How has inequality evolved in Spain during different periods of the economic cycle? Which classes have improved, or worsened, their economic situation? Why has the concentration of income increased recently?

This article contributes new evidence that reveals: a) that the concentration of income has increased in recent years and b) that, in general terms, inequality in Spain is greater than we thought.

To respond to the questions formulated above, the article analyses: 1) the proportion of total national income that is in the hands of the different economic classes and 2) how the income of each of these classes has evolved. The classes are defined in the following way: lower class (the 50% of people with the lowest incomes), the upper class (the 10% with the highest incomes), and the middle class (the 40% that are sandwiched between the lower class and the upper class). Within the upper class, there is a differentiation between the elite (the 1% with the highest incomes) and the remaining 9%.

The data used combine information from the national accounts, fiscal data and survey data. This method – Distributional National Accounts or DINA – provides clear advantages in the analysis of inequality:

• It captures the totality of national income, obtaining a more precise and realistic picture of the phenomenon. In contrast, the majority of prior studies capture only part of the reality: for example, income declared to the tax authorities, or self-declared in surveys.

• It has been used to analyse how inequality has evolved in other developed economies. This enables more homogeneous international comparisons to be made.

The first graph shows what proportion of the total of income is in the hands of the lower class, the middle class and the upper class. Three scenarios are observed:

1. That of a lower class that, since 2003, has seen how the weight of its income has decreased. In 2003 it possessed nearly 19% of total income, whereas this figure fell to 14.6% in the year 2015.

2. Also, since 2003, we see that the income share of the middle class has remained constant at around 45%. This does not mean that its average income was not affected by the crisis and did not fall, but that it fell to a lesser extent than that of the lower class – despite the fact that the latter did not play such a significant role in as many forums focusing on the economic difficulties suffered at the time.

3. Lastly, the most favourable scenario was experienced by the upper class. Although this group entered the new millennium with the loss of part of its income share, from 2006 it saw itself setting out on an upward path to recovery – especially pronounced at the start of the crisis.

In other words, during recent years the lower class has lost a part of its income share. This process has taken place while the income share of the upper class has increased, which has led to an increase in inequality.

In the pre-crisis period, while still fully immersed in the Spanish property bubble, the tendency was the opposite: the share in income of the upper class was falling while that of the lower class was increasing. In other words, the concentration of income was lower, and inequality tended to decrease.

The income of the lower class has gradually lost relative importance, a tendency that contrasts with the improvement in the position of the upper class. But… how can we known exactly which people have improved their economic situation?

According to figure 2, the people with the highest incomes entered the new millennium on the wrong foot: both the upper class and the elite who receive the highest income lost part of their income share. However, this situation changed immediately.

From 2002 onwards, two different paths can be observed: that of the upper class – excluding the richest elite – which has remained more or less constant, obtaining around 24% of total income, and that of the richest elite which has experienced a clear improvement – increasing its income share from 11.6% to 15.5%. The latter, since then and especially during the crisis, have seen their relative position continually improving.
 

Therefore, the people who have gradually accumulated a higher proportion of the national income are the richest. Inequality has increased due to the fact that income has gradually become more concentrated in a small number of hands.

If we briefly leave aside the evolutionary tendencies and take a snapshot of the phenomenon, we can confirm another surprising fact: in 2015, the richest 1% of the population accumulated more income – some 15.5% of total income – than the poorest 50% – some 14.6%.

Inequality has increased so much that we have been experiencing this imbalance – with a minority obtaining more income than 50% of the population – since 2014. Whichever year we select, we find ourselves with figures on the concentration of income that exceed by far the prior analysis forecasts – see, for example, the work by Alvaredo et al. (2018) – which confirm that the size of the inequality is greater than we thought.

The improvement of the relative position of the elite is due to the fact that they increasingly receive a higher proportion of the total income generated both by labour – salaries and pensions – and especially by returns from capital.

Capital income is a source of income that acquires more importance as the people’s economic position becomes more favourable: the majority of people obtain little income via this route, whereas for the rich it is increasingly important (Brindusa et al. 2018, Alvaredo et al. 2018).

Capital income, moreover, tends to be more concentrated than labour income, so the fact that its importance is increasing (Karabarbounis and Neiman, 2014) explains why inequality is tending to perpetuate itself and grow. In short, the recent increase in inequality is due, in part, to the growth of capital income (Alvaredo et al. 2018).

Finally, if we analyse what percentage of income the French and US upper class accumulate, we see, in contrast, that Spain is situated in an intermediate position. The country’s upper class has come to accumulate around 40% of total income. This figure is higher for the USA, where the upper class obtains close to half of total income. The difference between the USA and France is notable – nearly 15 percentage points.

France does not only figure as the most egalitarian country of the three. It is also the one that has experienced the most stable trajectory. While the income share of the upper class has remained constant in Spain’s neighbouring country – around 33% - in Spain and the USA there have been variations and relevant changes:

• In Spain, the income share of the upper class started to fall at the start of the new millennium. Until halfway through the first decade, when this indicator again set out on an upward path. A path that has not ceased until the upper class obtained, in 2015, an income share similar to the one it had at the start of the period analysed – close to 40%.

• The case of the USA is different: not only is this the country where the richest people accumulate a higher proportion of income, it is also the only one in which their share has not ceased to grow throughout the entire period.

Finally, seeing how the income share of the richest 1% in each country has evolved – see figure 5 – we can observe some important nuances.

The USA is the country where the richest elite monopolizes the most income and France is the country where it monopolizes the least. Although the concentration of income is not as accentuated in Spain as it is in the USA, Spain is the country where the accumulation of income in fewer hands has most intensified recently: the richest elite had 11.7% of income in 2007 and 15.5% in 2015.

We have new and solid data that reveal two important things: that inequality in Spain is greater than we thought and that it has tended to increase recently. This is due to a minority – the richest 1% - gradually accumulating a higher proportion of the total national income originating from both labour and capital alike. This last fact highlights the difficulty in making the distribution of income in Spain more egalitarian, as capital income tends to be more concentrated than other income. Consequently, if measures are not taken to revert this situation of inequality, it would do no more than perpetuate itself and continue growing.

Although income in Spain is not as concentrated as in the USA, the country is becoming distanced from more egalitarian countries – such as France – and is converging with the first in terms of inequality. We are talking, therefore, about an economic and political challenge that should not be neglected.

This article has been adapted based on the study:

ALVAREDO, F., ARTOLA, M. and MARTÍNEZ-TOLEDANO, C. (próximamente). Long-run Income Inequality in Spain, 1932-2015: Evidence from Distributional National Accounts.

Other references:

ALVAREDO, F., CHANCEL, L., PIKETTY, T., SAEZ, E. and ZUCMAN, G. (2018). World Inequality Report 2018. World Inequality Lab.

ANGHEL, B., BASSO, E., BOVER, O., CASASO, J. M., Hospido, L., Izquierdo, M., Kataryniuk, I., Lacuesta, A., Montero, J. M. and Vozmediano, E. (2018). Income, consumption and wealth inequality in Spain. Documentos Ocasionales, n.º 1806, Banco de España.

KARABARBOUNIS, L. and NEIMAN, B. (2014). The Global Decline of the Labor Share, The Quarterly Journal of Economics, Volume 129, Issue 1, págs. 61–103.