Ireland’s Inequality of Market Income moves towards OECD average

One of the notable features of the distribution of income in Ireland in the decade after the crash of 2008 was the unusually high level of inequality of market income.  See this previous post for some discussion of definitions.

Using estimates from the OECD, the gini coefficient for the distribution of market income reached almost 0.60 in the years after 2008 and was the highest in the OECD (and also the EU). However, since then the gini coefficient for market income has declined and the latest update from the OECD shows the estimate falling below 0.50 for the first time.

The distances between the ginis are indicative of the impact of transfers on income inequality (from market income to gross income) and of taxes (from gross income to disposable income).

The impact of transfers rose considerably in the crash, as 300,000 jobs were lost and many became reliant on unemployment-related and other transfers.  With the onset of the recovery, the impact of transfer reduced as the numbers working rose with a related fall in the numbers on unemployment supports.

Using OECD estimates for 2010, it can be seen from the difference between the gini coefficient for market income and for that for gross income, that transfers reduced the gini coefficient by 0.21 points. By 2016, this had fallen to 0.16 with a further reduction to 0.13 in 2022 which is the lowest it has been put at in the series.

On the other hand, looking at the difference between the gini coefficient for gross income and that disposable income,  the impact of taxes on income inequality is estimated to have increased in the past 20 years, from 0.05 points in 2004 to 0.08 at the latest estimate.

Here is where the estimate of the gini coefficient of market income for Ireland sits relative to the 41 other members of the OECD. 

It can be discerned how much of outlier an estimate close to 0.60 would be.  But the latest estimate for Ireland below 0.50 moves Ireland relative position towards the middle of the OECD ranking.  Ireland is now 13th of the 42 OECD member states and converging on the arithmetic average for the OECD of 0.47.

Ireland remains below the OECD average for the gini coefficient of disposable income with a 2022 estimate of 0.29 compared to an OECD average of 0.32.  This means the impact of transfers and taxes in Ireland remains high in EU terms, with their combined impact the fourth highest in the OECD (and also in the EU).

The impact of transfers on the gini coefficient in Ireland is now close to the OECD average, 0.13 in Ireland versus an arithmetic average of 0.12 across the OECD.  It is for the impact of taxes that Ireland continues to stand out.

In 2022, Ireland’s gini coefficient for disposable income was 0.075 points lower than that for gross income. No other country showed a reduction in inequality due to income taxes and social contributions as large as this.

Finally, given the impact of demographics, old-age dependency ratios and pensions, here is the gini coefficient for market income for those who are most likely to be in receipt of it – the working age population from 18 to 65 years.

Ireland is eighth-highest in the OECD, though the gap to the OECD average is modest. Among EU member states, only France and Greece have higher estimates but is within a couple points of five or six more.

The CSO use a slightly different definition of market income (and also report gini coefficients as percentages) and their latest estimates from the 2024 SILC (which will be used for 2023 by the OECD) point to a further recent reduction in the gini coefficient for market income.

If this reduction is reflected in due course in the OECD estimates then Ireland’s gini coefficient for market income may very well have moved to OECD average.

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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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The Recent Decline in the Inequality of Market Income in Ireland

One feature  of how the inequality of disposable income is determined in Ireland has been the recent decline the in the inequality of market income. Market income is typically defined as including wages, rents, dividends, interest and typically certain pension income such as from private and occupational pensions.

Here is the OECD’s estimate of the gini coefficient for market income in Ireland since 2012 (chart crime incoming):

In the OECD’s dataset, the figure for the latest year, 2021, corresponds to the household survey undertaken for SILC2022.  The reference year for income in the SILC is now the previous calendar year and this is the year the OECD use in their database.  The 2022 outturn for Ireland will be based on the survey done for SILC2023. It should also be noted that in SILC2023 the CSO revised their SILC results for 2020 to 2022 (due to the population findings of the Census) though the impact of the revision on the main measures of income inequality was modest.

The recent reduction in Ireland of the inequality of market means Ireland no longer has the highest gini coefficient for market income in the OECD.  The latest estimates show that France, Italy, Finland and the U.S. among others have higher gini coefficients for market income, with Ireland eighth highest.

It should also be noted that although the inequality of market income has been declining in Ireland for the past decade it has been lower previously – with lower gini coefficients estimated for the late 1990s/early 2000s.

