Income Equality in Slovakia

Grigory Soroka: Reflection in the Mirror // Public domain

Over the last fifteen years, income inequality has increased by 14% in both Denmark and Sweden. I assume you have not read or seen this information anywhere. Much more popular are articles on income inequality in bad countries, such as the United States or the United Kingdom.

Likewise, you might not have noticed the information that income inequality in Slovakia fell by 14% over the same period, making the rate of income inequality in Slovakia the lowest in the EU. Or in other words – income equality in Slovakia is the highest. And not only within the EU but also within the OECD.

The media image of the term “income inequality” is not good at all. It belongs to a group of terms such as privilege, injustice, incorrectness, terms that cannot and mustn’t be spoken of in a positive sense. A common problem of these terms is the lack of a clear definition. This not only complicates the estimation of inequality, but even more so its interpretation.

People see the very existence of super-rich people as evidence of “income inequality” and usually confuse ownership of capital with income. If Patrik Tkáč (the richest Slovak businessman) owns a helicopter that 99% of the country’s population cannot afford, Slovaks consider income inequality to be great. That is not to say that the difference between income (not assets) isn’t gigantic in this case. But this observation won’t tell us anything.

Therefore, economists, sociologists, and statisticians view “income inequality” as a social and economic phenomenon. They are interested in the rate, the size of inequality. They are therefore talking about the income distribution across society. The income of dozens of rich people amounting to millions is opposed by the income of millions of citizens, calculated in billions.

Here comes the Gini coefficient, the inequality indicator, where zero stands for the lowest (no) inequality and hundred for the highest. There are countries where this coefficient reaches the value of 50-60, these are mainly developing countries, often in Africa. In these countries, income earned by mass of people is lower than income of the few richest people. Slovakia is the opposite extreme, in 2018 the indicator reached 20.9. Scandinavians could envy us with their values of 26-28.

But they don’t. Here we come to the fundamental question. Is a high level of income equality good or bad? Right at the beginning of the search for answers to this question, I will add that the data for the calculation of the Gini coefficient come from surveys. And in surveys, people don’t always tell the truth.

You can have a good reason not to admit your illegal income no matter whether you rank at the top of the income ladder or at its bottom. And you probably have less desire to spend half an hour filling in the questionnaire when you’re at the top. There are estimates that the real inequality is in fact higher by 1-2 points, some economists in Slovakia claimed that the difference was even higher.

However, it is hard to make conclusions based on conjectures, especially in international comparisons, thus the work of statisticians must suffice here.

The Scandinavians are not envious of our income equality, since our incomes are even, but evenly low though. Most of Slovaks’ income comes from employment. 99% of employees in Slovakia had income of less than EUR 5,000 per month in 2019. The difference between the minimum wage of EUR 623 and the salary of EUR 5,000 may seem huge, but from the point of view of the economy as a whole it is not.

If we want to talk about huge difference, it’s the one between a million and EUR 5,000. The growing purchasing power of Slovak wages is beginning to provide space to create savings and to invest these savings, but we are only at the beginning. An adult Scandinavian owns financial assets worth USD 200,000 (after deducting debt).

The financial wealth of Slovaks is calculated in about tens of thousands of euros, as a matter of fact, the wealth of Slovaks lies in the bricks of their houses. A house or a flat is a money-making property only for a very small number of Slovaks. Income from capital will push the inequality rate higher.

The low level of inequality in Slovakia is also the result of an extensive redistribution system. 80-90% of pensioners’ income comes from this system. Old-age pensions themselves are relatively egalitarian and are financed mostly by people with higher incomes. 10% of employees with the highest income provide 30% of all social contributions.

Conversely, the contributions of half of the lowest-income employees account only for 25% of the contributions. Unfortunately, the Financial Administration cannot provide us with an analogous division of income tax, that would allow us to look at the progressiveness of taxation in this area.

