Toro
Diamond Member
One way to achieve that is rising redistribution: government steadily increases the share of the economy (the GDP) that it transfers to poor households. But there is a limit to this strategy. If the pie doesnt increase in size, a country can redistribute until everyone has an equal slice but then no further improvement in incomes will be possible. For the absolute incomes of the poor to rise, we need economic growth.
We also need that growth to trickle down to the poor. Does it? ...
[The United States and Sweden] enjoyed significant economic growth. But in the U.S. the incomes of low-end households didnt improve much, apart from a brief period in the late 1990s. In Sweden growth was much more helpful to the poor.
In Austria, Belgium, Denmark, Finland, France, Ireland, the Netherlands, Norway, Spain, and the United Kingdom, the pattern during these years resembles Swedens. In Australia, Canada, Germany, Italy, and Switzerland it looks more like the American one.
What accounts for this difference in the degree to which economic growth has boosted the incomes of the poor? We usually think of trickle down as a process of rising earnings, via more work hours and higher wages. But in almost all of these countries (Ireland and the Netherlands are exceptions) the earnings of low-end households increased little, if at all, over time. Instead, ... it is increases in net government transfers transfers received minus taxes paid that tended to drive increases in incomes.
None of these countries significantly increased the share of GDP going to government transfers. What happened is that some nations did more than others to pass the fruits of economic growth on to the poor. ...
Should we bemoan the fact that employment and earnings arent the key trickle-down mechanism? No. At higher points in the income distribution they do play more of a role. But for the bottom ten percent there are limits to what employment can accomplish. ...
When is economic growth good for the poor? Consider the Evidence