The chart below has the recent outturns for Ireland and a selected set of OECD countries, showing Ireland losing its outlier status (and is also a chart having the vertical axis more appropriately start at zero).

We can start to get some insight into the nature of the fall in the inequality of market income in Ireland by looking at income shares.  These can be determined using the information in the ESRI’s PILSReP Database. 

Here are the quintile shares in the SILCs for selected years since 2013:

It can be seen that the market income share of the top 20 percent declined from 57 percent in 2013 to 50 percent in 2021.  The offsetting share increase can be seen for the bottom three quintiles. The share of market income going to the bottom 60 percent increased from 16.5 percent in 2013 to 23.4 percent in 2019.

We can get more granular detail on this change by looking at the Lorenz curves – a plot of cumulative shares by the cumulative population.  Here are the Lorenz curves for the distribution of market income in the 2013 and 2021 SILCs (again using figures from the ESRI’s PILSReP spreadsheet):

The most significant change happened at the bottom where there was a large reduction in the number of zeroes (i.e. non-recipients of market income).  In the 2013 distribution of market income, a cumulative share of one percent was not reached until the 33rd percentile.  By 2021, this was reached by the 24th percentile (with the 33rd percentile having a cumulative share of 4.1 percent).

The 2013 Lorenz curve remained at zero until the 22nd percentile; the 2021 distribution was zero until the 13th percentile.  The recovery and expansion of employment significantly reduced the number of zeroes in the distribution of market income.

The associated reduction in unemployment also means that the impact of transfers on income inequality has also fallen.  We can see this if we return to OECD data and look at their gini coefficients for market income, gross income (market income plus transfers) and disposable income (gross income minus taxes and social contributions).

For 2012, the OECD put the impact of transfers on Ireland’s gini coefficient at 0.20 points, reducing the gini coefficient from 0.58 for market income to 0.38 for gross income.  The impact of taxes further reduced the gini coefficient by 0.07 points, giving the gini coefficient of 0.31 for disposable income.

For 2021, the impact of transfers reduced to 0.15 points (due to there being fewer recipients of unemployment related transfers).  Transfers reduced the gini coefficient for market income from 0.51 to 0.36 for gross income.  The impact of taxes was largely unchanged again reducing the gini coefficient by 0.07 points, giving the gini coefficient for disposable income of 0.29.

Thus, while there was a reduction of .07 in the gini coefficient for market income, this translated into a reduction of “only” 0.02 in the gini coefficient for disposable income, due to the reduced impact of transfers. 

We can use the OECD to examine the impact of transfers and taxes on income inequality in all OECD member states in 2021 (or the latest available year in the dataset).

For 2021, the combined impact in Ireland of transfers and taxes on income inequality was the fourth highest among OECD countries.  For transfers, Ireland was eighth highest, with transfers in Finland, France, Greece, Belgium, Austria, Poland, Italy and Czechia all having a bigger impact on inequality. 

For taxes and social contributions, Ireland continues to stand out, with the 0.07 point reduction in Ireland having the largest impact on income inequality in the OECD.

Eurostat also provide measures of market income inequality.  One of these is an S80/S20 quintile share ratio for gross market income.  The outturns of this quintile share ratio for Ireland have shown a remarkable reduction in recent years; falling from almost 100 in 2013 to around 15 now.

The huge swings in this measure, at least for Ireland, indicate that it is sensitive to small changes at the bottom of the distribution.  It was the relatively high number of zeroes in the distribution of market income in Ireland that gave rise to the exceptionally high outturns up to 2013 for this measure.

One can imagine the top 20 per cent/bottom 20 percent ratio being something like 50/0.5 in 2013 (giving an answer of c.100) and this moving to something like 50/3.5 in recent years (giving an answer of c.15).

This is a relatively small change in the share of the bottom 20 percent (from 0.5 percent to 3.5 percent) but it has a marked impact on the outturn for the quintile share ratio.  And even with this reduction, Ireland remains the highest in the EU for this measure.

We could calculate a similar quintile share ratio using the shares of market income from the ESRI estimates in the table provided earlier.  But the answer would be very very different, i.e. over 100 for recent years (50.3/0.4 = 127, for 2022), rather than the 15 shown in the Eurostat results for 2022.

