Monday, 27 November 2017

Populism and Income Inequality in Europe

2016 shocked many with the election of President Trump in the US and the Brexit vote in the UK referendum. Since then, it is widely held that rising inequality may explain the march of populism in a number of recent elections, notably in Europe. Branko Milanovic´s famous elephant chart[i] is often used to support the notion that globalization, as suggested also by the Stolper-Samuelson theorem, has hurt the middle class in advanced countries to the benefit of China and other emerging countries. The Finnish think tank SITRA warns, however, that those who dominated the 75th-85th percentiles of the global income distribution in 1988 were not those in 2008. Then, that same bracket was primarily made up of middle class Chinese[ii].

Milanovic´s Elephant Chart
Source: Goodreads

A brilliant article in the New York Times[i] has just shown that the United States leads the income inequality league across OECD nations. There, the richest 1% to have roughly doubled their share of national income since 1980, to 20 percent in 2016. In Europe, it is in Britain where the richest 1% have extended their claim on national income the most during 1980-2016, from 6 to 14%. (The article also rejects some common misconceptions by showing that a rise in international trade - measured as a country´s import or export share of GDP - is associated with more income equality, not inequality.)
In 2017, however, the narrative that it is the rise in income inequality that explains populism has been scratched by election results in Austria or the Czech Republic, comparatively egalitarian countries that voted for populists nonetheless. Before that, fast growing Hungary and Poland with similar characteristics had turned to rightist populism.
The Timbro Authoritarian Populism Index claims to be the only Europe-wide comprehensive study that explores the rise of authoritarian populism in Europe by analysing electoral data from 1980. As their data show, “Authoritarian-Populism has overtaken Liberalism and has now established itself as the third ideological force in European politics, behind Conservatism/Christian Democracy and Social Democracy”. It provides numbers only for Europe.

 Top 1% Claim on National Income and Timbro Populism Index
Sources: Rothwell, NYT 17th 11. 2017 (based on World Income Database); Timbro Authoritarian Populism Index 2016; own calculations based on Spearman´s rank correlation and rho test as in

I have collected the numbers from the New York Times article and the Timbro index in the table above. It allows me to carry out a back-of-the-envelope calculation of the Spearman rank correlation[ii] between rise and level of income inequality and the Timbro Populism Index. Not less, not more. The formula used for Spearman´s Rho is

Rho = 1- (6∑Diff_Sq)/(n3 – n),

with n = 12 and Diff_Sq denoting the squared difference in country ranking between the Timbro Index and the rise 1980-2016, and 2016 level, respectively, of the percentage share of national income captured by the richest 1% of each country´s population.

The Spearman Rho values are negative, not positive as most would expect, but statistically insignificant. Between the Timbro Populism Index and the rise of the percentage share in national income captured by the top 1%, Spearman´s Rho is = -0.357; for the level of the percentage share in national income captured by the top 1%, Rho is almost zero at -0.052.  The results for Spearman’s Rho are lower than the critical value for two-tail tests (n=12 => 0.406). I therefore have to reject the null hypothesis that there is a correlation between the 2016 Timbro Authoritarian Populism Index with either the rise 1980-2016 or the 2016 level of Income Inequality in a panel of 12 European countries. My back-of-the-envelope calculation certainly does not imply any causality. It may suggest, however, that other explanations, such as homogeneity in a fairly egalitarian (often small-country) context may encourage populist voting when people think their way of living is under threat.

[i] Branko Milanovic (2016), Global Inequality, Harvard University Press
[iii] Jonathan Rothwell, Dispelling misconceptions about what’s driving income inequality in the U.S, New York Times, 17th November 2017.
[iv] When data is not normally distributed or when the presence of outliers gives a distorted picture of the association between two random variables, the Spearman’s rank correlation is a non-parametric test that is preferred over the Pearson’s correlation coefficient.

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