The Reality of Social Mobility & Wealth in Switzerland | Melanie Häner-Müller (#19)

Episode Summary

Switzerland is often seen as a country of opportunity, but how easy is it to move up the economic ladder? And why do people believe inequality is rising when the data says otherwise?

In this episode, Melanie Häner-Müller, economist and Head of Social Policy at the Institute for Swiss Economic Policy (IWP), explains the realities of social mobility and income inequality in Switzerland. We break down how social mobility is measured, why Switzerland has high income mobility but average educational mobility, and how its system compares to countries like Sweden and the U.S.

Expect to learn why income inequality in Switzerland has been surprisingly stable for over a century, what’s driving the widening wealth gap, and why public perception often exaggerates inequality. We also explore the impact of education, immigration, and tax policies on social mobility.

This is a deep dive into the hidden forces shaping economic opportunity, packed with insights for anyone interested in social and economic policy.

Meet Melanie Häner-Müller

Melanie Häner-Müller is an economist specializing in social mobility, income inequality, and economic policy. She leads the Social Policy division at the Institute for Swiss Economic Policy (IWP) in Lucerne, where her research focuses on Switzerland’s welfare system, pension policies, and education. Her work has been published in leading academic journals and featured in major media outlets, including NZZ am Sonntag. She also teaches at the Universities of Lucerne and Basel.

Episode Transcript

Mike: [00:00:00] Melanie, thank you very much for joining me. Welcome to how it ticks.

How are you?

Melanie: Hello, Mike. Thanks for having me. I’m fine.

Mike: If you are in an elevator and you have 30 seconds to explain to the person next to you what you do, how would you summarize it?

Melanie: Well, I have a job that is really fascinating because I can do research on stuff that interests me in everyday life, but also as a researcher, more specifically, I’m investigating the chances of moving up the social ladder. So social mobility research, and also how income and wealth is distributed in Swiss society.

Mike: Okay, you’ve prepared that. You’ve thought of that before. How do you Before we go into this, I do want to ask you a lot about social mobility and the social ladder. How do you define that exactly?[00:01:00]

Melanie: Well, usually, um, when someone thinks about social mobility, you are mainly focusing on family background influences, right? So how Influential for your own success is your family background. So how similar in terms of, in terms of social status are children and their parents?

Mike: Now, I know you’ve studied social mobility going back all the way to the Middle Ages. When you look at that data, what is one of the more surprising things that you’ve discovered?

Melanie: Well, I thought that back in the late middle ages, things have been completely different. So that social mobility is never comparable to nowadays social mobility. actually what we found was [00:02:00] kind of a cyclical pattern with times where social mobility was higher and then other times when social persistence was higher.

So social mobility was lower, but I couldn’t have guessed that actually there is this just a cyclical pattern, but on average, we still find like. pattern and also the influences of parents, grandparents and great grandparents that follow a specific pattern. So what we found is that the social or like the family background influence vanishes.

within four generations. And that’s also what we know from everyday lives. And like there is this proverb, right? That the first generation builds something, then the second tries to still keep it. Then the third generation is already on the, on the way down. And the [00:03:00] fourth generation has nothing left at all.

And this is exactly what we found in our, uh, data set, more or less on average. Like there is a strong parental influence on one’s social status. Then the grand parental effect is about, uh, an additional half of, of the parental effect, but then when it comes to grades. grandparents and more distant generations, we do not find any statistically significant effect.

Mike: For generations, I’m just thinking, do you have every single family is moving completely on their own different timeline or are you actually finding everyone’s moving together?

Melanie: Now, um, so there is, I think like, this is very important when it comes to social mobility research. It’s about, um, Swapping places on the social ladder. So, uh, in order for a family to move up, there needs to be a spot on the top, right? So there [00:04:00] needs to be a family that moves on the same time downwards.

And what we found is, um, that You actually see this pattern in, in every generation for different surnames, and that’s probably also what, what people would, um, wonder, how can you get data back to the Middle Ages, so do you have income data, or, or what kind of data makes it possible to trace families back over 15 successive generations, and what we have is, um, We have a surname based approach, so we basically count surnames.

How do we count them? We count them, um, in the elite group, so for example among students or other political, um, elite groups, and then we count them also in the overall broad society, meaning that we take birth registers where we have every [00:05:00] newborn, um, for comparison. So that makes it possible to compare every family’s surname representation in the elite and compare it to the overall representation in society.

So if, for example, we have One specific surname, such as Marion, and it makes up for, um, so like, uh, 1 percent of, um, the newborns are called Marion, but 5 percent of newly enrolled students are called Marion. Then the family Marion would be overrepresented by the factor 5 in the specific generation. And we do this for every surname that we can find in every generation’s data.

And then we can compare the overall under representation of each family across generations.

Mike: That’s interesting. [00:06:00] So, what, what are some of the most, um, privileged or successful surnames?

