POLICY BRIEF 14-3

Income Inequality Developments in the Great Recession

by Tomas Hellebrandt, Peterson Institute for International Economics

January 2014

The Great Recession—which cost tens of millions of people their jobs, was accompanied by large movements in asset values, and threatened the global financial system—has strengthened concerns over the fairness of the distribution of wealth and income in many societies. Using data on eight advanced economies (Germany, Greece, Ireland, Italy, Slovakia, Spain, the United Kingdom, and United States) between 2007 and 2010, Tomas Hellebrandt shows how the Great Recession affected income inequality in different countries and how families and the state tried to mitigate its impact—primarily through redistributing income within households and through benefit and tax policies. The social safety net and changes in direct taxes have counteracted the increase in income disparities. This Policy Brief argues that increasing direct taxes can contribute to reducing inequality, while tax cuts tend to make the distribution of disposable incomes more unequal. In addition, means-tested social assistance benefits mitigate inequality better than work-related social insurance programs.

Data disclosure: The data underlying this analysis are available here [xlsx].

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