István György Tóth (with contributions by Márton Medgyesi and Tamás Keller)

István György Tóth / [email protected] / http://www.tarki.hu

István György TóthIstván György Tóth(with contributions by Márton Medgyesi and Tamás Keller)(with contributions by Márton Medgyesi and Tamás Keller)

Kickoff conference at LSE,19-20 March 2010

Income inequality Income inequality measured and perceived: measured and perceived:

European comparisonsEuropean comparisons


1) Part I: describe and assess the level and background factors of inequality in European countries as measured by EU-SILC

2) Part II: describe and assess the level of tolerance towards inequality in European countries as measured by EU-SILC

3) Part III. conclude

Research question


In Part I we …

- examine the distribution of incomes in EU member states (new and old), with standard methods and assumptions

- test if alternative measures and concepts affect the broad picture

- analyse determining factors of income inequality

Base: and SSO 2009 Annual Report


In Part II we …

- examine the distribution of inequality perceptions in EU member states

- try finding alternative measures for a better fit between measured and perceived (tolerated) inequality levels

- analyse determining factors of inequality tolerance


• For measured income inequalities:

– Eurostat EU-SILC UDB 2007 released XXXXXXX– reference year: 2006– income concept: yearly net household monetary income– country coverage: EU27 – (RO, BG and MT)– Bottom and top coding at 0.1 and at 99.95 percentiles– Research background: SSO, OECD ineq paper,

Tarki international comparisons

• For inequality tolerance • Special Eurobarometer 72xxxx• ISSP • ESS• xxx

Data and definitions


Measured Income InequalityMeasured Income Inequality


Source: Based on data from the Eurostat New Cronos database. http://epp.eurostat.ec.europa.eu/Note: Bootstrap confi dence intervals were obtained by 1,000 replications.

- Statistical margin of error: (overlapping) groups of countries can be identified

- „Unequal”: PT, LV, GR, LT

- „Equal”: SI, SE, DK

- NMS: in the whole spectrum

Gini indices of income inequality and 95% confidence intervals


Alternative Equivalence scales:

•„”OECD II” (1st adult=1, other 14+ members=0.5, all members <14=0.3), which is the default in this paper (e=0.7, approx)•per capita adjustment (adjust for hh size, each member receives a weight of 1)

Results:

Gini (OECD2) < Gini (Per capita)

- The effect of switching is large in countries where initial measured

Gini (OECD2) is lower

- Consequence: based on per capita incomes, country differences are larger

- NMS in both groups

Note: more restrictive scales (e=sqr2) to be investigated

INEQUALITY SENSITIVITY: ALTERNATIVE EQ SCALES


Sensitivity of Gini estimates to the

choice of equivalence scale (1.)

0,20

0,22

0,24

0,26

0,28

0,30

0,32

0,34

0,36

0,38

e=1 e=0.75 OECD II e=0.5 e=0.25 e=0

IE UK DK FI SE

0,20

0,22

0,24

0,26

0,28

0,30

0,32

0,34

0,36

0,38

0,40

e=1 e=0.75 OECD II e=0.5 e=0.25 e=0

EE LT LV


Sensitivity of Gini estimates to the

choice of equivalence scale (2.)

0,20

0,22

0,24

0,26

0,28

0,30

0,32

0,34

0,36

e=1 e=0.75 OECD II e=0.5 e=0.25 e=0

AT BE DE FR LU NL

0,20

0,22

0,24

0,26

0,28

0,30

0,32

0,34

0,36

0,38

0,40

e=1 e=0.75 OECD II e=0.5 e=0.25 e=0

CY ES GR IT PT

0,20

0,22

0,24

0,26

0,28

0,30

0,32

0,34

0,36

e=1 e=0.75 OECD II e=0.5 e=0.25 e=0

CZ HU PL SI SK


Source: EU-SILC (2006)Note: The bottom of the data bars represents the first decile, the top represents the tenth decile and the marks in between show the average incomes of the individual deciles.

- Methods:- Bars connect (Euro, PPP) avg incomes of deciles- Not shown: variance at ends of distributions!!