Melanie: Well, um, as we are focusing on Basel, um, there indeed, there is this famous Dijk families. So, for example, Burkhardt, Merian, Stechelin, Fischer, and so on and so forth. But even among them, there was always kind of swapping places. So, it wasn’t the case that, for example, the family, Work hard was at the very top the whole time.

So even among elite families, there was swapping of places, but still I have to, mention that we have, um, uh, more persistent elites than overall society. So social mobility patterns are higher, um, in overall society than in elite [00:07:00] groups.

Mike: Okay, so when you said before that there is this four generation cycle, so even when this cycle is on the way down within these elite groups, it’s still higher than the average.

Melanie: Exactly. Exactly.

Mike: Do you, does that tell you something? Like, what, what do you take away from that information?

Melanie: Well, for me, it was interesting to see that there is no. dynastic effect on average that we could see. For example, if my great grandparents would have a direct effect on my social status, even though I’ve never met them before, that would be a sign of stickiness, of Dynasty effects. And so it would be just enough to have the right surname, right?

And, um, fortunately, this does not seem to be the case in Switzerland. So I would say this is good news, because, um, [00:08:00] if we are looking, and this is what is usually done, and what we do also in other studies, just at the parent child relationships, then that means that we cannot really be sure where do those resemblances stem from?

Is it an institutional problem or is it just similar talent and similar efforts that they both spend? So it’s always very difficult to, to assess the equality of opportunities. only based on parent child, um, relationships. And so that’s why we opted for this more long term approach because there you can really, uh, derive potential, um, dynasty effects.

Mike: Is the opposite true? Do you have people or families in the bottom percentile, which are, which are basically stuck there as well? Hmm.

Melanie: Um, that was not Part [00:09:00] of our focus that would be very interesting and for other countries, for example, Gregory Clark did this also for prisoner data. So we just have the overall society data and the elite groups, but we did not collect data on on, let’s say. groups of lower social status, such as prisoners, but that would be interesting to, to, to find out what, uh, Clark and coauthors showed in their studies is that the stickiness is, um, true for, or observable for both groups at both tails of the social status distribution.

So the elite and the very bottom families.

Mike: I wanted to linger on that four generation piece of information again. So, even though we have all of these other international, global, events going on, especially now when there seems to be another global event every week, you’d think everything else seems to be accelerating. So based on that data, there doesn’t [00:10:00] seem to be anything disrupting that or are there breaks in that cycle based on, um, other historical events.

Melanie: Well, this kind of cyclical pattern, we can best investigate when we just focus on parent child, so like two generational, uh, relationships. And if we focus on that, we see such a cyclical pattern and we work together with historians to find out, okay, what characterizes those. cheek times where you have a very high social persistence, so very low social mobility.

And what we could find out was that usually in terms, in times of crisis and, um, wars, you observe a high stickiness and thereafter you have an increase in social mobility again. And this was found before, um, when it came to [00:11:00] inequality matters. So it is, um, also called like the great equalizer, right? So wars typically also affect, uh, income and wealth situation of people and maybe, uh, an equalizer or have an equalizing effect.

And that’s what we could also show, um, is true for social mobility as well. So that in terms of crisis and wars, sometimes you also have a countervailing force so that um, structures, social structures are disrupted and then you have opportunities again to move up the social ladder so you have more dynamic societies in the aftermath of crisis and wars and this is what we could detect also for our data set.

Mike: So if you look at Switzerland, I suppose in the last hundred years, there hasn’t been any drastic war or something directly [00:12:00] impacting the country. Can we still use this information to sort of look ahead into the future for the next 10, years? Can we, what can we learn about that?

How can we apply it?

Melanie: Yeah, that’s it. That’s a good question. So I would say that this cyclicality is observable, but it is also not massive. So I would be rather optimistic that, um, we really have this long term stability. And so I would also look optimistically in the future that this, um, possibility of swapping places might also work in the future.

So I think like. When we talk about the future development of social mobility, people are, and there is also evidence on that, that people are worried that you do not have in the next generation the same opportunities that, for example, your parents used to have. And I would say, like, this is very [00:13:00] important to note because this is another form of social mobility we are talking about.

When I Um, investigating the effect of family background on your own social status. I am interested in this swapping of places on the social ladder. So this is what we call relative social mobility. But nowadays also media debate, public debate, are also worried about whether on average the next generation can be better off than the previous ones.

used to be. And this is what we call absolute social mobility. And of course, in times where we have already very high incomes, very high educational social status, it is very or it becomes more difficult to really be at this margin and, um, push [00:14:00] more forward because if everyone has basically a university degree, then the next generation can either have also a university degree or, uh, or be lower, lowly, um, or lowly educated, right?

So that means, um, that in terms of absolute social mobility, there might be a tougher time to, to move forward, but that does not affect the equality of opportunities. Yeah. Yeah.

Mike: What are the data points which define social mobility? So you said education, but there must be more than that, which define where someone sits on the social mobility ladder.

Melanie: That’s also very crucial when we, um, compare different studies also from different countries, because we, from research would definitely recommend to always look at different indicators of social [00:15:00] status because they might be or they might reveal different extents of social mobility. So usually people are looking at educational status, at incomes, at wealth, occupational status, maybe even political representation.