The reason for the difference is due to the income definitions used.  The CSO (and the OECD) only include private and occupational pensions in their measure of market income.  For their measure of gross market income, Eurostat include all old-age transfer payments.  This includes state pension benefits such as means-tested and non-contributory pension benefits and all survivors pension benefits.  This is based on the concept of pension income being a part of lifetime earnings.  Outside of private and occupation pensions, the CSO (and the OECD) count pension income as a social transfer, i.e., not part of market income.

Ireland’s gross market income quintile share ratio is high because of the relatively high number of non-recipients of market income and the relatively low number of pensioners.  It has been found that excluding zeroes, Ireland “lies around mid-table in terms of market income inequality” in the EU. 

It is also the case the estimates of market income inequality have tracked the estimates of quasi-jobless households (households with very-low work intensity where less than one-fifth of the available time is worked).  For a considerable period, Ireland had the highest share in the EU for population aged under 60 living in households with very-low work intensity. This has not been the case since 2018.  The lower level of quasi-jobless households is linked to the lower level of market income inequality – both are estimated using the SILC.

Eurostat also provide a number of gini coefficients.  All of these are after income taxes and social contributions have been deducted but then vary in the amount of social transfers that are included.  Eurostat provide three gini-coefficients:

• Disposable income before all social transfers
• Disposable income including pension transfers
• Disposable income including all transfers

The final one is just the standard disposable income while the first is akin to market income after taxes.  Here are the estimated gini coefficients across the EU15 for disposable income before all social transfers: 

By this measure of market income inequality, Ireland has had, in recent years, one of the lowest levels in the EU15.  This is after taxes and social contributions have been deducted and again we note that in Ireland these have the biggest impact on the gini coefficient across both the OECD and EU.

Taxes alone are unlikely to account for Ireland’s relative position here, which is at odds to what we have seen for other measures of market income inequality, such as the quintile share ratio.  The difference in results suggests the definitions used are important. The quintile share ratio is determined using gross market income. 

As discussed above this includes all pension income.  The previous chart excludes all pension income.  This would suggest that pension income has a significant impact on Ireland’s relative position using the quintile share ratio for gross market income. 

We can see this if we look at the gini coefficient after adding in pension income.

So, after taxes and before all transfers, Ireland has a relatively low gini coefficient across the EU15.  Once pensions are added in, Ireland has one of the highest gini coefficients in the EU15 (with the higher UK estimate in the above chart going back to 2018 when the UK last provided data to Eurostat).  Eurostat quintile share ratio for gross market income includes all pension income which may go some way to explaining Ireland’s relatively high outturn for that measure (due to Ireland having a lower old-age dependency ratio).

This highlights that the impact of pensions is key to the transition from the distribution of market income across the population to that of disposable income.  We don’t get much insight into this from the OECD’s income inequality estimates. 

However, we can examine it if we look at the three gini coefficients provided by Eurostat at the same time.  Here they are for Ireland since 2012:

In line with earlier results we see a decline in the gini coefficients from Eurostat for those income measures most closer aligned with market income.  The gini coefficient for disposable income before all transfers declined from 53.5 in 2012 (Eurostat uses the 0-100 scale) to 47.0 in 2022.  The gini coefficient for disposable income including pension transfers declined from 46.1 in 2012 to 38.6 in 2022. 

The difference between those gini coefficients reflects the impact of pension transfers on income inequality.  We can see that this has increased over the past decade, from an impact of 7.4 in 2012 t0 one of 8.5 in 2022.  This is likely explained by the increasing share of pensioners in the Irish population.

The final gini coefficient is that for disposable income.  This has also declined, albeit more modestly, from 30.4 in 2012 to 27.9 in 2022.  The different to this gini gives the impact on income inequality of all transfers other than pensions.  We can see that this has declined from 15.7 in 2012 to 10.6 in 2022.  Again, this is likely driven by the reduction in unemployment and the reduced need for unemployment-related income supports.

We can compare the impact of pensions and other transfers across the EU in 2022.

In line with the OECD estimates, the estimates from Eurostat show that Ireland does not stand out for the impact of transfers on income inequality.  In 2022, the impact of transfers on income inequality in Ireland was the ninth highest in the EU27.

However, what the Eurostat estimates allow us to see is the composition of that impact which can be broken down into that due to pensions and that due to transfers other than pensions. 