Conclusion:Ranked by country avg incomes, NMS-s cluster at the bottom (presumably, roughly corresponding to GDP ranking)- Care be taken with PPP (CY vs SE)

The income distributions of the countries of the European Union

(Euros, PPP)


The distribution of the population among the different categories of the overall European

income distribution, by country

Source: Own calculations based on EU-SILC 2006

Findings:-The majority of the population in LT, LV, PL, EE SK, HU belong to the <50%med EU bracket-This ratio in CZ and SI is lower


Note: Percentages are simple country averages.

Age (>5%): North (and CY)Education (>15%): Mediterranean countries (PT, CY, GR), Former socialist countries (HU, LT, SI, PL), + LU, + IEEmployment (>10%): Baltics and Anglo-Saxon countries plus FI, DK, BE, CZ

Percentage of inequalities explained by different factors

in the country groups, 2005


Perceptions and tolerancePerceptions and tolerance


European societies differ very much in their general attitudes towards inequalities. The share of people most dissatisfied with the overall level of inequality is over 70% in LT, HU, SI, EE, BG GR andLV while it is below 40% in DK, NL, AT, IT and MT.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

DK NL AT MT IT UK SE BE IE ES PT LU EU FI PL CZ FR SK DE RO CY LT GR BG EE SI HU LV

Inequality tolerance: are income differences too large?

The share of population who “totally agree” with the question: “Nowadays income differences between people are fir too large”. Source of date: Special EuroBarometer, 2009.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

CZ DK NL SK UK PL IT BE AT LU PT EU EE DE FR ES LT FI SE IE BG RO SI MT LV CY HU GR

Preference for redistribution – Government should reduce income levels

The “preference for (vertical) redistribution” is strongest in some Eastern European countries, including HU and LV and Latvia, while in some other former transition countries (CZ, SK) this share shows among the lowest in Europe

The share of population who “totally agree” with the question: “Government should ensure that the wealth of country is redistributed in a fair way”. Source of date:

Special EuroBarometer, 2009.


Inequality intolerance and redistributive preference correlates, with some exceptions. In GR, HU and CY, the frustration with inequality levels is coupled with a high strain on government, while in PL, SK and CZ the relatively lower level of inequality intolerance is coupled with some of the lowest level of popular redistributive preferences.

The relationship between inequality tolerance and redistributive preference

Y axis: The share of population who “totally agree” with the question: “Government should ensure that the wealth of country is redistributed in a fair way”. Source of date: Special EuroBarometer, 2009.X axis: The share of population who “totally agree” with the question: “Nowadays income differences between people are fir too large”. Source of date: Special EuroBarometer, 2009.


Inequality attitudes correspond only loosely to actual inequality levels. The level (and severity) of poverty seems to be a closer proxy to what people associate with “inequality” as the correlation for poverty rate and poverty gap is higher with inequality (in)tolerance.

Inequality tolerance (2009) and Gini coefficient (2008)

Y axis: The share of population who “totally agree” with the question: “Nowadays income differences between people are fir too large”. Source of date: Special EuroBarometer, 2009.X axis Gini coefficient 2008. Source of data: Eurostat New Cronos Database.


Tests for …

Alternative measures S80/S20relative poverty rate and gap employment and wage differentials by education

Averageing over years

Spell (quasi panel) analysis


Results

inequality attitudes correspond only loosely to actual inequality levels

the level (and severity) of poverty seems to be a closer proxy to what people associate with “inequality” (the correlation for poverty rate and poverty gap is higher with inequality (in)tolerance

people make their judgements about levels of inequalities based on perceived poverty levels, rather than on the basis of some abstract inequality concepts

using period averages may help sorting out distortions caused by measurement error

a change in poverty levels may provoke higherredistributive preferences but much depends on national contexts


Poverty rate and redistributive preference

Y axis: Redistributive preference is the share of population who “agree strongly” or “agree” to the question whether “Government should reduce differences in income levels”. Source of data: ESS 1st wave, ESS 2nd wave, ESS 3rd wave(2002-2006).X axis: At risk of poverty rate (cut-off point: 60% of median equivalised income after social transfers) between 2002 and 2006. Source of data: Eurostat New Cronos Database.


