1. Income inequality and the effect of public
policies in the European Union: what happens
with enlargement?
2. Inequalities, Employment and Income
Convergence: Evidence from Regional Data
Papers by:
1. Figari, Paulus, and Sutherland (FPS)
2. Galbraith and Garcilazo (GG)
Comments by:
Lars Osberg
Economics, Dalhousie University
Common Focus: Determinants of
Inequality within the European Union



FPS: impacts of tax/transfer policy on
inequality & relative poverty EU15→EU19
GG: pay inequality (within/between regions) &
unemployment rates for 187 European
Regions 1984-2003.
Motivating Concern: “Social Cohesion” &
Inequality in a possibly fragile federation

A shared problem of EU, Canada & others
 Quibble: both papers have rhetoric of “social
cohesion” but only data is income inequality

Is it vertical or horizontal equity that matters more for a
sense of common citizenship?
FPS: Income inequality and the effect of public
policies in the European Union: what happens
with enlargement?


15 pre-2004 EU states plus Estonia,
Hungary, Poland and Slovenia
Methodology:

EUROMOD static micro-simulation
model

direct taxes, social contributions, cash
benefits simulated in a comparable way
using tax-benefit rules in place + info in
survey datasets
Income Concept & Measurement

Pre-Tax Income
[1] “market income” = pre-tax gross earnings (not
including employer social insurance contributions) +
self-employment income + capital income + private
pensions & transfers
[2] “market income plus public pensions”

Adjustments




modified OECD equivalence scale
top and bottom coded/truncated
Eurostat PPP indexes for GDP
5% confidence intervals - nonparametric bootstrap.

1000 for each country & 250 for EU
Income inequality before and after
taxes and benefits - Gini coefficient
0.60
0.55
0.45
0.40
0.35
0.30
Market income
Market income & public pensions
Disposable income
Source: EUROMOD
EU19
EU15
PT
IT
PL
EE
EL
ES
IE
UK
HU
SI
DE
FR
NL
LU
BE
SE
DK
0.20
FI
0.25
AT
Gini coefficient
0.50
Diversity within the EU


Public pensions play widely varying role in
reducing inequality
Tax/transfer systems



EU-15:Gini (market income→PDI) = 0.50 → 0.30


Reduce inequality to differing degrees
 Netherlands, Southern European, Estonia &
Anglo-Saxon redistribute the least
Change inequality ordering
inequality reduced by 39%
EU-19:Gini (market income→PDI) = 0.52 → 0.33

inequality reduced by 35%

Did enlargement imply a “big” change?
Income inequality before and after taxes
and benefits – Ge(0) & Ge(1) indices
0.70

0.60

0.50
Ge(0)
Generalized Entropy Indices

0.40
0.30

0.20
Rankings change

market income & public pensions
0.45
EU19
EU15
IT
PT
EL
PL
EE
ES
IE
UK
BE
HU
SI
DE
FR
NL
SE
DK
LU
AT
0.00
FI
0.10

disposable income
Ge(0) – low-end sensitive
Ge(1) – more top-end
sensitive
But not much
EU19 inequality > EU15
inequality always
Source: EUROMOD
0.40

0.35

0.25
0.20
EU-15

0.15

0.10

0.05
disposable income
Source: EUROMOD
EU19
EU15
PT
IT
PL
EE
EL
ES
UK
IE
HU
SI
FI
DE
FR
BE
NL
SE
LU
DK
market income & public pensions
Ge(0) by 66%
Ge(1). by 49%
EU-19:

0.00
AT
Ge(1)
0.30
Taxes and benefits reduce
inequality by ??

Ge(0) by 60%
Ge(1) by 45%
Sensitivities
GINI
DPI
EU15 Euro
0.31
EU 15 PPP
0.3
EU19 -Euro
0.36
EU19 -PPP
0.33


Top & Bottom coding make little
difference
Equivalence scale

Income per capita or OECD ? – slightly less
decrease in Gini
Inequality Decomposition

EU-15


Essentially all of EU15 inequality in
market income + public pensions
explained within countries
EU-19

More (2-14%) of total EU19 inequality
explained by inequality between
countries
Which tax and benefit components
make a difference?
Household income composition: whole population
200
180
160
market income
social insurance contributions
means-tested benefits
personal taxes
public pensions
non means-tested benefits
140
100
80
60
40
20
0
-20
-40
EU19
EU15
LU
IE
NL
AT
DK
BE
SE
UK
DE
FI
FR
IT
ES
EL
SI
PT
HU
-80
EE
-60
PL
% of disposable income
120
Source: EUROMOD
A buried gem!

“Overall, market income at 100% of
disposable income in Figure 4a
means that direct taxes and cash
benefits balance each other”

Implication: the consumptive activities
of the state are entirely financed by
indirect taxation
Household income composition:
bottom decile group
180
market income
social insurance contributions
means-tested benefits
160
140
personal taxes
public pensions
non means-tested benefits
100
80
60
40
20
0
-20
EU19
EU15
LU
IE
NL
AT
DK
BE
SE
UK
DE
FI
FR
IT
ES
EL
SI
PT
HU
-60
EE
-40
PL
% of disposable income
120
Source: EUROMOD
“Similar” individuals are not treated
“similarly” by the state in EU nations.

Does horizontal equity matter for a
sense of common citizenship in a
European polity?