And for some countries, those indicators show very similar mobility results. And for others, it clearly makes a difference whether you are looking at income or education. For example, in the case of Switzerland.

Mike: That’s true, so How does Switzerland differ from some of its neighbors, say we take Germany for example, which without knowing more about it, I would assume they’re very similar. What would some of the differences be?

Melanie: Yes. So in Germany, actually, um, the social mobility rates are lower than [00:16:00] in Switzerland, especially when it comes to income. In Switzerland, we have very high income mobility. And what, or how can we assess high, high income mobility? Maybe an example is helpful for that. So, uh, if we, We are looking at how much of the income can be explained by family background, then we have in Switzerland, the number of 15%.

So 15 percent of my income can be explained by my parental background. Or family, overall family background, and this is not much. So even like, for example, the Danish, um, society that is, um, quite familiar for being very mobile, they show a number of 20%. So there we have, um, 20 percent that are [00:17:00] explained by family background.

And, for example, in Germany, we have even 43 percent that are explained by family background. In France, for example, it’s still 29%. And, in the US, it’s, close to 50 percent that are explained by family background. So huge disparities. Um, so in terms of income in Switzerland, we are very mobile. And then still, if you are, um, going through media, articles, sometimes you stumble across the, um, the explanation that we do not have equality of opportunity in terms of university degrees.

And so the question then is, oh, but she just told us that, um, we have a high social mobility, um, but how does that fit with, uh, this other fact? And this is very important. So that’s why we have, [00:18:00] um, to make this distinction between income and educational mobility in Switzerland, because indeed, Academic children are way overrepresented at Swiss universities, so you are way more likely to pursue a university degree if you stem from an academic household.

Mike: that, sorry, and just to, that would, by defining academic household, that would be one or both of your parents also went to university.

Melanie: Exactly, exactly. And so there is this, um, over representation, so you have over 50 percent of chance, um, to also go to university if your, um, parents have a university degree. And if your parents just have, um, the mandatory school degrees, um, then you are, um, below 15%. So there is really this huge gap, um, in [00:19:00] university attendance.

But I think like what is then the missing puzzle piece that we also need to consider is, um, that in Switzerland having a high university degree or a university degree at all does not explain all the opportunities. in the labor market. So for example, in the U S you, uh, if you want a very high salary, uh, then of course you need an Ivy league degree.

And this is not true for Switzerland. So yes, we do not really have those Ivy league, um, uh, universities, but you do not even need a university degree. So you can really, make it up the income ladder. Even without a university degree, and this makes it important to note, so because that explains why we have a very high income mobility, despite average educational mobility.

Mike: [00:20:00] Okay, so now we have social mobility, income mobility, and educational mobility. I want to just. To ask you one thing you said about Switzerland having 15 percent income mobility, which seems quite low based on the, or very low compared to other countries. And you have the U S conversely very high. Where my mind went was how correlated is access to education with income, mobility. So, for example, in the U. S. it’s very well known, it’s very, very expensive and often getting into Ivy League universities, you need very educated, very wealthy parents to even have the chance of getting to one of those.

So, I guess in that context, 50 percent can explain. Am I right or am I missing something?

Melanie: No, you’re definitely right for the U. S. And in Switzerland, this is not the case, right? So our university fees are. rather low. Of course, you cannot just [00:21:00] account for the university fees. You also need to take into account the standard of living. So because maybe you cannot afford, you do not have enough time to work apart.

So maybe it’s difficult to, to really come up for your everyday life. And that’s also what we observe in Switzerland. So that usually, so first thing, your parents choice, um, definitely influence your own choice. So if your parents went to university, they are more tempted to suggest to their children to also pursue a university degree.

Um, but, uh, so this is, this holds true for both the vocational path and also the university path. But now the big difference is that in Switzerland you have the possibility to go to this vocational educational training. So you have this apprenticeship, so you work [00:22:00] in the respective company, and you also get a good school training, and you have Later on, the possibility to pursue additional degrees, you could even go to university, so you have this very high permeability of the system.

It’s not only about this duality of the system that we have this VET system and the university degree. but we also have a very permeable system. And so this makes it possible that even though you have only later access or no access at all to university, that you could still have a very high salary because you are very well trained for the labor markets demands.

So if you are looking at, for example, returns to education, Then Swiss studies show that like the optimum in terms of those, um, um, rents you could make is actually to combine [00:23:00] a vocational path with a further training. So it’s not the purely academic path and not the purely vocational path, but it’s the combination of the two.

So those mixed paths that promise the highest rents.

Mike: So in general then it sounds like a general rule of thumb is the lower the percentage of income mobility tied to family background the better. Why if, if, if a clear reason for Switzerland’s low percentage of income tied to their family background is to do with this sort of dual education system.

 should this be a model then for many other countries to follow? And I wonder, are there other countries that you’ve looked at equally as low, if not lower, which are similar to Switzerland in the way they have education?

