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

Source: EUROMOD

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

AT

DK

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LU NL FI

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DE SI

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UK IE ES EL

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PL IT PT

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15

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19

Gin

i co

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Market income Market income & public pensions Disposable income

Diversity within the EU

Public pensions play widely varying role in reducing inequality

Tax/transfer systems Reduce inequality to differing degrees

Netherlands, Southern European, Estonia & Anglo-Saxon redistribute the least

Change inequality ordering

EU-15:Gini (market income→PDI) = 0.50 → 0.30 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

Generalized Entropy Indices Ge(0) – low-end sensitive Ge(1) – more top-end

sensitive Rankings change

But not much EU19 inequality > EU15

inequality always

Taxes and benefits reduce inequality by ??

EU-15 Ge(0) by 66% Ge(1). by 49%

EU-19: Ge(0) by 60% Ge(1) by 45%

Source: EUROMOD

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0.45

AT

DK

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HU IE UK

ES EL

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PL IT PT

EU

15

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Ge(

1)

market income & public pensions disposable income

Source: EUROMOD

0.00

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0.70

AT

LU

DK

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15

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Ge(0

)

market income & public pensions disposable income

SensitivitiesGINI

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

Source: EUROMOD

-80

-60

-40

-20

0

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200P

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15

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% o

f d

isp

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market income personal taxes

social insurance contributions public pensionsmeans-tested benefits non means-tested benefits

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

Source: EUROMOD

-60

-40

-20

0

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PL

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% o

f d

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market income personal taxes

social insurance contributions public pensionsmeans-tested benefits non means-tested benefits

“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)

Source: EUROMOD

5%

10%

15%

20%

25%

30%

35%

40%

45%LU D

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EL IT PT IE

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15

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19

Excl. all benefits(except public pensions) Excl. means-tested benefits

Excl. non means-tested benefits Disposable income

Means tested benefits often target poverty gap – but to differing degrees!

% Change in Poverty due to Means Tested Programs

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Rate FGT(0)

Intensity FGT(1)

Comments (LO) FPS recognize “rules ≠ reality”

Nontake-up of benefits, evasion of taxes imply EUROMOD = idealized picture

UK & other Anglo nations 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 inequality between 16 industrial sectors in each region &

between regions Is there a tradeoff between cohesion and

competitiveness ? No Less inter-industry pay inequality generally associated with

lower regional unemployment Time effects & European Macro-environment

Maastricht Treaty (1992) 4 percentage point increase in unemployment rate

Euro (1998) 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 Europe-wide Theil’s T Statistic, 1995

Regional Contribution to the Europe-wide 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 relative size of regional population of young workers Inter-industry inequality of wages (Theil) in region

Demand 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)

Relative regional wage rate not significant More inequality between industry wages – more unemployment

tot_un Beta P>|t| Beta P>|t| Beta P>|t| Beta P>|t| Beta P>|t|wn_theil 4.326 0.002 3.806 0.002 7.207 0.000 12.168 0.000 3.994 0.001

pop24 54.715 0.000 48.115 0.000 72.367 0.000 103.683 0.000 38.898 0.000relwage -0.084 0.077 -0.025 0.615 -0.079 0.276 -0.250 0.110 -0.031 0.444g_gdp -10.255 0.000 -10.654 0.000 -7.507 0.003 -15.870 0.000 -8.863 0.000

constant -8.588 0.000 -8.696 0.000 -11.736 0.000 -10.881 0.000 -6.246 0.000R^2

N 1834 1824 1829 1791 1833

Model 1 Model 2 Model 3 Model 4 Model 5ElderlyMale

0.5695 0.568 0.5994 0.603 0.5356

Total Female Youth

Country Fixed Effects in European Unemployment

-10.000

-8.000

-6.000

-4.000

-2.000

0.000

2.000

4.000

6.000

8.000

ie at pt nl hu* uk cz* se* gr* be* it de fi pl es

Time Fixed Effects in European Unemployment

-6.000

-4.000

-2.000

0.000

2.000

4.000

6.000

Un

em

plo

ymen

t

Years

Total Male Female <25 Yrs >25 Yrs

Single European Act

Maastrich Treaty

Euro

Lisbon Treaty

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