“Similar” treatment does NOT require
identical treatment
Net Fiscal Residuum similar?
 “reasonably comparable levels of public
services at reasonably comparable levels
of taxation”


36(2) Constitution Act of Canada, 1982
Income poverty rates
- Before & after taxes and benefits
(Poverty line = 60% of national median equivalised household income)
45%
40%
35%
30%
25%
20%
15%
Excl. all benefits(except public pensions)
Excl. means-tested benefits
Excl. non means-tested benefits
Disposable income
EU19
EU15
IE
PT
IT
EL
ES
EE
PL
SI
UK
HU
DE
FI
NL
SE
BE
AT
DK
LU
5%
FR
10%
Source: EUROMOD
Means tested benefits often target poverty
gap – but to differing degrees!
% Change in Poverty due to Means Tested Programs
90.0%
80.0%
Rate FGT(0)
70.0%
Intensity FGT(1)
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
19
EU
K
15
EU
U
SI
SE
PT
PL
L
N
LU
IT
IE
U
H
FR
FI
ES
EL
EE
K
D
E
D
BE
AT
0.0%
Comments (LO)

FPS recognize “rules ≠ reality”


UK & other Anglo nations



Nontake-up of benefits, evasion of taxes imply
EUROMOD = idealized picture
Big news 1980+ is the exploding share of top 1%
Survey based micro-data can only track trends
among ‘the middle 90%’
 Can social cohesion survive the increasingly
conspicuous consumption of the top 1% ?
Quantitative impact & sociological impact?


‘Social Cohesion’ & quantitatively small stereotypes
Addition of small, poor nations cannot move
aggregate stats much – but can affect politics
GG - Inequalities, Employment and
Income Convergence:
Evidence from Regional Data

Focus: relationship of pay inequality & unemployment
rates for 187 European Regions 1984-2003


Is there a tradeoff between cohesion and
competitiveness ?



inequality between 16 industrial sectors in each region &
between regions
No
Less inter-industry pay inequality generally associated with
lower regional unemployment
Time effects & European Macro-environment

Maastricht Treaty (1992)


Euro (1998)


4 percentage point increase in unemployment rate
General reduction in unemployment
Lisbon Treaty (2000)

Increase in unemployment
Methodology: Theil Decomposition

Time series payroll data 1984-2003

Wages & Employment



LO: FT or PT? Time period? Wage Concept ?
16 Industries in 187 regions
Theil’s entropy measure decomposed into:
Between sectors, within region component
 Between region component


Contribute to inequality ‘from below’ or ‘from
above’?
Within-Regions Between-Sectors
Theil’s T Statistic, 1998
Regional Contribution to the Europewide Theil’s T Statistic, 1995
Regional Contribution to the Europewide Theil’s T Statistic, 2000
Between-Regions Component and
Within-Regions Theil’s T Statistic, 1998
A Model of Regional Unemployment


UN = a +B1Theil + B2 RelWage + B3 GDPG +
B4 PopUn24 + Di Country + DjTime
Reduced form model of regional unemployment
rates

2 ‘supply’ and 2 ‘demand’ variables
 Supply



Demand



relative size of regional population of young workers
Inter-industry inequality of wages (Theil) in region
growth of regional GDP
average wage rate of the region
+ Country and Time specific Fixed Effects

assumes common EU business cycle -
Coefficient Estimates: Linear Model (1984-2003)
Model 1
Total
tot_un
Beta P>|t|
wn_theil 4.326 0.002
pop24 54.715 0.000
relwage -0.084 0.077
g_gdp -10.255 0.000
constant -8.588 0.000
R^2
0.5695
N
1834


Model 2
Male
Beta P>|t|
3.806 0.002
48.115 0.000
-0.025 0.615
-10.654 0.000
-8.696 0.000
0.568
1824
Model 3
Female
Beta P>|t|
7.207 0.000
72.367 0.000
-0.079 0.276
-7.507 0.003
-11.736 0.000
0.5994
1829
Model 4
Youth
Beta P>|t|
12.168 0.000
103.683 0.000
-0.250 0.110
-15.870 0.000
-10.881 0.000
0.603
1791
Model 5
Elderly
Beta P>|t|
3.994 0.001
38.898 0.000
-0.031 0.444
-8.863 0.000
-6.246 0.000
0.5356
1833
Relative regional wage rate not significant
More inequality between industry wages – more unemployment
Country Fixed Effects in European
Unemployment
8.000
6.000
4.000
2.000
0.000
-2.000
-4.000
-6.000
-8.000
-10.000
ie
at
pt
nl hu* uk cz* se* gr* be*
it
de
fi
pl
es
Unemployment
Time Fixed Effects in European
Unemployment
6.000
Lisbon Treaty
4.000
Maastrich Treaty
2.000
0.000
-2.000
-4.000
Euro
Single European Act
-6.000
Years
Total
Male
Female
<25 Yrs
>25 Yrs
GG Conclusions:

“ Positive impact of pay inequality on
unemployment suggests that promoting
cohesion in the structure of pay in lagging
regions could lead to a catching-up process
leading to territorial cohesion”


Counter to argument that “pay flexibility’ is needed
Specific Suggestions:


“raising minimum wages, targeting industrial
development policies in poor areas, active labor
market polices for the unemployed, policies to
improve workers’ skills such as on-the-job training,
adult education, and assistance programs for people
at the bottom”
“expanding university enrollments is perhaps the
proven effective route to reducing youth
unemployment”
Comments - LO


Specific policies not part of modelling
Very much a reduced form model of regional
unemployment rates + causal interpretation

Is it believable? What is causality?
 Very large coefficients on regional GDP growth



-10.3 % point change U rate (all) if +1% growth GDP
Causality ? – is this good news or bad (if true)?
Inter-industry wage differentials are small part
of level of pay inequality & trend to greater
individual earnings inequality


BIG NEWS – rising share of top 1% in Anglo nations
“Middle 90%” - much less change in income shares but
increased residual unexplained variance in individual
earnings