Melanie: So in [00:24:00] terms of, um, income, we are really at the, in a pole position. So it’s hard to find, um, any competitors, but in terms of, educational ability, we are just average. And for example, in Germany, you have, you have, quite a similar, dual educational system, but it is less permeable and it is also less used.

And so I would say like, it’s difficult to just export something and then hope that people, will. use it the same way, right? So it’s not only, so I think this is very important. It’s not only about education, but it’s about the combination of the labor market and the educational system. So for example, if companies just hire, only managers with university degrees, then of course it’s Quite difficult to maintain this high income mobility, this low income [00:25:00] persistent.

So I would say like, this is, um, for now, it’s a big asset in Switzerland, but we have to be careful in in observing the trends also on the labor market. So there is like this famous example of, uh, UBS CEO, um, Sergio Armati, who, um, uh, did his apprenticeship in the bank and then moved up the, the career ladder up to CEO, right?

And the question is, is that possible also for future generations, or is there a tendency that like companies use the The information of having people with, uh, university degrees as a proxy for higher quality, uh, labor forces.

Mike: How does globalization affect these numbers? So, Switzerland has this huge amount of immigration and part of that is to do with just a flood of [00:26:00] people, talent, wanting to work here for lots of different reasons. That must dilute the numbers when it comes to family and, and family mobility.

Is that true?

Melanie: So maybe we have to take a first step going back to the Middle Ages, because there we also had a lot of immigration, especially in Basel, which was close to the border and, um, was, um, Had multiple waves of immigration. And, um, that’s, that was very important for our surname analysis because that’s why we needed to resample all the time the surnames because new surnames appeared and they could also move up the social ladder.

So you, we could not just focus on the ones born in Basel, but we also needed to take into account all the immigrant families. And. We also went to historical data where you could find [00:27:00] that people, especially the elite, was afraid that they could risk their good position, or like, that their good position could be in risk because of those immigrant families, because they, they could feel the pressure from, from those immigrants who were talented, um, who were successful.

So they, for example, so forbids that they would, , be in, top political positions or sometimes they try to ban or, or at least warn, women to, to marry, um those men and so on and so forth. So there you could really feel or see those dynamics. And that’s also what we see then in the mobility patterns.

So that, um, like elite structures could be disrupted. Um, also thanks to geographic mobility, right? So like immigrant families who, intervened in those, um, more and more cemented, family dynasties. And for nowadays, in a newer research [00:28:00] project, we, We’re looking at income mobility in total, and so we took, administrative data where we basically have everyone living in Switzerland included in our data set.

And for those people, we know the family structure, we know their nationality, we know their income, and so on and so forth. And what we do is based on a sibling similarity analysis, we first determine the extent of family background that is explained or like that, that explains, um, my income chances. And this is exactly where we end up with those 15%.

And then we can further disentangle and try to find out, okay, what explains now this, uh, those 15 percent, uh, overall family background effect. And how much explanatory power do we find, for example, for the variable nationality? So that would [00:29:00] then mean, okay, like, uh, if I have a specific nationality, if I’m foreign born, and then, um, uh, this explains a lot of my family background effect, right?

Because this is very decisive. And this would then again be rather problematic when it comes to equality of opportunity. And what we find is, so we test for nationality, we test for parental income, we test for the place of residence, so urban or rural regions, and we also test for civil status of the, of the parents, because we also know that divorced or married parents would, might have a different effect on, on children’s income perspectives.

And what we find is like, All those factors together do not even explain 10 [00:30:00] percent of those remaining 15%. So like 90 percent of this family background effect is still kind of a mystery. So this is, this is interesting. And I think in terms of nationality, this is a very good sign. So we do, in terms of income perspective, not detect, vast, , drawbacks if you, have, uh, or if you are foreign born, which would again then be problematic in terms of equality of opportunity, but still one wonders, okay, what are the, the, the rest of the 90 percent of this, um, of this family background effect?

And so far we tested also for, for a bunch of other variables, but so far we couldn’t really, um, solve this, um, mystery.

Mike: That’s really interesting. That’s kind of beautiful in a way. It’s just the magic about the Swiss culture seems to be immeasurable.

Melanie: Exactly. And I would also say, like, for now, our, um, [00:31:00] preliminary conclusion is that, yes, there is this remaining family background effect of those 15 percent, but there seems to be nothing very systematic. And so maybe. Like every family has their own recipe of success, so maybe there is just no systematic behind it, which would then also be, of course, good news.

But, um, in future studies, we will, of course, try to dig deeper, whether we’re going to find or at least try to explain more of those remaining 90%.

Mike: Is there a difference within Switzerland, so is there a difference in the German, French, Italian speaking parts on this?

Melanie: yes. so there are regions, , that are a little bit stickier than others. , but there is no clear pattern. You could not say, well, for example, the, the German speaking part is more mobile than, than the French speaking [00:32:00] part. So there is no clear pattern. They are just, several regions where you have, you have at the moment higher or lower income mobility.