And using this we can see that the impact of pensions on income inequality in Ireland is the lowest in the EU27, due likely to the low share of pensioners in Ireland’s population and also possibly the flat-rated benefits under the State pension schemes.  And, on the other the impact on income inequality of transfers other than pensions in Ireland is the highest in the EU27.  This will mainly reflect the impact of working-age transfer payments.

And, all of this is just how we get to the bottom line: disposable income.  This is the income people have available to spend.  The rest are somewhat notional figures.  So, to conclude here are the gini coefficients for disposable income across the EU15.

In terms of the EU15, Ireland has moved from upper-middle to lower-middle for the inequality of disposable income.

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Do the Collisons have more wealth than half the population?

Around a month ago, Oxfam issued its annual missive on wealth inequality.  Each year it is designed to generate headlines and this year Oxfam Ireland did so by targeting the Collison brothers, John and Patrick.  The headline of the press release was:

 

A number of media outlets gave prominence to the claim (such as here, here, here, here, here, here, and here).  From Oxfam’s perspective this is achieving their objective and they certainly have no reason to change their approach.

The estimates of the wealth of individuals are taken from the Forbes Billionaires list. For the end of 2022, Forbes estimated that the net wealth of each of the Collison brothers was $9.5 billion.  This corresponds to the €15 billion figure in the headline.

There are a variety of sources that give estimates of the population-wide distribution of net wealth in Ireland.  In their recent reports Oxfam have used the estimates from the Credit Suisse Global Wealth Report. 

For 2021, the aggregate net wealth of Ireland’s adult population of 3.66 million adults aged over 20 is put at $920 billion (Table 2.2, page 110).  The wealth share of the bottom 50 percent is estimated to be 1.2 percent (Table 4.5, page 140).  Fairly straightforward arithmetic tells us that $11 billion is the estimated net wealth of the bottom 50 percent.  It also seems straightforward that the headline is correct.

But let’s look at the wealth estimates in a little more detail. First, by decile:

We can see that while the total for the bottom 50 percent is as Oxfam have stated, the result in very much dependent on the negative wealth share of the first decile.  Indeed, we get the somewhat contradictory outcome that although the Collison’s estimated net wealth is greater than the bottom 50 percent, it is significantly less than the net wealth of the those in the fifth decile alone (those between 40 percent and 50 percent of the wealth distribution).  For the aggregate total for the bottom 50 percent this wealth of the fifth decile is offset by the negative net wealth of the first decile.

While we might typically characterise the bottom 10 percent of the wealth distribution as the “poorest” this may not necessarily be the best descriptor.  Those with a negative net wealth have liabilities that exceed their assets.  It is likely that this is the result of borrowing used to acquire assets or borrowing that will help acquire assets in the future. 

Someone who has taken out loans to help them through third-level education may have a negative net wealth.  Someone who has taken out a loan to help start a business may have a negative net wealth.  A homeowner with a mortgage may have a negative net wealth if the value of the property drops below the amount owed on the mortgage.  In time, we would expect many in such circumstances to move up the wealth distribution.

Indeed, this would have happened to many homeowners who found themselves in negative equity following the 2008 crash.  And it appears that the estimation techniques used in the Credit Suisse reports have not fully factored in the reduction in negative equity of Irish homeowners.

For 2013, the Credit Suisse report puts the wealth share of the bottom 10 percent in Ireland at –3.5 percent. This was close to the nadir for house prices, but as shown above for 2021, the wealth share of the bottom 10 percent is only estimated to have improved to –2.8 percent in the Credit Suisse reports.

An alternative source of wealth distribution data for Ireland is the Household Finance and Consumption Survey (HFCS) undertaken by the CSO.  This actually is where the –3.5 percent net wealth share for the bottom decile in Ireland for 2013 comes from.  But the latest HFSC (for 2020) shows that the wealth share of the bottom 10 percent had increased to –0.6 percent.  In the 2018 HFCS, the CSO discussed the reasons for this:

In 2018, 8.0% of households in the first net wealth decile were owner occupied, compared to almost 80% in 2013. This large change is due to the increase in residential property prices over this time and the consequent movement of people out of negative equity. In 2013, 31.9% of all HMRs owned with a mortgage were in negative equity, whereas the 2018 rate is 4.1%. In 2013, just over three in four (75.8%) households in the bottom wealth decile were in negative equity, compared to 5.8% in 2018.

