Taking Income Dynamics Seriously: Do Stagnating Incomes Increase Demand for Redistribution and Welfare?

Income inequality has increased in many advanced democracies since the 1980s, but we know that the shape, strength, and timing of inequality trends varies across countries. Recent studies point to the importance of individual-level trajectories of income growth or stagnation, and how gains and losses are distributed across different income groups. Despite this interest in income trends, I argue that dynamic developments in individuals’ economic position are strikingly absent in much of the political economy literature on redistribution preferences, which tends to limit the focus on current income position. To address this gap, this paper explores how both absolute and relative income growth explains demand for redistribution. Theoretically, I argue that commonly used theories of redistribution, such as the Meltzer-Richard model, can be read as fully dynamic theories with the implication that individuals stagnating over time relative to other income groups should become more in favour of redistribution, independent of their current income level. At the same time, compositional effects related to the relative incidence of income growth and stagnation also play a role. The risk of income stagnation is likely to be more concentrated among low-income citizens, and for a variety of reasons we can expect that the incidence of income stagnation among the poor has become even more concentrated since the financial crisis and euro crisis after 2009. The empirical analysis constructs individual-level measures for inflation-adjusted income trends across different income groups since the 1980s, based on Luxembourg Income Study and OECD income survey data. The analysis then matches these data on real income growth rates with International Social Survey Programme (ISSP, modules on Social Inequality and Role of Government) data on redistribution and welfare preferences in 17 OECD countries between 1985 and 2016. The descriptive findings highlight a large cross-national variation in the trends of relative and absolute income growth. The US case – strong income growth among top income groups, stagnation for lower-middle income groups – differs from trends in other advanced democracies, where we see more varied patterns of income growth. The results of logistic regression models show that relative income stagnation is a crucial determinant of redistribution and welfare preferences, alongside current income levels. Stagnating groups become substantially more supportive of redistribution and generous welfare state arrangements. At the same time, relative income stagnation is much more concentrated among low-income groups than among middle- or high-income groups in many countries – a trend reinforced after the Great Recession. Finally, the findings show that mainly the relative distribution of income growth matters, while lower absolute income growth rates if anything tend to reduce citizens’ support for redistribution. These findings help understanding the widespread absence of redistributive responses to rising income inequality. Although redistribution support has increased among low-income groups as a result of disappointing income trends, support has not increased among electorally pivotal middle-income and upper-income voters, as the latter have generally experienced more favourable income trajectories.