Thus, we can only work with the known fact that while people with the lowest wages face an effective tax rate of 0–5%, it is 17-20% for the people at the opposite end of the income ladder.

In the US, tax rates are much more progressive. In addition, the personal and corporate income tax there do not represent 15 % of the state’s income as in Slovakia, but a half. Not many people know that 90 % of the taxes is paid by one fifth of the highest-income Americans.

Income redistribution reduces the inequality rate in Slovakia by 42 %, in France and Denmark by 43 %. But beware, this does not mean that without state redistributive systems, the degree of inequality would go through the roof.

Pensioners would not be dependent on state benefits, but on the income from their savings, as they would not be forced to pay 25% of their gross wage to the Social Insurance Agency. They would probably rather learn to invest their resources in the stock markets and thus start to benefit from fruits of developed market economies.

Let’s get back to the problem of what to “think” about income inequality. Some economists are using models and figures with the aim to show that high levels of inequality hamper economic growth. A high-income person does not eat for two, let alone for ten, and does not buy 100 cars, but “only” ten. They claim that if these resources were in the hands of common people, they would buy 100 cars and thus support economic growth through consumption.

Let’s now leave aside the question whether Keynesian support of consumption actually leads to prosperity or whether it is rather savings and capital accumulation that brings wealth. The problem of these claims is that they stem from the search for correlations of often very different countries. What may be relevant for South Africa may not be the case in Slovenia, which has a low level of inequality.

Anyhow, this view runs into a fundamental problem, since it would bring, for example, high taxes on above-standard income and a ban on inheritance. When you make it complicated for people to get rich, they will stop trying and start enjoying themselves more. Which also does not contribute to economic growth. In fact, this negative impact of such measures is the major weakness of these views.

Let’s take China as an example. The huge economic boom was accompanied with a significant increase in income inequality. But would it be possible to lift half a billion people out of poverty if the party leadership stuck to keeping inequality low? Quite the contrary, I dare say that there is a causal relationship between the growth of inequality and economic growth.

Good opinion polls, which get closer to the heart of the matter (unlike Eurobarometer), show that people are not looking for an egalitarian society, but for economic justice. They also grant the cyclist Peter Sagan and the skier Petra Vlhová the right to above-average income. People prefer a society that rewards hard work and uniqueness.

Therefore, many social scientists do not look at income inequality indicators, but rather at the chances of moving up the income ladder. Social mobility is what we should be interested in. In this sense, the focus should not be on Gini coefficients, but on barriers to social mobility.

There are only a few of these researches in Slovakia, as they are based on comparing the incomes of two different generations and data are still scarce. However, the available outputs (e.g. the publication “The Apple Falls far from the Tree” (Jablko padá ďaleko od stromu) by Slovak Institute for Financial Policy) point to the fact that, compared to their parents, young people have a good chance to reach the same or higher position in the income ladder, of course on average.

When it comes to children from lowest-ranking families, they are less successful. So if the government is to have a strong urge to intervene in inequality, they should, of course, focus on these areas. However, you will not make it easier for marginalized groups to get a job by taxing Patrik Tkáč‘s helicopter.

It is necessary to remove obstacles and support opportunities directly. The former can be done from the Government Office, the latter must take place in the individual regions.

It is very likely that the income inequality rate indicator will continue to grow in Slovakia. And not only because the current Slovak income inequality values are basically extremely low. In Slovakia, only 8% of mothers are raising their children on their own while in the EU it is 15%. Educated women marry educated men.

The upper middle class gradually accumulates financial assets that will generate additional income, the type of income which the groups ranking lower in the ladder lack. The labor market learns to better appreciate the uniqueness of skills and talents, uniqueness will receive luxury rewards, the mediocrity average rewards.

However, these are more or less natural phenomena of economic life, which should not create wrinkles on our foreheads or motivate the redistributive desires of politicians. Their number one task is to get involuntarily unemployed people at least to the first rung of the income ladder.