For 2020, the CSO estimate that the wealth share of the bottom 50 percent was +7.8 percent. Using this would give a very different result compared to the +1.2 percent used to give Oxfam its headline.  Per estimates from the CSO, the net wealth of the bottom 50 percent of the wealth distribution in Ireland is many multiple times the net wealth of the Collison brothers.

In the press release, Oxfam use the soundbite that “the rich are getting richer while the poor are getting even poorer” and also exhorts that “the very existence of billionaires while out-of-control inequality rises, is damning proof of policy failure.”

The wealth figures for the Collison brothers is based on the assumption that they each retain a 10 percent stake in the online payments firm they founded, Stripe.  In a 2020 funding round, investors provided $600 million to Stripe and in return received 0.63 percent of the company.  This gives a value of $95 billion for the overall company and the $9.5 billion figure used for respective net wealth of the Collison brothers.  Recent estimates suggest the value of the company has declined to around $60 billion – still a huge sum.

That the Collisons have set up a business that is valued at tens of billions has made no one poorer.  Indeed, Stripe has yet to even make a profit. People have collected more in payments from the company (such as wages etc.) than the company has generated in revenue.  Reporting on a recent note to investors Bloomberg said:

The payments giant forecast adjusted earnings before interest, taxes, depreciation and amortization of $100 million this year, according to people familiar with the matter. That compares with a loss of about $80 million in 2022, when Stripe processed $800 billion, the people said, asking not to be identified discussing internal financial information.

Although loss-making in 2020, Stripe was valued at close to $100 billion by investors because of the expectation it would make profits in the future.  No one is poorer now due to profits that Stripe might make in the future.  And even if the profit is $100 million in 2023, it shows that these expectations still have a long way to go. It will be a success if the Collisons can achieve it.

The role of expectations is significant in the wealth valuations of those who top various rich lists.  A prominent name on such lists is Jeff Bezos.  Bezos maintains an ownership of around 10 percent in Amazon, the online retailing company he founded.  Amazon’s market capitalisation hit $1 trillion for the first time in early 2020.  This pushed Bezos to top of the rich lists. 

But as with the Collisons much of this was based on expectations.  In the 20 years to the end of 2019, Amazon had earned a cumulative net profit of $30 billion. Not per annum, in total.  Jeff Bezos will have received some of this $30 billion in dividends over the years but it would have been an insignificant contributor, in relative terms of course, to the factors that pushed his net wealth to near $200 billion in 2021.

The key factor was further increases in Amazon’s share price.  By the middle of 2021, Amazon’s market capitalisation was $1.9 trillion.  Bezos’s 10 percent stake gets us the $200 billion headlines.  Of course, there has been a bit of a change in expectations in the interim and now Amazon’s market capitalisation is around $950 billion – a reduction of $1 trillion.  This reduction is greater than Credit Suisse’s estimate of the net wealth of the entire Irish population ($920 billion).

If Jeff Bezos’s wealth has fallen by $100 billion (10% of $1 trillion) who has benefitted from it? If the rich are getting poorer are the poorer getting richer?  Of course, it is nonsense to look for such transfers.  Jeff Bezo’s wealth has fallen because the expectation of the profits Amazon might make in the future has fallen.

It is typical to talk of “wealth accumulation” when referring to those at the top of the wealth distribution.  But while it is certain that neither Jeff Bezos or the Collison brothers are stuck for money it is not the case that they have accumulated the vast fortunes that have pushed them to the top of the global and Irish rich lists (can we still include them in Irish rich lists if they no longer live here?).  Their wealth is driven by the valuations other people put on the companies they have founded.

So, do the Collisons have more wealth than half the population? Errmm, No.  While supporting figures can be found in the Credit Suisse Wealth Report, estimates from the CSO tell us the claim is well wide of the mark.  And is the Collisons founding of a company that is valued at $60 billion “a damning proof of policy failure”? Again, no. But their doing it is a cheap way for others to get headlines.

This is not say there aren’t issues with inequality, there certainly are and Oxfam is absolutely correct to draw attention to world’s poorest.  But, as noted elsewhere,  the living conditions of the world’s poorest are not affected by whether the stock market valuation of Amazon is $1,900 billion or $900 billion, or whether a funding round for Stripe values it at $60 billion or $95 billion. While good for headlines in the media, the rich list valuations should not be the object of our outrage.

