The Definition Market Income and the Decline in its Inequality

An earlier post looked at the recent decline in the inequality of market income in Ireland. The latest updates of SILC estimates from Eurostat show that this has been maintained. Eurostat now have 2023 SILC estimates for most EU Member States – though for income it should be noted that the reference period for income in the SILC is the previous calendar year.  Thus, Eurostat’s 2023 figures for income inequality are the result of household incomes in 2022.

We start with Eurostat’s S80/S20 quintile share ratio for what it terms Gross Market Income. By this measure Ireland continues to have the highest inequality in the EU15 (the UK figure that is slightly higher than the 2023 outturn for Ireland is from 2018 – with no subsequent figures available from Eurostat due to Brexit etc.).

Given the vertical scale required to include the estimates for Ireland, it is pretty much impossible to see what has happened in other countries, though the legend reflects the ranking of the latest estimates.  Ireland has a peak value of 95 (for 2013) while the highest value for the other countries shown is 20 (the UK in 2012).

To get a better picture of where things stand now here are the 2023 estimates for all 27 EU Member States.

At 12.8, Ireland has the highest quintile share ratio for Gross Market Income in the EU. If the EU was considered a single entity, the aggregate outcome would be 9.3, pushed up by the relatively high value for large countries such as Germany and France.  The arithmetic mean across the EU27 countries is 8.5.

As with all indicators, definitions matter, and the definition of Gross Market Income used by Eurostat may be a bit wider than we might expect.  Here are the income components from the SILC that are included by Eurostat in Gross Market Income:

Nothing stands out until we get to the bottom.  Eurostat’s measure of Gross Market Income includes all old-age and survivor’s benefits.  Typically, we might expect only income from occupational and private pensions to be included as market income. Eurostat include all pension income including means-tests and non-contributory payments from national welfare systems in what they call Gross Market Income.

This differs from agencies such as the CSO and OECD who only include income from occupational and private pensions in their definitions of market income.  The CSO’s national definition of market income can be found here, with the OECD approach set out in this document (see page six).  And while they have similar treatments for occupational and private pensions their definitions of market income do differ slightly in other regards.

There is nothing wrong with Eurostat’s approach – it’s just a case of being conscious of what is included.  Indeed, absent the inclusion of all pension income, calculating a quintile share ratio for market income would not be very useful as the estimates would be large and likely volatile.  For most countries, given old-age population ratios, there would likely be a large share of the bottom quintile with no market income if the only pension income included was from occupational and private pensions.

To illustrate this, here is the CSO’s latest Lorenz curve for market income using the national definition:

The horizontal axis is the percentile of the population ranked from lowest income to highest income.  The Lorenz curve for market income remains at zero up until the 13th percentile of the population – one-eighth of the population are in households with no market income.  The income share only reaches two percent by the 20th percentile.  The share of the top quintile is 48 percent.  Thus, using the national definition of market income, the S80/S20 ratio is around 24.  If would have been much higher – and possibly indeterminate – for the period 2010 to 2012.

With other EU countries having higher old-age dependency ratios it is possible that using the CSO (or OECD) definition these countries could have even higher outcomes than 24 for their S80/S20 ratios for market income (excluding old-age transfers).  Given the small amount of market income in the bottom quintile under this definition these quintile share ratio estimates could also be very volatile and not very useful.

As we have seen above, when all pension transfers are included as with Eurostat’s definition the quintile share ratio of gross market income for Ireland comes in, not at 24, but at around half that at 12.8, with most countries showing far less volatile outcomes than Ireland.

Unlike the quintile share ratio which uses parts of the distribution, an inequality indicator that takes into account the full population distribution is the gini coefficient.  Unfortunately, Eurostat don’t publish a gini coefficient for their definition of gross market income.

The closest is one they publish for disposable income before social transfers (pensions excluded from social transfers).  The main difference between this and gross market income is that income taxes and social insurance contributions are deducted.  Like gross market income all pensions are included. Here are the latest outturns from Eurostat.

Given what we have seen above for the quintile share ratio and it is not surprising to see Ireland has one of the highest outturns for this indicator.  It is likely the impact of Ireland’s progressive tax system that pulls the Irish figure down from the top spot but it is still the fifth highest.

Eurostat have a related gini coefficient for disposable income before social transfers (pensions included in social transfers).  In this instance pensions are excluded from income.  From Eurostat, this is the measure that is perhaps closest to market income but it still has differences: income taxes and social contributions are deducted while income from private and occupational pensions are not included.

Here we see Ireland has a very different relative position. Excluding all pensions, Ireland has a relatively low level of disposable income inequality and indeed has the lowest in the EU15.  However, if taxes weren’t deducted as they are here, it is likely that Ireland’s relative position would be significantly higher if we wish to look at market income.

All in all, it may that the range of indicators provided by Eurostat, while useful, may not fully hit the mark if we wish to focus on the distribution of market income.  Eurostat’s quintile share ratio for gross market income is useful but the income definition used is possible broader than we might like.

There is no single indicator or particular definition that is supreme but the one that may be most useful here is the gini coefficient for market income produced by the OECD.  Their latest estimates (2021 for most countries) place Ireland as having the eighth highest inequality of market income in the OECD (and fifth among EU Member States in the OECD).

It can also be seen how close many of the estimates are.  If would not take a huge reduction to bring Ireland’s estimate down to the level of Austria (0.51 versus 0.49) which would move Ireland to 16th, or pretty much mid-ranking in the OECD.

However, given the above discussion we know that pensions and the old-age dependency ratio can have a significant impact on population-wide measures of income inequality.  As Ireland has a relatively low old-age dependency ratio we might expect the inequality of market income to be lower here.  However, the relatively low old-age dependency ratio is offset by a relatively high child-dependency ratio – thus the working-age share of the population is broadly in line with peers.

That no single indicator is supreme can be further developed by considering different age cohorts of the population.  The OECD only give a single indicator for the inequality of market income – the gini coefficient.  However, they do give it by different age groups.

For market income it might be instructive to look at inequality among the working-age population, i.e., those aged 18 to 65 years.  This strips out the effect of pensions and the old-age dependency ratio.

What we see is a picture that isn’t much changed.  In the latest figures, Ireland has the seventh-highest inequality of market income in the OECD with the gap to the middle largely the same – though it can be noted that Ireland is the highest among EU Member States in the OECD.

Whether Ireland actually will move towards the middle remains to be seen. In the last decade the OECD’s population-wide gini coefficient for market income in Ireland has gone from close to 0.60 to around 0.50, but all of that fall was pre-COVID.  Since 2020, the gini coefficient for market income has not been falling.

With the latest OECD data not extending beyond 2021 there are still some COVID impacts to wash out of their estimates. The CSO’s estimates extend one year beyond those of the OECD – to income reference year 2022.

The CSO figures point to the gini coefficient for market income (reference year 2022) now being back to where it was pre-COVID (2019).  The estimates from SILC 2024 which will reflect household incomes in 2023 will give us a better indication of where things stand post-COVID.

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