International trends in income inequality and social policy

In most OECD-countries income inequality has increased during the last two decades. In this paper, we investigate whether changes in the overall distribution of income can be attributed to social policy measures. For most (but not all) countries we find a possible relationship between changing welfare state policies (as measured by expenditure ratios and replacement rates) and changing income inequality. Especially the United Kingdom and the Netherlands combined an above-average rise in inequality with a reduction in the generosity of the welfare system. A more elaborate budget incidence analysis for the Netherlands indicates that in the period 1981-1997 inequality of disposable household income increased sharply. The two main forces behind this phenomenon were a more unequal distribution of market incomes and changes in social transfers. Fundamental social security reforms in the Netherlands indeed seem to have made the income distribution less equal. However, income inequality in the Netherlands is still below the OECD average at the end of the observed period