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Including HAP in Disposable Income

The CSO have published the 2020 results for the Survey of Income and Living Conditions (SILC).  There were a number of methodological changes that mean there is a series break in 2020 compared to earlier estimates.  These are set out in a useful Information Note.

The note also confirms that the Housing Assistance Payment (HAP) payments to landlords, as well as payments to landlords under the Rental Accommodation Scheme (RAS) are considered part of household income:

From 2020, social transfers in SILC are defined as the total income received from DEASP social welfare transfers (e.g. jobseekers related payments, state pension (contributory and non-contributory), family or children related allowances), income received as education related allowances (e.g. Student Universal Support Ireland [SUSI] grants) and housing related supports which include rent supplement and Local Authority contributions to landlords of SILC respondents who are Housing Assistance Payment (HAP) or Rental Accommodation Scheme (RAS) tenants.

This isn’t necessarily a change that was introduced this year but it is now clear that the rent payments made by local authorities to lands in the HAP and RAS are included in the household income of the tenants.  It does not appear that the rent paid by Local Authorities to Approved Housing Bodies (AHBs) is included in the income of AHB tenants.  These rents paid to AHBs, as with those paid under the HAP or RAS (or the smaller Mortgage-To-Rent programme) are based on market rents.  Nor is a similar social transfer to households included in the income of tenants of Local Authorities even though they benefit from subsidised rents in the same way as RAS or AHB tenants.

The rent contribution that recipients of HAP make to their local authority is calculated on the same basis as the above but the tenants may be required to make an additional payment to the landlord if the agreed rent exceeds the relevant HAP limit for that area.  For the first half of 2019 it was estimated that 28 per cent of HAP tenants were making a top-up payment to their landlord.

That the rent contributions tenants make to their local authorities under these programmes is part of those households housing costs is incontrovertible (as well as any top-up payments that may be made to private landlords in HAP). What is less clear-cut is whether the payments local authorities make landlords on behalf of tenants should be included in the tenants’ income.

In terms scaled up to national level, around €1.5 billion of housing supports are included in income in the 2020 SILC.  This includes €600 million for HAP,  €130 million for RAS and €25 million for MTR. As these are not taxable they are then also fully included in disposable income.  These payments make up close to one per cent of the aggregate disposable income of around €90 billion that is represented in the SILC.

This may not seem like a significant amount but the payments will certainly be significant for those households involved.  There are around 17,000 households in the Rental Accommodation Scheme and 68,000 in the Housing Assistance Payment programme.

The issue is whether payments that households don’t directly receive should be included in their disposable income?  There is no doubt that the payments benefit the living conditions of the households but they are not income that the households can choose how to spent. 

As of the 30th June 2019, the average monthly landlord payment was €830 per month and the average rent contribution from the tenant was €47.50 per month.  The treatment in the SILC is that the €830 is counted as household income.  It is not clear in the notes but it certainly should be the case that the €830 also be included in the household’s housing costs and not the €47.50 differential rent. 

Different definitions abound but disposable income would seem like something a household's decisions should be able to have a bearing on how it is used - even if that can be spending on necessities or long-term commitments.  The household can, to a certain extent, choose how to do these. 

If a private tenant moves to a property that has a lower rent, then the use of their disposable income will change.  With a lower rent, the household’s income after housing costs are deducted will rise. 

If a household receiving HAP moves to an area that has lower HAP limits, then the inclusion of HAP as income, would see their income fall after the move.  The decision to move to an area with lower rents hasn't changed their spending (at least for the 72 per cent not making a top-up payment).  They continue to pay the appropriate differentiated rent. But in the SILC the move has changed their income. 

It seems a little incongruent that a spending/consumption decision would change income.  But then, the HAP aids consumption and does contribute to living standards so could be viewed as contributing to income.  But should the disposable income of a household with a medical car be increased every time they attend a GP?  No.  This is a benefit-in-kind rather than a cash transfer.

Why should HAP be counted as a cash transfer rather than a benefit-in-kind?  The State is paying for housing services.  Though that is with the intention of maintaining income after housing costs for beneficiaries.

