Isolating the effect of various influences on income inequality is of policy importance. Traditionally, comparison studies explored the changes of inequality through the lens of summary indices. This method however, can be crude because the intertwined nature of the tax policies and the market income distribution creates a complex nonlinear pattern than cannot be fully captured by indices. We propose a unified simulation framework for exploring the drivers of the cross-national differences in the distribution of household disposable income, focusing on the role of tax-benefit systems, employment structures and market returns and demographic structures. Our framework extends the methodology by developing a household income distribution, which incorporates a flexible parametric approach of modelling market incomes, the complexity of tax-benefit rules through micro-simulation (EUROMOD), and the integration of the labour supply behaviours. The result is an integrated framework across countries for generating and simulating the distribution of household disposable income under alternative scenarios, thereby enabling the study of the various drivers of the cross-national distributional differences in household disposable income. We apply the method through the analysis of two European countries–the UK and Ireland–that share many similarities, while displaying at the same time sufficient differences to merit understanding more clearly of the factors that have resulted in different levels of inequality. The direct effect of the differences in tax-benefit rules between the two countries accounts for roughly half of the observed difference in income inequality. The Irish tax-benefit system is more redistributive than the UK system due to a higher tax progressivity and more generous average transfer rates. These differences are largely attributable to policy differences, but also to differences in market income distribution. Market income distributional differences reinforce the net redistributive policy effect via the market composition and demographic differences.
|Title of host publication||7th ECINEQ Meeting|
|Editors||Frank Cowell, Jacques Silber|
|Place of Publication||Roma, Italy|
|Publisher||Society for the Study of Economic Inequality|
|Number of pages||48|
|Publication status||Published - 2017|
|Event||Proceedings of the Seventh ECINEQ meeting 2017 - City University of New York, Manhattan, United States|
Duration: 17 Jul 2017 → 19 Jul 2017
|Conference||Proceedings of the Seventh ECINEQ meeting 2017|
|Abbreviated title||ECINEQ 2017|
|Period||17/07/17 → 19/07/17|
Sologon, D. M., Kerm, P. V., Li, J., & O'Donoghue, C. (2017). Cross-National Differences in Income Inequality: Isolating the Roles of Demography, Market Returns, Policy and Labour Supply. In F. Cowell, & J. Silber (Eds.), 7th ECINEQ Meeting (pp. 1-48). Roma, Italy: Society for the Study of Economic Inequality.