Who Enjoys the Fruits of Growth? Impact of Governments and Markets on Living Standards in Germany, the Netherlands and the U.S.A., 1987–1996

The 1980s and 1990s have been decades of quite good economic growth in North America and much of Western Europe. But how have the fruits of growth been shared? This paper reviews changing income distributions in the U.S., Germany and the Netherlands. These three countries may be taken as exemplars and leading economic performers in “the three worlds of welfare capitalism” (Esping-Andersen, 1990). The U.S. is a liberal welfare-capitalist state, Germany a corporatist state, and the Netherlands (less clearly) a social democratic welfare-capitalist state. The paper focuses particularly on income changes in the bottom, middle and top quintiles and takes a ten year period into account. Previous analyses have shown that labor and market income dispersion are increasing, with increased returns to human capital. The potential impact of government through the tax-transfer system has been largely ignored. All three governments redistribute income from the rich to the poor. However, the paper shows that only the Dutch government has redistributed sufficiently to ensure that the bottom quintile has gained along with others. In Germany and the U.S. the poorest quintile was considerably worse off in absolute terms at the end of the decade, than the beginning. The German government somewhat counteracted the trend towards greater income dispersion by redistributing to the poorest quintile, so the loss of market income was partly compensated. In the U.S. the impact of government on the poorest quintile stayed about the same, so this group ended up with about the same decrease in disposable income as market income. The U.S., Germany and the Netherlands are the only three countries for which ten or more consecutive years of panel data are available. The data come from the PSID-GSOEP Equivalent File 1980-97 and from a comparable file constructed from the Dutch SEP data