However, it is not clear why the rent paid by a local authority paid to a private landlord should be counted in the household’s income but not the rent local authorities pay to AHBs.  Perhaps it could be justified on the basis that the household under HAP can choose they property the rents are to be paid for but in either case their income after housing costs will be determined by the differential rent not the rent paid to the landlord (whether that is a private landlord or an AHB).

Consider the contrived example of two households of similar composition, similar income and living in similar properties. Both are eligible for social housing. 

One of the households is an AHB tenant and the household’s income is under the at-risk-of-poverty threshold.  The household’s income after housing costs is calculated after the differential rent, and other costs, are deducted.  Logically, the household’s income after housing costs are deducted from it will also be below the AROP threshold

The second household is a HAP recipient and rents a similar property to the first household but does so from a private landlord.  The inclusion of the rent paid to the landlord in this household’s disposable income puts it above the at-risk-of-poverty threshold.

These households are similar in almost all respects. But one is considered below the at-risk-of-poverty threshold and one is above it.  The only difference is that one is a AHB tenant and one is a HAP recipient.  Assuming no top-up payment to the HAP landlord, both households have similar income remaining after housing costs are deducted. Their living standards are likely to be similar but their income in the SILC will differ significantly.

So, it could be that the headline at-risk-of-poverty rate is being under-estimated because a cash transfer for housing that households cannot spend is included in the income for HAP and RAS tenants.  Would it be better classed as a benefit-in-kind? That is how HAP and RAS are treated in the national accounts?  Or if an income transfer is to be included in household income should it be included for all social housing tenants and not just those in HAP or RAS?

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The level and distribution of income in Ireland in the 2020 SILC

Eurostat have 2020 figures for Ireland to the EU-SILC, the EU’s Statistics on Income and Living Conditions.  Ireland is one of the last countries to have provided figures to Eurostat and the national version won’t be published by the CSO for another few weeks.

Those figures won’t be much different to what is now available on Eurostat but will come with much more detailed background notes.  One such item to be explained is that all the 2020 figures Eurostat have for Ireland are marked with a “b” – for series break.  It is not yet clear what this is. It could be that was a change during 2020 with in-person interviews shelved as COVID hit.

And at the outset it is probably worth noting that although this is the 2020 SILC, the year represents when the data was collected rather than the period for which it applies to.  The CSO carry out the survey across the full year, and respondents are asked for details of their income in the 12 months prior to the survey.

Thus, if someone was interviewed in January 2020 for the 2020 SILC, the reference period for their income would almost wholly encompass 2019.  This would move one month forward for people interviewed in February and so on.  Indeed, when this data goes through the OECD’s methodology it will be assigned to 2019 when published on the OECD’s income inequality database.

Another difference worth noting is the equivalent scale used to compare households of different sizes.  The CSO apply a national equivalence scale with applies a weight of 1.00 to the first adult, 0.66 to all subsequent adults and 0.33 to all children under 14.  These are added together with the household’s income divided by the result to get income in terms of equivalent people.

Eurostat uses the OECD-modified scale which gives a weight of 1.00 to the first adult, but 0.5 to all subsequent adults and 0.3 to all children under 14.

This means that a household of 2 adults and 2 young children would have an equivalising factor of 2.32 with the CSO’s approach and a factor of 2.1 with Eurostat’s approach.  This changes the level of equivalised income within each dataset but should not have a hugely significant impact on growth rates or other relative comparisons.  So, the figures the CSO itself publishes in a few weeks could be slightly different but the overall trends will be the same.

The Level of Income

We will start with median equivalised income in nominal terms.

In and of itself the actual level is not that informative.  Eurostat’s figure for 2020 is €26,250 but income per equivalent person is not a concept we can readily relate to.  What matters are the growth rate and relative differences, both within the income distribution in Ireland and with other countries.

Eurostat’s figures show that for the SILC data collected in 2020, the change in median equivalised income was +2.8 per cent.  That matches the average nominal growth rate of the previous 15 years though the significant volatility in the outcomes that gave rise to that average is evident from the chart.

Relative to the rest of the EU15, Ireland had the fourth-highest median equivalised disposable income  - in nominal terms.  While some exchange rate conversions are made no adjustment is made for different price levels in the below chart.

The Distribution of Income

Three of the commonly used inequality measures that are applied to the SILC data are the gini coefficient, the quintile share ratio and the at-risk-of-poverty rate.  Here is the gini coefficient fir Ireland since 2004 with a higher figure representing higher inequality.

