Crunching the Numbers on Predistribution – People’s Policy Project

Report on Income Inequality and the Role of Redistribution in Achieving Sustainable Development Goals

An analysis of a recent study by Mogstad, Salvanes, and Torsvik reveals critical insights into the drivers of income inequality, with significant implications for achieving Sustainable Development Goal 10 (Reduced Inequalities). The study initially concluded that predistribution of earnings, rather than redistribution through taxes and transfers, is the primary reason for lower income inequality in Nordic countries compared to the United States and the United Kingdom. However, a methodological review indicates that this conclusion misrepresents the role of social welfare systems, which are fundamental to the SDG framework.

Analysis of Methodological Approaches to Measuring Inequality

The Predistribution vs. Redistribution Debate in the Context of SDG 10

The central debate revolves around two mechanisms for reducing inequality:

1. Predistribution: Policies that aim to create a more equal distribution of market earnings before government intervention. This aligns with SDG 8 (Decent Work and Economic Growth) by promoting fair wages.
2. Redistribution: The use of taxes and social transfers (welfare programs) to alter the final distribution of disposable income. This is a direct mechanism for achieving SDG 10 and SDG 1 (No Poverty).

The original study posited that predistribution was the more significant factor in the Nordic model’s success in mitigating inequality.

Methodological Limitations and Their Impact on SDG-Related Conclusions

The study’s primary limitation was its exclusive focus on the working-age population (18 to 65 years old). This approach systematically omits a key demographic that benefits from redistributive policies, thereby skewing the results.

• Exclusion of Key Beneficiaries: By excluding retired individuals, the analysis fails to account for the primary function of a welfare state, which is to provide income security to non-workers. This directly impacts assessments related to SDG 1 and SDG 10.
• Distorted Gini Coefficients: Market income inequality is mechanically higher among retirement-age populations, as many have zero labor income. Excluding this group artificially lowers the measure of pre-tax inequality and, consequently, diminishes the apparent impact of redistributive transfers like pensions.

A Comprehensive Assessment of Redistribution’s Impact on SDG 10

Gini Coefficient Analysis for Total Populations

A revised analysis incorporating OECD data for the entire population of each country presents a more accurate picture of the role of redistribution. The Gini coefficient, where 0 represents perfect equality and 1 represents perfect inequality, demonstrates the significant impact of taxes and transfers.

Key findings from the comprehensive data (2019) include:

• United States: Taxes and transfers reduce the Gini coefficient by 0.110 points (a 21.8% reduction).
• Nordic Average: Taxes and transfers reduce the Gini coefficient by an average of 0.183 points (a 40.4% reduction).
• United Kingdom: Taxes and transfers reduce the Gini coefficient by 0.142 points (a 28.0% reduction).

Quantifying the Role of Taxes and Transfers

By using data inclusive of all age groups, the contribution of redistribution to closing the inequality gap becomes substantially clearer.

1. The final gap in disposable income Gini between the U.S. (0.395) and the Nordic average (0.270) is 0.125 points.
2. Of this gap, approximately 0.073 points (nearly three-fifths) can be attributed to the more robust tax and transfer systems in Nordic countries.
3. This contrasts sharply with the original study’s estimate, which attributed only about one-third of the difference to redistribution.

Policy Implications for Advancing the Sustainable Development Agenda

The Indispensable Role of the Welfare State

The evidence underscores that a strong welfare state is a critical tool for achieving the Sustainable Development Goals. While predistributive measures promoting fair wages are important for SDG 8, robust redistributive systems are indispensable for directly tackling SDG 10 (Reduced Inequalities) and SDG 1 (No Poverty). Ensuring non-workers, including the elderly and other vulnerable groups, have sufficient income is a core function of these systems.

Recommendations for SDG-Aligned Policy and Research

To effectively monitor and advance progress on the SDGs, the following actions are recommended:

• Policy analysis and academic research on inequality must utilize comprehensive data that includes the entire population, not just working-age individuals, to accurately assess the impact of social protection systems.
• Governments should strengthen welfare states and social transfer programs as a primary strategy for reducing inequality and ensuring no one is left behind, in line with the central promise of the 2030 Agenda.
• Policymakers must pursue an integrated approach that combines predistributive policies (e.g., minimum wages, collective bargaining) with strong redistributive mechanisms to build more equitable and sustainable societies.

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article primarily addresses issues related to the following Sustainable Development Goals:

• SDG 10: Reduced Inequalities

  This is the most central SDG to the article. The entire text is a detailed analysis of income inequality, comparing Nordic countries with the United States and the United Kingdom. It discusses the causes of inequality and the effectiveness of different policy approaches—specifically redistribution (taxes and transfers) versus predistribution—in achieving greater equality. The article uses the Gini coefficient, a primary metric for measuring income inequality, to support its arguments.

• SDG 1: No Poverty

  The article’s conclusion that reducing inequality requires ensuring “nonworkers have money” through a “strong welfare state” directly connects to SDG 1. Social protection systems, such as the welfare programs and transfers discussed, are a cornerstone of poverty reduction strategies. By providing income to vulnerable groups like the retired, who may have zero labor income, these systems prevent poverty and are essential for achieving SDG 1.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the article’s discussion, the following specific targets can be identified:

• Target 10.4: Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality.

  The article is a direct examination of this target. It analyzes the impact of fiscal and social protection policies (referred to as “redistribution,” “taxes and transfers,” and the “welfare state”) on income inequality. The core argument is that these policies are more effective at reducing the Gini coefficient than previously suggested, especially when the entire population is considered. The comparison between the Nordic countries’ extensive welfare states and the systems in the US and UK is a case study on the role of such policies in achieving greater equality.

• Target 10.2: By 2030, empower and promote the social, economic and political inclusion of all, irrespective of age… or other status.

  The article critiques a study for excluding people of retirement age (nonworkers over 65) from its analysis of inequality. The author argues this exclusion is a critical flaw because “the primary purpose of the welfare state is to distribute income to nonworkers.” By demonstrating that including the elderly in the data provides a more accurate picture of how redistribution reduces inequality, the article advocates for the full economic inclusion of all age groups in policy analysis and measurement, which is the essence of Target 10.2.

• Target 1.3: Implement nationally appropriate social protection systems and measures for all…

  The article’s strong conclusion in favor of a “strong welfare state” to support nonworkers is a direct endorsement of Target 1.3. It argues that social security and other transfer programs are essential for reducing overall inequality by providing a financial floor for those without labor income, such as retirees. This highlights the importance of comprehensive social protection systems as a tool for both equality (SDG 10) and poverty prevention (SDG 1).

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article explicitly and repeatedly uses a key indicator to measure progress:

• Gini Coefficient

  The Gini coefficient is the central indicator used throughout the article to measure income inequality. The text defines it as “a common measure of income inequality” where 0 is perfect equality and 1 is perfect inequality. The entire analysis is based on comparing the Gini coefficient of market income (before taxes and transfers) with the Gini coefficient of disposable income (after taxes and transfers). The difference between these two values, presented in the tables as “Reduction in Gini,” is used to quantify the redistributive impact of fiscal policy. This method directly aligns with the measurement approach for SDG Target 10.4 and its associated indicators, which assess the effect of social protection and fiscal policies on inequality.

4. Table of SDGs, Targets, and Indicators

Source: peoplespolicyproject.org