Monday, February 22, 2021

Tiger phases of income inequality

A feature of the distribution of disposable income in Ireland over the past 20 years is how stable the standard measures of inequality have been, even as the economy has swung from boom to bust. Income inequality in Ireland is lower than it was in the 1980s and early 1990s (and likely much lower than it was in the 1970s) but measures such as the gini co-efficient appear to have been largely unchanged since 2000.

Gini Coefficient Ireland 1995-2019

Indeed, given the confidence intervals of the estimates it is likely that very few of the annual changes gave rise to a significant change in inequality.  In recent years, the confidence intervals have been of the range +/- 0.7 or 0.8.  This means there would have to be an annual change in the gini coefficient of 1.5 points, or more, in order for there to be a statistically significant change in inequality in a single year.

The lack of annual changes that are significant is probably no surprise.  Yes, inequality is impacted by conditions in a particular year but it is also the result of policies and outcomes going back several years, maybe even decades.

A sequence of changes in the same direction can result in a significant change in inequality.  For example, if the Irish gini coefficient was to start at a particular level and fall by one point in each of the following two years, then it is likely that neither of the annual changes would be considered significant (the confidence intervals for adjacent years would overlap) but the change over the two years would be significant (the confidence intervals for the starting and final years would not overlap).

With the above chart it is hard to set out any narrative for income inequality in Ireland apart from stating that inequality now is lower than it was in the 1990s.  But maybe we can extract a tale or two if we make a couple of adjustments:

  • truncate the vertical axis so that the changes are highlighted
  • calculate a three-year trailing average to smooth out some of the volatility in the single-year estimates.

By doing the above (and adding some annotation) we get the following:

Gini Coefficient Ireland 3YMA 1997-2019 Phases

These are the estimates available from Eurostat.  There is no estimate for 2002 so the figures in the above chart for 2002,2003 and 2004 are based on an average of two rather than three years.

The changes are now somewhat exaggerated (as the vertical axis is so narrow) but we can fit a narrative that links changes in inequality to the widely varying performance of the Irish economy over the past 25 years.  And given the confidence intervals of the individual-year estimates it is likely that the peak-to-trough changes shown in this chart are significant.

We start with the “good tiger” phase of the 1990s when the Irish economy underwent a transformation with a huge expansion in employment opportunities and strong income growth based on increased output and exports.  This period saw a relatively steep fall in the inequality of disposable income.

Then we enter the “bad tiger” phase of the early 2000s with a credit-fueled, construction dependent economy and significant net inward migration.  This period was accompanied by a rise income inequality though with around half of the gains of the late 1990s reversed.

It didn’t last and the “sick tiger” began to cough and splutter in 2008 as the credit binge came to an end.  Initially the crash led to fall in inequality perhaps as some of the high incomes of the boom evaporated but as the economy continued through recession and austerity inequality rose as we moved in the early 2010s.  Again, the rise saw about half of the reductions in equality of the preceding fall reversed.

Eventually, the “sick tiger” was replaced by the “recovering tiger”.  From 2014 on, there was a return to strong employment growth and even some modest wage inflation.  Without needing the stimulant of credit to act as a P.ED., this period seemed to mirror the performance of the economy in the 1990s though this time the reduction in inequality was at a slower rate.

Still, the outcome of the rollercoaster was that, at the end of the 25 years, disposable income inequality in Ireland was at its lowest ever measured level in 2019. 

Of course, the “recovering tiger” has been replaced by the “covid tiger”.  It is really difficult to tell what impact the pandemic will have on income inequality in Ireland.  Many households have seen their income largely unchanged (social welfare recipients, many employees, some self-employed). 

Other households have suffered very large income shocks – though state supports such as the PUP, TWSS and variants have meant that there continued to be strong growth in aggregate household disposable income in 2020.

It could be 2020 from an inequality perspective is much like most of preceding 20 years and will not have a statistically significant change in inequality.  We know that the hardest-hit sectors have been in the services part of the domestic economy.  These sectors have a higher share of low-paid workers.  But we also know, that:

  1. Low-paid workers are in households right across the distribution of disposable, and
  2. The income replacement rates for low-paid workers on the PUP and TWSS will be higher.   

It will be some time yet before we have updated inequality statistics for 2020 (and the CSO will also be working to ensure consistency with previous estimates) but, at this remove, as good a guess as any would that there will not be a statistically significant change in the gini coefficient in 2020.  Maybe.

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