But I think like this is very difficult to, um, assess because the question then is How do you arrange people in the respective regions? So if, for example, the parents live in the canton of Bern and the children live in the canton of Zurich, well, how do you then assess the mobility of within Zurich, right?

So there is, and we know that there is a lot of heterogeneity in that. So it’s quite difficult to assess.

Mike: Now, you were involved in a recent study on income and wealth inequality, and actually this is one of the reasons it took us so long to have this conversation is because we were waiting for this study to be published. What did this study [00:33:00] reveal about income inequality in Switzerland?

Melanie: yes, exactly. So we tried to really, um, investigate every possible data point there is in Switzerland on income and wealth inequality. And so what we could find is that there is a very stable income distribution over time. Um, and we have data available going back to 1917. So over more or less 100 years, we find this, um, great stability.

And, uh, so on average, for example, top 10 percent of the income distribution, the top earners, um, they have always. earned about 30 percent of the total income in Switzerland. So this is quite remarkable, considering the various crises we have experienced, [00:34:00] such as the World War II, um, the oil crisis, the financial crisis, or most recently also the COVID crisis.

And so this was one major finding. Then the second major finding was that Inequality in Switzerland, income inequality in Switzerland is not only stable because you could also have a stable inequality at the high level, um, but it is also remarkably low, especially before. any redistributive measures. So before any tax redistribution. So this was the second, um, uh, finding. And, uh, then also what, um, this, this is, this is all good news, but there are also several aspects that are a little more worrisome. So for example, we found that the perception of income inequality [00:35:00] worsened over time. So nowadays people, um, experience or perceive income inequality way higher than it actually is.

And also, and they used to perceive it 10 years ago.

Mike: What is it about Switzerland, do you think, what is it unique about Switzerland that really enabled Switzerland to be so consistent over, a hundred years?

Melanie: Yeah. So I would say also, Citing the, the recent, noble laureate, um, Atze Moglu and, and his co authors, it’s always about the institutions. So it’s a combination of a set of institutions. So on the one hand, We have the flexible labor market, which is definitely a key element. It ensures low unemployment rates.

Low unemployment [00:36:00] rates usually are correlated with lower income inequality. If you have a huge unemployment rate, then usually also income inequality rises, and it’s not only about this low unemployment rate, but it’s also about, , this this crisis resilience, that is very strong, um, in, in the Swiss labor market, , due to the various aspects of this labor market.

So I would say it’s. about the labor market institutions and then again, like in terms of social mobility, the educational system is also key so that people are trained and also have access to, further training possibilities, um, which makes the workforce suitable and also adaptable to the demands of the labor market.

That may change over time, but they, um, are a very good match. [00:37:00] Yeah,

Mike: between the perceived income inequality and the actual? And I also perceived if I, if I walk down the street in the city on a Saturday and I see the cars that are driving that street, I think bloody hell people are making a lot more money than I am. So I can at least understand conceptually where that discrepancy comes from, but where is it from the data perspective?

What have you, what has your research found about that?

Melanie: so interestingly, even 10 years ago, people would, if you ask them, where do you belong in the income distribution? Most of Swiss people would actually consider them. themselves as being part of the middle class. And so this is very typical for Switzerland. And, um, we could see that also in the data. And so, um, 10 years ago, [00:38:00] then, so usually in those surveys that are, um, in, in, in different, um, countries.

So to, to, um, have this comparison possibilities, there you show people, basically, how does your, or you ask them, how does your society look like? And you show them different pictures of different societies. And so, um, In Switzerland, you always had this big bulge in the middle. So where you really have this, um, huge, um, middle class and then a smaller top, um, elite and a smaller bottom share as well.

So this was. the number one picture that people tended to select always in Switzerland. And now we have a tie between this picture and a picture that looks like a Christmas tree. So way more at the bottom part of the, of the income distribution. So not really [00:39:00] what you observed, like that people tend to have way more.

So the elite’s perception was not really changing. It was more that there are more that are worse off than, or at least that’s what people perceive. So it’s like this, um, Christmas tree against this huge belly in the, in the, as a middle class. And so for now it’s a tie. And, um, the question is, okay, how, where does that.

come from. So my first guess would have been, Oh, well, there was COVID crisis. And then there was also, the credit Chris credit Swiss, um, crisis and other. Factors such as war and electricity prices and so on. So, um, you might have guessed, well, this, this might be a driver, but, uh, unfortunately the most recent data there is.

So this is, um, uh, a survey that is run. every 10 years. So the [00:40:00] newest data we got was from 2019. So before all that. And so then the question is, okay, how come that we still observed is worsening? So we will be, of course, very interested in the data for 2029. Let’s hope that, um, The word would, will look, , differently, um, in, uh, at this time point, but, so it was before all that.

And so, there are multiple, hypotheses. So there is no clear research evidence on that. So the first is, it is kind of an important debate from, , other countries because this whole research on inequality. is done also in Anglo Saxon countries. So this is also where our method comes from.

