Wednesday, 18 February 2015

Getting Beneath the Surface of Gross versus Net Income Inequality

Nat O'Connor: TASC's new report, Cherishing All Equally: Economic Inequality in Ireland, is designed to provoke deeper debate about what is and is not working in Irish economic and social policy.

The report points to the international debate on the problematic growth of income and wealth inequality to show that the issue is important and needs to be talked about in a different manner. Part of the problem in Ireland is that any mention of inequality is treated as left-right politics as opposed to a description of a major social or economic problem that merits serious analysis by everyone in the political spectrum. (An 'inconvenient truth' about our economy perhaps?)

One of the technical puzzles highlighted in the report is why does Ireland have such high gross inequality of wages and salaries before welfare reduces net inequality to EU average levels.

First of all, here’s what John FitzGerald (TCD, formerly ESRI) had to say on this point: "A really important research question, to which I do not have an answer, is why market incomes in Ireland are the most unequal in the OECD area. That is the puzzle. The welfare and taxation systems have to do considerable running to make a really big difference. I do not know whether the members have an answer to the question. It is an important question that deserves a response but I am afraid I cannot answer it." (Oireachtas Joint Committee on Education and Social Protection)

Unfortunately, despite its length, the report only scratches the surface of some of the complex issues to do with economic inequality. We wanted to describe and join the dots rather than get into theory. Nonetheless, my best guess of why Ireland has such high pre-tax pre-welfare income inequality is as follows:

1. The relatively large number of jobless households in Ireland means that when gross income in counted there are a lot of zero or near-zero household incomes. That affects the calculation of the Gini coefficent and makes Ireland more unequal than other countries that might have similar wage differences but fewer people on zero incomes.

Explaining jobless households requires much more in-depth analysis, but most of the people affected are not unemployed but are people unable to work due to disability, long-term illness or care duties. Part of the explanation is probably due to the social and economic exclusion of people in peripheral social housing estates in the larger urban areas (Dublin, Limerick, Cork) where there was a lack of support service infrastructure to get people into working lives. I would also note that in Eurostat statistics Ireland does poorly for employment of people affected by disability.

2. Ireland has a smaller proportion of the working age population in work (65.5% in 2013) compared to the EU average of 68.4%. And many North West European countries with comparable wage differences have employment levels of 70% to 80% or more (Eurostat). So Ireland's Gini coefficient of market inequality will also be affected by the somewhat smaller labour force.

Ireland does not subsidise childcare, which means many parents can’t work (mostly women). That means more zero-income stay-at-home parents whose earnings would have been more than offset by childcare costs. In other countries, both the childcare workers and more parents would have non-zero earnings, because childcare is affordable to more people.

3. There seems to be a big contrast between wages in MNC and IFSC jobs compared to non-Dublin domestic jobs. Top pay among professionals and senior public servants also may skew the distribution. Likewise, the work done by younger people with third level degrees is high value add and higher paid, compared to traditional work done by middle and older generations, many of whom had limited secondary education never mind third level.

4. There may be a lack of ‘mid-high income’ jobs (40-70K) due to the relative lack of manufacturing/light industry compared to other countries. The chance of getting a ‘high skill’ as opposed to ‘high education’ job was always less in Ireland than in more industrial countries. The high rate of young people not in education, training or employment in Ireland compared to Germany shows the effectiveness of the German system of apprenticeships in providing an alternative pathway for people for whom more academic third level education is not suitable.

5. We have under-development of the economy in many parts of Ireland (e.g. a lack of middle-income manufacturing or services jobs, based in turn on weak infrastructure). Weak local government helps explain the lack of development as well as the clustering of foreign direct investment in only some regions.

6. The tax systems in North West European countries seem to deter higher gross pay, as much more of it will be taken in tax. Higher tax and social insurance creates incentives for employers to hire more people or keep the money for investment, rather than paying out tens of thousands of euro in order to create a post-tax incentive for a executives or professional employees. (Evidence of this is in the tables on pages 20-21 of the report, which show that NW European countries have seen much less growth in the top 10% of gross/market incomes).

It’s hard to weight these factors, and there may of course be additional factors. But this is where I’d start when trying to explain the underlying market inequality in the distribution of wages, salaries, etc. in Ireland.

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