Inequality in Germany: A Macroeconomic Perspective

Abstract

Household surveys such as the German Socio-Economic Panel (SOEP) tend to underestimate income and wealth inequality. The research methodology developed by Thomas Piketty et al. therefore analyses official tax statistics in order to more accurately determine the inequality between the people at the top of the income and wealth distribution scale and the rest of the population. However, Piketty’s methodology underestimates the rise in inequality in Germany since the turn of the millennium due to the fact that companies are retaining a significant percentage of their rising profits which are therefore not recorded as private household income. We show how the specific pattern of income distribution in Germany has contributed to the country’s large and persistent current account surplus, thereby contributing to macroeconomic instability at the international level. We note that addressing economic inequality in Germany politically through wealth and inheritance taxes faces the resistance of powerful lobby groups including family-owned businesses (the German Mittelstand).

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

NOTES ON CONTRIBUTORS

Jan Behringer is an economist at the Macroeconomic Policy Institute (IMK) in Düsseldorf. His recent research and publications focus on macroeconomic implications of income distribution.

Nikolaus Kowall holds a foundation professorship for international macroeconomics at the University of Applied Science BFI Vienna. His research interests include international economics and political economy.

Thomas Theobald is Senior Economist for financial markets and business cycle analyses at the Macroeconomic Policy Institute in Düsseldorf. His research interests include macroeconomic modelling, macro-prudential regulation, time series econometrics and forecast models.

Till van Treeck is Professor of Socio-Economics and director of the Institute for Socio-Economics at the University of Duisburg-Essen. His research interests include macroeconomics and comparative political economy, income distribution and (socio-) economic education.

Notes

1. Pahnke et al. (2015, 4-7) show that equity ratios have strongly increases in SMEs, but not in large companies, and that the retained earnings of SMEs have also strongly increased throughout the 2000s, to exceed 80 billion euros, or almost 3 percent of GDP, just before the start of the financial crisis in 2008. Corporate saving, as a percentage of GDP, follows an increasing trend in Germany since the 1980s, while no such secular trends can be observed in the large Anglo-Saxon economies of the United Kingdom and the United States.

2. We restrict our analysis to the period until 2012, because this is the latest year for which wealth inequality data are provided by the SOEP.

3. See also Brenke and Wagner (2013, 114), where it is argued that if unearned income and the income of top earners increase at an above average rate, and if these same top earners have a relatively high savings rate while low-income households save nothing or next to nothing, it is inevitable that wealth will become increasingly concentrated in the hands of the few.

4. However, the SOEP data on savings suffers from a number of serious flaws and cannot easily be compared against the NAS savings rate. The way that the SOEP questions are phrased rules out negative savings rates. Moreover, compared to the questions on incomes, the number of respondents who fail to provide data on savings or only provide inconsistent data is relatively high.

5. According to the SOEP, a net equivalised household income of about 45,000 euros would be enough for someone to be classified in the top 5% of incomes for 2012.

6. Consequently, it is not possible to fully support the proposal of e.g. Leigh (2007) to simply use top income shares as a substitute for other measures of inequality over periods when alternative income distribution measures are unavailable.

7. Kumhof and Ranciere (2010) refer to ‘investors’ (rich households and corporations) and ‘workers’.

8. Wagner (2011) sums up this situation by pointing out that the core of the problem is not so much government debt as the huge imbalances in international trade: Germany’s economic model has contributed significantly to the instability of the Eurozone. It has pursued an excessive export strategy, supported by stagnating real wages. If the incomes of the vast majority of the population rise only slowly, then domestic demand will also be weak. This also means that people cannot buy more goods and services from abroad. However, if a country keeps producing more goods than it can consume itself, this inevitably leads to other countries becoming indebted. The basis of these countries’ economies – i.e. jobs and thus also tax revenue – has been gradually eroded, while Germany has continued to accumulate wealth.

9. Bartels and Bönke (2013, Figures 3 and 4) illustrate the development of transitory and permanent changes in real income in Germany between 1985 and 2006. Whilst a more pronounced increase was recorded in terms of permanent changes to gross household income, the changes to both the permanent and transitory components of net household income were relatively low. This would appear to be at odds with the evolution of the Gini coefficient over the same period.