MR model cannot be rejected: positive association between inequality and redistribution. • For weighted inequality: positive association is highly statistically and economically significant. Dependent Variable: Social Expenditures (in % of GDP) Perceived POUM 6. Variation: POUM Hypothesis Prospects of Upward Mobility (POUM): poor people believe that they/their children are likely to move upward on the economic ladder. • POUM hypothesis: the greater upward mobility, the smaller is redistribution – poor with POUM are reluctant to vote for redistribution. • We show: POUM hypothesis works better empirically when based on perceived POUM (based on the hard-work question) – which are much larger than actual POUM (based on the probability of being in a much better occupation than one’s father). 7. Discussion and Extensions • Why is the perception of income inequality biased?  preference for symmetry; inferences from acquaintances, … • MR/POUM model: direct democracy (majority voting on issues). How about representative democracy? Email: [email protected] Phone: +49 511 762 8214 Actual POUM -30.62*** - - 12.35 Social expenditures 80ies 0.602*** 0.590*** Log GDP 2.632 1.387 Trade openness 0.0130 0.0569 Dependency ratio 0.217 0.673 Note: * p < 0.10, ** p< 0.05, *** p< 0.01; N=22