So, um, it is, and then also in France. So it is from Thomas Piketty and his co authors. They popularized the, those fascinating, [00:41:00] research approaches, um, for assessing income, inequality in a, in the long term perspective. And there they could observe this kind of U shaped pattern. So that you had a decrease in income inequality after the Second World War.

And now, Since the 80s, you have a re increase in income inequality, and so this is what is popularized in, um, in, in research, and this is, this holds true for those Anglo Saxon countries. But this is not true, uh, for, for Switzerland. So I would say like, this is part of it. So that is kind of an important debate.

So you also see like, um, neighboring countries, who, really experienced, , different. , crisis and different economic developments and so that you import this debate. And then, um, [00:42:00] secondly, you could also say, well, in public debate, there is always this, argument of widening.

gaps and so on and so forth. So like this, those pictures, and of course they, um, might also influence the, the perception of people. So this is, um, those, those two potential, um, hypotheses, could be mentioned, but for now we do not, we cannot really, um, Scientifically assess the drivers of those, um, perceptions.

Um, maybe what I can just tell is, from research, what we definitely know is that the perception should not be neglected. Because when it comes to redistribution preferences, the actual income inequality is way less important than the perceived inequality. So perceptions are what drive the redistribution preferences [00:43:00] and in a direct democracy such as in Switzerland, this might also have direct effects on redistribution policies.

And this is exactly what we also see in, in the data. So, um, there we have data going back to the 80s, where you, um, always ask people how they perceive inequality in society, and also, um, to what extent government is responsible to redistribute income from the top to the bottom. And you could observe now, , quite a substantial increase in the share of people strongly agreeing that, um, government redistributive policies are necessary.

So I would say like there is first evidence that not only the perception of inequality increased, but also the preferences for redistribution, was aligned [00:44:00] and this is what, would, have been suggested also by research.

Mike: Yeah, I guess it then would really be in the best interest of the government to properly educate people about this because if there is a perceived gap which is different to reality then people could potentially end up voting for things which are not necessarily the best for the country, just the perceived best which could be different.

Melanie: Exactly, exactly. This is, this is, very important so that, and this was also part of, uh or one goal of our study. Of course, you can always read or interpret the data, differently. So you could always say, well, even though we have this, amount of income concentration. Um, we would opt for an even lower concentration.

So, of course, this is then up to policy. But what we want to provide is just the pure income distribution data so that people can make their own, mind and [00:45:00] and and see also what the data looks like. And then, um, based on that have their own redistribution preferences.

Mike: How does Switzerland compare then, which other countries did you look into as part of this research? Hmm.

Melanie: So we compared it to, um, France, Germany, uh, the U. K. And the U. S. And and several more, because The great thing is that we apply the same research method as Thomas Piketty and his co authors, and they built the World Inequality Database, where they have income concentration data for, I would say, now even Every country in the world wild and what?

Yeah, it’s very fascinating what they what they built. And so we were kind of inspired to build our own little Swiss inequality database. And there you do not. Um, so we [00:46:00] have. the same income concentration data as he does, um, for the overall Switzerland, but what we could then also investigate was the income concentration in the Swiss cantons.

So that’s why we call it the Swiss inequality database, so that we do not have only, um, general Swiss level data, but also cantonal, um, level data because Switzerland is a very, very heterogeneous country. And so income concentration is very different in the Canton of Zouk than it is, for example, in the Canton of Europe.

Mike: How do you think tax plays into this, Switzerland being relatively low with the amount of income tax you have to pay compared to France and Germany, does that play a role in this?

Melanie: Well, that’s interesting. Because you could see actually that, for example, in the Canton of Zug, um, where you have the lowest, and in Schwyz as well, [00:47:00] where you have the lowest tax rates in, within Switzerland, you actually have the highest income concentrations. Why so? Well, richer people are actually more tempted to move to those cantons for tax reasons.

But then what’s also interesting is, on the other hand, they have the greatest share in the overall taxes paid in the respective cantons. So overall, for example, in Switzerland, the top 10 percent of income, um, of the income distribution, they pay around 50 percent of the taxes. in the canton of, so it’s a large, it’s a, it’s a large

Mike: we shouldn’t be too angry at the rich people, we should be thanking them.

Melanie: Well, yes, again, so this is like always, those are the two sides of the same metal, right? And then in the canton of Zug, I, I would have [00:48:00] expected, well, Then, of course, this share is lower, right, because you have low tax rates. No, but as you have a lot of rich people and then you have also a very progressive federal level tax, they pay, um, uh, three quarters, um, of the

Mike: just Zug

Melanie: Yes, exactly. No, the top 10 percent earners in

Mike: Yeah, okay.

Melanie: So there you see, well, yes, tax policies, of course, have an impact on the income concentration. Um, well, and there is, in general, of course, also this lowering effect. Um so, , income inequality after taxes is, of course, , in, in every progressive tax system, lower than pre tax, income inequality. And this holds true as well for Switzerland, but if we compare it to our neighboring countries, for example, France and Germany, we see that after those redistributive [00:49:00] measures, we are more or less the same.