Poverty gap and redistributive preference

Y axis: Redistributive preference is the share of population who “agree strongly” or “agree” to the question whether “Government should reduce differences in income levels”. Source of data: ESS 1st wave, ESS 2nd wave, ESS 3rd wave(2002-2006).X axis: Relative median at-risk-of-poverty gap. The difference (in %) between the income of persons below the at-risk-of-poverty line and the at-risk-of-poverty line (cut-off point: 60% of median equivalised income after social transfers) between 2002 and 2006. Source of data: Eurostat New Cronos Database.


•There are significant cross country differences tolerance for inequalities

•It is not only country averages but also the internal distribution of preferences vary across countries

•In addition to objective income position, subjective mobility experiences and prospects, reference roups (comparison incomes) all matter

•Tolerance for inequality also contributes to demand for redistribution: in addition to self interest motives (income position, POUM, risk aversion) and to exogenous values (over individualism in society and over altruistic and reciprocity motives)

•This is a growing and interesting area research area.

Conclusion


Table 1.1 Trends in poverty in countries with low, medium and high levels of poverty

Period: 1995–2001 Poverty trend

Decline No significant change or unclear trend

Increase

Level of

poverty

Low Denmark, Luxembourg,Netherlands,Sweden

Finland

Medium Austria,Belgium, Germany

France

High Italy, Greece, Portugal

Spain, UK

Ireland

Notes: (1) Low poverty level: poverty rate<12; medium poverty level: 12<poverty rate<18; and high poverty level: poverty rate>18. (2) Increasing/declining trend: poverty rates increased (declined) in minimum two consecutive years or by minimum 2%.


Table 6.1 Magnitude and direction of change in the variables examined between 2000 and 2005

Country Gini coefficient

00/05

Poverty rate 00/05

GDP PPS 00/05

AT 0 + 0

BE 0 ++ 0

BG - -- +++

CY .. .. 0

CZ 0 +++ ++

DE + ++ 0

DK + ++ 0

EE - 0 +++

ES - + +

FI 0 ++ 0

FR 0 0 0

GR 0 0 ++

HU ++ ++ ++

IE ++ -- +


Country Gini coefficient

00/05

Poverty rate 00/05

GDP PPS 00/05

IT ++ + --

LT ++ ++ +++

LU 0 ++ +

LV ++ +++ +++

MT .. .. -

NL 0 - 0

PL + ++ +

PT 0 - 0

RO + ++ +++

SE + + ++

SI + + ++

SK .. .. +++

UK - + 0

Table 6.1 Magnitude and direction of change in the variables examined between 2000 and 2005


Figure 6.6 The change in the Gini coefficient and the change in GDP PPS per capita, 2000-05

DK00

IE05

NL00NL05

PL00

PT00PT05

BE00BE05

BG00

BG05

CZ00 CZ 05DK05DE00

DE05

EE00

EE05

IE00

GR 00

GR 05

ES00

ES05

FR 00F R05

IT 00

IT05

LV99

LV05

LT00

LT 05

HU00

HU04

AT 00AT05

PL05

RO00

RO05

SI00

SI05

F I00

FI05

SE00SE05

U K00

UK05

20

25

30

35

40

20 40 60 80 100 120 140 160

GDP per capita in Purchasing Pow er Standards

Gini coeffic ient .

? Data 2000

? Data 2005


Figure 6.7 The change in the poverty rate and the change in GDP PPS per capita, 2000-05

DK00

IE05

GR00

AT00

PT05

SI00

BE00

BE05BG00

BG05

CZ00

C Z05

DK05DE00

EE00EE05

IE00GR 05

ES00

ES05

F R00/DE05/FI05FR05

IT 00IT05

LV99

LV05

LT00

LT 05

HU00

HU04

N L00

NL05

AT05

PL00

PL05

PT 00

RO00

RO05

SI05

FI00

SE00

SE05

UK00UK05

5

10

15

20

25

20 40 60 80 100 120 140 160

GDP per capita in Purchas ing Pow er Standards

Pov erty rate

? Data 2000

? Data 2005


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Documents

István György Tóth (with contributions by Márton Medgyesi and Tamás Keller)