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Differences in income inequality across Europe: market driven or....?
The composition of income inequality within Europe has been the subject of various analyses. This paper focuses on income inequality and the sources of the inequality. Decomposing income inequality faces the problem of the uniqueness of the decomposition rule, as laid out in Shorrocks (1982). To counter such problems, this paper uses two measures of inequality: the Gini coefficient and the Squared Coefficient of Variation. Equivalence-scaled gross and net household income in twelve present EU countries is decomposed. This is done in two steps. First, the gross income is decomposed into contributions from imputed taxes and net income. Second, the net income is decomposed into contributions from labour income, capital income and transfers. The latter decomposition is used to point to differences in the importance of market forces, proposing that the extent of influence of market forces on the income sources follow the rank: capital income, labour income and transfers. The last being the least influenced. The paper finds sizeable differences in the levels of taxes and the different income sources across the twelve countries. The decomposition exercise furthermore points to the importance of tax systems in reducing aggregate inequality. There are also important differences in the contribution to inequality from labour market income and capital income, although no clear relationship between market influence and inequality can be found. This may still point to important differences across Europe, although data problems call for caution. Transfers are shown to contribute positively to inequality, which must be seen in the perspective of variation in pension schemes across the countries. The main lesson to take from the paper is therefore the large differences in the composition of income inequality across Europe and a call for caution when using the ECHP panel data for inequality analyses.
Deding, Mette C., Schmidt, Torben Dall (2002 Dec.) 'Differences in income inequality across Europe: market driven or....?', EPAG WORKING PAPERS, 37. Colchester: University of Essex.
Mette C. Deding, Torben Dall Schmidt
Countries included
Austria, Belgium, Denmark, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, United Kingdom
ECHP Waves
1994, 1995, 1996, 1997, 1998
Institutions Involved
Danish National Institute of Social Research, Institute of Border Region Studies, Aabenraa, Denmark
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