So we have more or less the same income inequality. What differs us is that we have lower. inequality in market incomes. So before redistributive measures are taken, we have a rather already evenly distributed income distribution. And this does not hold true for Germany or France. They have way more redistributive policies.

And so In the end, after taxes, the situations look rather similar, so we end up at the more or less same level, but they have way more redistributive measures in place than we do. Yeah,

Mike: do you think is the difference is income, equality or inequality compared to wealth inequality, because I’m thinking about it. If someone makes a hundred thousand francs per year, and someone else makes 200, [00:50:00] 000 francs, that’s one thing.

But if one person has a wealth of a hundred million, because their family in the historically it used to be, you know, Kings. Then that is a much bigger discrepancy regardless of income. What, how did you compare those two in terms of importance?

Melanie: that’s very interesting because we haven’t talked so far about wealth inequality, right? And so, um, we have to maybe first just mention that, um, since the 2000s, we have an increase in wealth inequality, even though we have still this stable income inequality. And then the question is how. how come? So is this possible?

Because what exactly is wealth? Well, it is nothing else than accumulated income. It can be accumulated over one’s lifetime or over generations, as you just mentioned, right? So in terms of inheritances. And so what we observe is [00:51:00] there is this increase in wealth inequality. And so we were also looking at Um, uh, investigating the drivers of this recent effect of this.

increase in wealth inequality and we could find like there are two main drivers. So the first is there is this influx of wealth from abroad because of course, um, uh, Switzerland is very attractive for rich people. So you have this influx of wealth from abroad that also explains part of this, of this increase in wealth concentration.

And then the second part is Um, the increase of capital gains and also, house prices. So house prices and the capital gains. But then the question would be, but shouldn’t we see something similar than also in the income inequality, because if you have high. [00:52:00] gains, then maybe you would also have an increase or you could expect also an increase in capital incomes, which would then be again, part of our income data.

And this is not true. So, um, if you are looking at the share of private households, income, which is stemming from wealth income. This share is very stable at 10%. So there seems to be this discrepancy. So there is this, um, increase in wealth inequality that so far has not been mirrored in the income inequality.

And so now the question is, okay, what do we do with those different numbers or how do we assess those two types of inequality? Well, what we can say is that, wealth inequality is way more complex and also more volatile. So, um, I just mentioned this cap, those capital gains. [00:53:00] The question is, how will they Behave in the future. If there are changes in monetary policies, how, how will that affect then the, the future, um, development of, of wealth inequality. Then second point, how will house prices evolve over time? How does that, um, affect then the, the, the development?

And what you could say is that, usually in, in the tax literature to assess, um, like this potential of paying taxes like this, your overall potential, so consumption potential is usually, um, easier to assess with income concepts than with wealth concepts because it’s, um, so there are different types of wealth and so it’s difficult to, to, um, to derive them and distinguish them.

So, I would say Income inequality is, um, [00:54:00] always a good proxy for, for overall, um, assessing the inequality situation, but of course you should always also, um, take into account the wealth inequality situation. When it comes to wealth inequality, we have also kind of a data problem because, um, a taxable wealth is, Everything without, um, the pension data, and in Switzerland, the biggest wealth for a lot of people, also in the middle class, are coming from, from pension, funds, and as they are, um, exempted for from taxes.

We do not have them in the data. So there are methods used in the literature to, proxy them, but still, um, you have this, um, uh, this, uh, lack of data. And, and so then we know also that wealth inequality is lower, , when you try to take into account those pension funds. so you see, [00:55:00] like, the wealth situation is, is rather, difficult to, to, uh, disentangle because you do not know whether this is just a temporary phenomenon or whether this is a long term trend.

Mike: I remember earlier in the podcast, I had a guest, Martin Koper, who was an international tax specialist. And I also asked him this specific question, what he thinks about, taxing wealth as opposed to income. And he said, exactly what you just said, it’s such a complicated problem. Because people have the option to move their wealth elsewhere.

And so, and that creates all sorts of complexities to be able to do. So if you want to create an inheritance tax, wealth tax, all these things that has got huge implications, um, and exactly what you said, it’s very complicated.

Melanie: Exactly, exactly. But maybe, um, when we try to, make a comparison now with this social mobility research, because you were talking about, um, inheritance, we also have, um, a study field that [00:56:00] is, related to marriage decisions, because we can use tax data, um, with tax data also to investigate the redistributive effects of.

Um, marriage. So if, people tend to marry alike, then of course income and wealth inequality might, uh, increase.

Mike: So

Melanie: And this is

Mike: marry alike, what do you mean?

Melanie: so that, for example, it is more likely for someone at the top of the income or wealth distribution to marry someone also from the top, um, than what you would have, um, as a, uh, as a result from random mating.

So usually in the literature we talk about assortative matching or assortative mating and so we compared always the situation of the actual partner choices to the situation where you would have random marriage selection. And so if we compare that, [00:57:00] we, um, see that there is a substantial increase in both income and wealth inequality due to marriage choices.

