One of the many threads in the debates about rising income inequality is the broad strategy by which policymakers should attempt to reduce inequality. There are two schools of thought in the debate. The first group consists of people who believe that helping the less well-off through the redistribution of income through taxes and government programs—referred to as tax-and transfer programs in economic policy jargon—is the best path forward. The second camp is comprised of researchers and commentators who instead think the best path forward is to deal with the underlying market forces that cause inequality in the first place. One camp favors redistribution, the other predistribution.
Predistribution is a rather opaque buzzword. So let’s take a deeper look at what it means and why it might matter for our thinking efficiency and reducing income inequality.
The term originated in an essay by Yale University professor Jacob Hacker and has caught on more in the United Kingdom than in the United States. In short, this approach prioritizes policies that more directly intervene in the labor market to reduce income inequality over polices that redistribute incomes after taxes are levied. For policymakers concerned about the incomes of those at the bottom of the income ladder, a predistributionist approach would favor raising wages, perhaps by increasing the minimum wage, over increasing government transfers to those workers in the form of, say, earned income tax credits.
So why might we think that intervening directly in the labor market would be preferable to increasing taxes and transferring some of those proceeds to workers further down the income ladder? First of all, the United States has a much more unequal distribution of market incomes than other advanced economies. In order to achieve a less unequal distribution of income, U.S. policymakers would have to increase post-tax-and-transfer income for those further down the income ladder more than those other advanced countries do. While there is a debate about how costly such an approach might be, the question, then, is which method is the most efficient way to reduce inequality: raising market incomes or raising incomes after taxes and transfers.
For a while, the assumption was that redistribution was less costly than fiddling with the mechanisms of the labor market. But there’s growing evidence that the labor market isn’t perfectly competitive and therefore pre-tax-and-transfer labor market policies wouldn’t be as costly as previously thought. The debates about the minimum wage are, again, a good example. If moderate increases in the minimum wage don’t lead to increases in unemployment then raising the minimum wage doesn’t reduce efficiency as much as previously thought. In fact, the losses in economic efficiency from raising revenues from high-earning workers and then transferring them to low- and moderate-wage earners may be more costly.
Researchers and policymakers should weigh the relative merits of each approach, redistribution and predistribution. Given the new emerging consensus about the labor market, focusing on labor market reforms that help workers earn higher incomes directly might come out as the better option more than previously thought.