The Effect pf Economic Inequality on Demand for Redistribtion

Abstract

In this paper we have examined the relationship between economic inequality and demand for redistribution for 23 OECD countries and 17 European countries respectively. We depart from two different theories with contradictory predictions of the relationship between demand for redistribution and economic inequality: the median voter theorem predicting a positive correlation (Meltzer and Richard 1986), and the social distance model (MacRae 2006) predicting a negative correlation. We test the theories using two different measures of demand for redistribution: aggregate vote share of right wing parties and individual attitudes towards increased government redistribution. We also briefly examine the Prospect of Upwards Mobility hypothesis, which claims that it is not economic inequality as such but social mobility that determines demand for redistribution. We used election data from between 1975 and 2009, and survey data from 2002-2010. This enabled us to exploit the cross-sectional and time variation in economic inequality, to study the effect on demand for redistribution. The main contribution of this paper lies in the usage of new data, inequality data from 2005 and 2010, together with more robust econometric estimation techniques, e.g. fixed effects models. The results of the econometric estimation for both measures of demand for redistribution do not support any of the theories strongly, and are principally in line with most of the literature that does not find a statistically significant association between economic inequality and demand for redistribution. However, we do identify several important methodological caveats, e.g. limited variation in explanatory variables and reverse causality, and therefore stress that the empirical findings should be taken with a grain of salt.