Um, but then the question is, okay, but that would definitely lead to this cementation of dynasties in terms of wealth, right? Because if we are talking about inheritances now, then, of course, if someone from the top 10 percent of the wealth distribution, marry someone also from the top, uh, 10 percent of the wealth distribution, then we have, uh, a very, um, big effect on, on the inheritance potentials.

And what it was interesting to see, um, thanks to our administrative and tax data, we could also link them to their parents and their parental wealth. And what we observe in Switzerland is that yes, there is this phenomenon that you tend to marry alike also in terms of wealth, but not particularly as much in terms of [00:58:00] parental wealth.

And why so? Because we have this social mobility. So it is the case that Yes, you tend to marry alike, but you also tend to move away from your parental background thanks to social mobility. So that’s why we, see no clear segmentation, um, or at least not a severe one across, uh, generations.

Mike: Interesting. So if I translate that back to you, essentially what you’re saying is, so I, um, choose, my wife and there’s very little discrepancy between our incomes. We’re very similar and our

Melanie: Exactly. Exactly.

Mike: I don’t do something that’s very relevant to what my parents did and neither does my wife. So therefore the chain doesn’t continue through marriage because of the independence between people and their parents.

Melanie: Exactly. Exactly. That’s [00:59:00] what makes social mobility even more crucial, right? Because we have this phenomenon of increase in inequality. And what I also find quite fascinating in this matter is that as a society, we have a for some kind of redistribution, right? So we have this progressive tax system and so on and so forth, but with our private decisions, we, we just accept that we increase, we accepted, um, I don’t know whether it’s, it’s a conscious decision, but at least, um, we, we have to take into account that, um, Due to our private decisions, inequality increases.

And in another study, we even compared the extent of this effect, of this matching effect, and we compared it to the tax redistribution effect. And what we found is that [01:00:00] up to the top five percent, this marriage effect that increases income inequality was even bigger than the, um, opposite tax redistribution effect.

Only for the top five, the progress, the progression was so intense that this mating effect could be offset.

Mike: Interesting. I just had a thought, have you, has there been any study or correlation between this and the happiness of a country? Like, have you compared, , the wealth, , distribution, whether it’s tied to marriage or anything else, and the general happiness of a country? Is something like that been looked at before?

Melanie: Um, in terms of, so you, you say between social mobility and happiness. Yes, so there is, there is a clear pattern, right, so that, that if you, you even have a higher tolerance for inequality, for example, if you know [01:01:00] that equality of opportunity is high, because you, you know that, okay, you, one day you might even make it to the top, right?

So there is a clear correlation, but you said if you are, um, whether you are more happy in a relationship where you have, um, similar sorts.

Mike: No, but it was also the independence from your parents in terms of your income . guess if you put it in perspective and you’re tied to the income mobility of your parents. That might really limit you and your perception of what you can do, similar to, the perception of opportunity.

Whereas if, you marry whoever you choose to, and you marry someone similar, but that’s relatively independent from what your parents income, is, then I wonder if that leads to people being happier.

Melanie: Yeah, definitely, definitely. So it’s like, um, that you [01:02:00] have this complete freedom, right? Not only in choosing your partner, but also in being detached from, from, from the parental background. Yes. So, I mean, this is not really the focus of our research as economists, but there is even, um, opposite evidence also showing that social mobility can also have negative effects on your happiness perspectives or, or your perception of, uh, and wellbeing.

Why so? Because you could also say, well, then you have kind of a real detachment from your family. Maybe one day you will not have the same. topics you could talk about, the same realities in life. So there is sociological literature that shows like this ambiguous evidence that yes, on the one hand, of course, people are happier if they know that they have those [01:03:00] opportunities, that they are not stuck where they are born.

But on the other hand, there is also evidence that it might be difficult for a, for an individual to, um, Being so much detached from the parental background that you have this kind of, um, yeah, strangeness then. Does that make

sense?

Mike: make sense. It does. Yeah. I was also just thinking this conversation we’re having now has really made me grateful and appreciative of working and living in a country like Switzerland. So I think the work that you’re doing is really important because If people had this information, and, and we could essentially close that gap of perception versus reality, especially when it comes to income, you’d probably have a lot more satisfaction amongst people. So I guess, as we wrap up the conversation, if people wanted to learn more about [01:04:00] this and follow you and your work, what can they do? Where can they go?

Melanie: Yeah, sure. So, um, I’m working at the Institute for Swiss Economic Policy at the University of Lucerne. And we have a website and we even have newsletters and we always have also some events with interesting guests and so on and so forth. So yes, and always contact me by email or also on LinkedIn whenever you are interested in research on Swiss social policy, income, Uh, distribution questions or social mobility questions.

Mike: Melody, it has been an absolute pleasure talking to you. Thank you very much for your time.

Melanie: Thank you so much, Mike.

Mike: Bye. Bye.

Melanie: Bye.