People on Low Incomes Benefit from Market-oriented Structural Reforms

An EconPol Europe study of data from 135 countries going back to 1960 reveals that people on low incomes do benefit from market-oriented structural reforms such as deregulating labor and financial markets, privatizing state-owned companies and reducing tariffs.

Authors Klaus Gründler (EconPol Europe, ifo Institute, LMU Munich), Niklas Potrafke (EconPol Europe, ifo Institute, LMU Munich) and Timo Wochner (LMU Munich) examined macro and micro data to investigate whether the income of low-income people increased to a smaller extent than that of high-income people. They found the opposite to be the case: market-oriented reforms were positively correlated with income shares of low-income citizens. Moreover, low-income earners do not support reforms. It is conceivable that low-income citizens have misperceptions about how they benefit from market-oriented reforms.

“Market-oriented structural reforms are certainly likely to benefit high-income and high-skilled citizens, who may well expand and start new businesses, invest in new industries, and enjoy economic freedom and globalization,” say authors. “But expanding businesses and investing in new industries is also likely to promote economic growth which increases demand for low-skilled labor.

“As a result, income and employment of low-skilled citizens also increases. When incomes of low-skilled citizens increase more than incomes of high-skilled citizens, income inequality may well decrease.”

While the authors acknowledge that the results do not suggest that reforms were correlated with income inequality in the full sample, they say that trade and financial liberalization were positively associated with income inequality in high-income countries. Focusing on overall income inequality, they add, hides the fact that reforms may well benefit individual groups.

“A major question is who benefits from reforms,” say authors. “We have employed macro data on citizens’ income shares and micro survey data on individual-level incomes based on the World Value Survey. The results show that income (shares) of especially low-income citizens increased after reforms. This finding is intriguing because low-income citizens do not support market-oriented policies and reforms – a view that seems to be based on misperceptions.”

Read the full study: https://www.econpol.eu/publications/policy_report_18

For further information, contact Juliet Shaw at shaw@econpol.eu / 0044 7837360470 / 0034 686481877