"Fear of Downward Mobility Influences Voter Behaviour"

As German politicians gear up for the autumn 2017 federal elections, social justice is the issue of the day. Campaigns are promising education for upward mobility, fair wages, just income redistribution, and an examination of top executive salaries. There have also been calls for changes to Agenda 2010, a programme of fundamental reforms to the German welfare state and the labour market. The ZEW economist Andreas Peichl takes a critical look at perceived inequality in Germany, along with its effects on politics and voter behaviour.

People in Germany sense growing levels of social inequality yet do not want more income redistribution. How do the two go together?

This perception is closely linked with relative inequality. For instance, the risk of poverty has been rising for a while now. To a certain degree, it reflects the distance felt to exist between social groups. I can only speculate about why an increasing sense of inequality has not been accompanied by more calls for redistribution. I think that because people have a certain hope or expectation of upward social mobility they don’t want to demand too much redistribution lest they be adversely affected by it later on. Moreover, there’s already a high level of redistribution in Germany. And additional taxes and transfers may reduce efficiency.

Does perceived inequality play a real role in voters’ decisions?

Recent elections seem to be driven more by the refugee crisis than by redistribution. Inequality nevertheless plays a role, especially in cases when its causes are seen as unfair. One example is the perception of rising inequality due to differences between regional economies.  Unlike earlier generations, many today are worried that their children won’t be any better off. The fear of downward mobility influences voter behaviour.

Can dissatisfaction with established political parties be attributed to economic factors?

Yes and no. It is true that inequality and other hard economic factors have risen in recent years, but not to a dramatic degree, and less so than in the United States. Moreover, very heterogeneous developments across some regions have increased the sense of inequality generally. Those trying to find explanations for dissatisfaction quickly arrive at the phenomenon of voter perception. People’s ideas about the state of the general economy are closely linked with established political parties, which have coexisted in a grand coalition for many years. The absence of a forceful opposition, combined with perceived injustice, has bred strong rises in dissatisfaction. People like to blame Agenda 2010 for inequality, but it has drastically reduced unemployment and made Germany one of Europe’s most robust economies. Even if it’s right to talk about making some tweaks, a complete overhaul would be foolish. Any discussion about social justice must also take into account the positive effects of the reform agenda.

The debate frequently gets emotional when it comes to executive pay. Should the income of top earners be made more dependent on performance?

No doubt, there have been some excesses that cannot be brought into line with most people’s sense of fairness. But it’s not enough just to talk about executive pay. Why doesn’t anyone complain about the difference between, say, what the well-known German singer Helene Fischer makes and the wages of her sound engineers? Is it fair, in performance terms, that substitute players in Germany’s professional football league earn four times as much as a team’s equipment manager? It’s right for us to think about what’s appropriate compensation for top earners. But discussions need to be broad-based, and not make scapegoats out of specific occupational groups. I don’t think salary caps make sense. But it’s also fair to ask whether salaries at any level should be tax-deductible.

What policies could create more equality?

There are two areas where adjustments can be made. First, the German tax system requires major reforms. This is especially true with regard to the estate tax, which should be kept low but permit no exceptions. And there’s certainly room for raising taxes on the highest incomes so as to lower them for lower- and middle-income earners. This could also be achieved by reducing the value-added tax. The second area of adjustment concerns equal opportunity. The government needs to invest more in early childhood education. It shouldn’t be the case that one’s future chances are determined at birth. Kindergartens, child care facilities, and mentor programmes can partly compensate for the fact that people have different starting points.