Redistribution in the age of austerity

What is it about?

Since 2010, many European countries committed to different levels of "austerity" meaning that based on fears about the fiscal sustainability of their public debt loads, then engaged in budget cuts or tax increases or both. There is already some evidence that such austerity measures are associated with an increase in inequality, but our paper uses a novel separation of inequality at the bottom versus inequality at the top to show that there is not only an increase in inequality associated with austerity, but it is driven by inequality at the top. Whatever motivated Europe's turn toward austerity and whatever the effects on growth might be, a result is that the rich pulled further away from the masses in countries that committed to more austerity.

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Why is it important?

This paper shows a timely empirical result about the effects of Europe's austerity experiment. The ability to discuss inequality at the top separately from inequality at the bottom, as well as link to explicit welfare implications, adds nuance to how macroeconomic policy effects the distribution of income. This makes it an important contribution to the ongoing discussions of income inequality and its drivers.