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Decomposing the Drivers of Changes in Inequality during the
Great Recession in Ireland
Cathal O’Donoghue, Jason Loughrey
H...
Objectives of Presentation
 Impact of the crisis has been multi-
dimensional
 Labour Market
 Incomes
 Prices
 Tax-Ben...
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...
Change in Inequality
0.25
0.27
0.29
0.31
0.33
2002 2004 2006 2008 2010 2012 2014
Disposable (Data)
Equivalised Disposable ...
Decomposition: Methodology
Decomposition
 Cowell and Fiorio (2011)
 A priori approaches (Shorrocks 1982, 1983)
 Factor
 Sub-Group Decomposition
...
Methodological Approach
 Disposable Income
 Tax-Benefit System T(), B() modelled using Tax-Benefit Microsimulation
Model...
Methodological Approach
 Estimate system of equations representing
 Z Demographic and Data Sampling Error
 Ii() Presenc...
Population and Market Drivers
Summary Statistics Distributional Drivers
 Reduction of those of pension age and a substantial increase of those of
worki...
Policy Drivers
Budget Constraint for a married couple with children 2007-2013
(Adjusted for CPI)
20000
25000
30000
35000
40000
45000
5000...
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
200...
Results 1: Fields Decomposition
Fields Decomposition
 Explanatory power of the model is
relatively high in 2007 at about 50%
 Declined about 15% between...
Results 2: Oaxaca-Blinder-Bourguignon Decomposition
Education-Income Drivers – Equation Coefficients
 Reductions in the relationship between Education and
 Presence of Empl...
Change in Inequality
• Decomposing inequality
changes into effects 2007-2012
• Market Income and
Demographic changes have
...
Shapeley Decomposition
• Shapeley – average 16 potential
pathways
• Large Variability
 Market income and TB unambiguously...
Summary and Conclusions
20
Key Lessons
 Change in population structure has been slightly inequality
increasing due to increase in education level
 ...
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IEA Presentation v1

  1. 1. 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
  2. 2. 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 EmploymentRate 500 550 600 650 700 750 800 850 900 AvEarnings • 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)
  3. 3. 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 Single Tax Credit Industry Hotel & food Financial Public admin Health • Benefits growing faster than CPI • Earnings mainly growing less than CPI
  4. 4. 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
  5. 5. Decomposition: Methodology
  6. 6. 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)
  7. 7. 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
  8. 8. 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
  9. 9. Population and Market Drivers
  10. 10. 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
  11. 11. Policy Drivers
  12. 12. 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 DisposableIncomeperYear 2007 2008 2009 2010 2011 2012 2013 2014 • Budget Constrain lower and flatter reflecting reduction in living standards and more redistributive system
  13. 13. 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
  14. 14. Results 1: Fields Decomposition
  15. 15. 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
  16. 16. Results 2: Oaxaca-Blinder-Bourguignon Decomposition
  17. 17. 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)
  18. 18. 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
  19. 19. 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
  20. 20. Summary and Conclusions 20
  21. 21. 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

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