Decomposing the Drivers of Changes in Inequality during the

Great Recession in Ireland

Cathal O’Donoghue, Jason Loughrey

Head, Teagasc Rural Economy and Development Programme

Denisa Maria Sologon

Luxembourg Institute for Social and Economic Research

1

Objectives of Presentation

Impact of the crisis has been multi-

dimensional

Labour Market

Incomes

Prices

Tax-Benefit System

Decompose Components

50

52

54

56

58

60

62

64

2000 2005 2010 2015 2020

Employment Rate

500

550

600

650

700

750

800

850

900

Av Earnings

• Lost most of the employment gain of Celtic Tiger

• Disproportionately Young or Male

• Employment rate of women under 35 higher than men in 2011

• Big falls in share of construction (50% fall in share amongst males)

Price and Wage Inflation and Policy Updating (2007-2014)

80

85

90

95

100

105

110

115

120

2006 2008 2010 2012 2014 2016

CPI Old Age Single UA SingleTax Credit Industry Hotel & foodFinancial Public admin Health

• Benefits growing faster than CPI

• Earnings mainly growing less than CPI

Change in Inequality

0.25

0.27

0.29

0.31

0.33

2002 2004 2006 2008 2010 2012 2014

Disposable (Data)

Equivalised Disposable Income (parametric equivalence scale, 0.5)

• Gini fell over 3 points between 2005 and 2008 with onset of crisis

• Rose Again to 2010, before falling slightly

• Focus of Study 2007 (pre crisis) and 2012 (“end” crisis – lowest employment)

fall in inequality

Decomposition: Methodology

Decomposition

Cowell and Fiorio (2011)

A priori approaches (Shorrocks 1982, 1983)

Factor

Sub-Group Decomposition

Combination-Shapeley (Chantreuil and Trannoy, 1999; Shorrocks, 1999)

Nested Shapeley (Chantreuil and Trannoy, 1999)

Micro-Ecnometric Explanatory models

Single Equation (Fields and Yoo, 2000); Redmond and Kattuman (2001)

and Morduch and Sicular, 2002)

Non Parametric Approach (DiNardo et al., (1996)

Parametric Systems of Equations (Oaxaca (1973), Blinder (1973),

Bourguignon et al. 2001, 2008)

Methodological Approach

Disposable Income

Tax-Benefit System T(), B() modelled using Tax-Benefit Microsimulation

Model

Single Equation Model

Then use Shorrocks Factor Decomposition

Parametric System (Income Generation Model) describes the generating

process for market income

1

1

M

m

m

ii YY where mm

i

m

i XY , For m = 1,…, ,

i

M

iY 1

Methodological Approach

Estimate system of equations representing

Z Demographic and Data Sampling Error

Ii() Presence of Income Source I

Yi() Level of Income Source I

For each Dataset (Year), Z, Swap

Presence of Income – Labour Market Characteristics

In-work, Employee, Unemployment Retirement, Job Characteristics

(Occupation, Industry, Sector, Contract), Has Capital Income, Has

Pension, Has Other Income etc.

Level of Income Source (Employee, Self-Employment, Farm, Capital,

Pension, Other)

Tax-Benefit System

24 = 16 possibilities for two years

Order matters – Use Shapeley Decomposition to get average impact

Population and Market Drivers

Summary Statistics Distributional Drivers

Reduction of those of pension age and a substantial increase of those of

working age at the bottom of the distribution.

This is accompanied by a large increase in those with children in the bottom

quintile. For those with the youngest children, there is an increase also at the top

60%, thus a hollowing out of the youngest children in the middle of the

distribution.

For those in work, the share decreased across all quintiles, but given re-

ranking, the share halved in the bottom two quintiles, consistent with the

working age story.

Overall, education levels rose, with the share rising in particular at the

bottom of the distribution with younger higher educated workers losing

employment.

The industries with the largest fall in employment shares were agriculture

and construction, while commerce and the other sectors having the largest

increase in share.

Employment income, capital and other income, more concentrated;

Self-employment less concentrated

Policy Drivers

Budget Constraint for a married couple with children 2007-2013

(Adjusted for CPI)

20000

25000

30000

35000

40000

45000

50000

55000

60000

0 20 40 60 80

Hours per Week

Dis

po

sab

le I

nco

me p

er

Year

2007

2008

2009

2010

2011

2012

2013

2014

• Budget Constrain lower and flatter reflecting reduction in living standards and

more redistributive system

Redistributive Impact of Policy Change in Gini due to Taxes and Benefits

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

2002 2004 2006 2008 2010 2012 2014

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

Benefits Tax

Equivalised Disposable Income (parametric equivalence scale, 0.5)

• For population, tax and benefit system more redistributive due to both greater

targeting and expenditure due to demand

Results 1: Fields Decomposition

Fields Decomposition

Explanatory power of the model is

relatively high in 2007 at about 50%

Declined about 15% between 2007

and 2012

Reflecting the asymmetric impact of

the economic downturn

Coefficients Change

Demographic not sign. Except

pension age (+)

Relationship between educational

attainment and income reduces

over the period, reflecting the

reduction in the more highly

educated younger population

Urban-rural gap decreasing slightly

Differences (unclear) in terms of

occupation and industry

2007 2012

Demography 0.1 5.1

Work 72.1 83.5

Education 25.1 9.7

Spatial 2.7 1.7

Share of Observed Variability Accounted

for by components

Results 2: Oaxaca-Blinder-Bourguignon Decomposition

Education-Income Drivers – Equation Coefficients

Reductions in the relationship between Education and

Presence of Employment

Level of Employment Income

Level of Other Income (Female)

Presence and Levels of Occupational Pensions (Male)

Increases in the relationship between Education and

Presence and Level of Capital Income

Presence of Other Income

Presence of Occupational Pensions (Female)

Change in Inequality

• Decomposing inequality

changes into effects 2007-2012

• Market Income and

Demographic changes have

been pushing inequality

upwards

• Labour market structure

and policy have been

pushing in the other

direction

-0.025

-0.02

-0.015

-0.01

-0.005

0

0.005

0.01

0.015

0.02

Change

Demographic Labour Market

Market Income Tax-Benefit

Av. Change in Inequality due to

components

Shapeley Decomposition

• Shapeley – average 16 potential

pathways

• Large Variability

Market income and TB unambiguously

reducing

Demography and Labour Market mixed

Range Change in Inequality

due to components

Pathways from 2007 to 2012

Labour

Market

Market

Income Policy

Demo-

graphy

Summary and Conclusions

20

Key Lessons

Change in population structure has been slightly inequality

increasing due to increase in education level

Polarisation of Employment increases inequality

Reduced link between education and employment and

increased share of higher education narrows inequality due to

the distribution of market income

Policy effects have been inequality reducing

However intra-distributional changes more nuanced

Conclusions for demography and market sensitive to order

of analysis