Ireland’s estimated gini co-efficient has been trending downward over the last few decades – but it should be noted that the changes are exaggerated by the truncated vertical axis used in the above chart.  The changes are small.  The Eurostat figure for the 2020 SILC is not significantly different from what it was the previous year, going from 0.283 to 0.287.

Within the EU15, Ireland’s gini coefficient for disposable income is in the middle of the pack.  Ireland stands out more for the change in the gini coefficient over the last 15 years.  This following chart shows how the average for each country from 2018 to 2020 differs from its average for 2004 to 2006. 

For most of the EU15, the gini was either unchanged or increasing over the period.  For those countries showing a reduction in their gini coefficient the fall in Ireland was the second largest, with only Portugal showing a larger fall.

The gini coefficient is a useful indicator but as an measure which condenses a population-wide distribution of income into a single number looking at other measures can also be useful.  The quintile share ratio compares the income share of the top 20 per cent of the income distribution to the income share of the bottom 20 per cent.

The pattern here corresponds to what is shown by the gini coefficient.  Over the last 15 years, Ireland’s quintile share ratio has fallen from around five in the mid-2000s to around four now.  This indicates that incomes at the bottom of the income distribution have grown faster than those at the top.

Ireland’s quintile share ratio is the sixth lowest in the EU15.

The at-risk-of-poverty rate focuses in the lower end of the income distribution and looks at how many people live in households with an equivalised income that is less than 60 per cent of the national median. 

With Eurostat putting Ireland’s median equivalised income at €26,250 in 2020, this gives an at-risk-of-poverty threshold of €15,750 for a single-person household.  If we multiple this by 2.1 we get the threshold for a 2 adult plus 2 young children household: €33,075.

Here is the share of people in Ireland who live in households with an equivalised income below the 60 per cent threshold.

This shows a similar pattern to the quintile share ratio and Ireland’s position in the EU15 is also the same (sixth lowest).

As it is a measure of inequality, the at-risk-of-poverty rate is not always a good indicator of changes in living standards at the lower end of the income distribution.  The post-2008 period in Ireland is a good illustration of this.  We know that there were very significant falls in income but this is not reflected in any noticeable increase in the at-risk-of-poverty rate in the period from 2009 to 2012.

This is because the at-risk-of-poverty rate is a relative measure.  As incomes in the economy fell, the threshold for been assessed as at-risk-of-poverty also fell.  One way to get an insight into absolute changes in living standards is to use a fixed threshold (with changes only made for inflation rather than the general trend of income in the economy).  Eurostat provide an anchored at-risk-of-poverty rate with the 2005 threshold as the anchor.

The at-risk-of-poverty rate was 20 per cent in 2005.  In the chart above, the 2005 threshold is rolled forward (adjusted for inflation) and the share of the population below that threshold is reported.  It is the changes rather than the levels that are informative here.  We can see that this anchored at-risk-of-poverty measure rose significantly after 2008.  It had been falling consistently since 2014, but was unchanged in 2020.

There’s much more to the SILC than income figures but that’s probably enough for now.

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Ireland in the Global Income Distribution

Here is a website that has an interactive chart showing the position of a country’s income distribution within the global distribution.  The ventiles (one-twentieths) for each country ranked along the horiontal axis where their position in the world income distribution given on the vertical axis.  The example below shows Ireland.

It shows that most incomes in Ireland are towards the top of the global income distribution (in price-adjusted terms).  Ireland’s first ventile (the bottom 5 per cent) were located at around the 65th percentile of the global income distribution with the second ventile at around the 80th percentile.

As the chart title indicates the estimates, which are based on the work of Branko Milanovic, are based on data that is around ten years old.  There have been significant changes in Ireland since then – the country is no longer facing the teeth of a deep recession – and these have led to large changes at the bottom of the income distribution.

The post-2008 crash resulted in large drops for the cut-off points of the percentiles that make up the lowest ventile of Ireland’s income distribution.  The first chart compares Ireland’s position in the global income distribution at a time when the income of the lowest ventile was unusually low.

After 2014, there was very strong income growth for these percentiles with a doubling of the incomes shown in just five years.  It is possible that average income of the bottom 5 per cent in Ireland would be placed at around the 85th percentile in the current global income distribution.

The at-risk-of-poverty threshold at 60 per cent of the national median is currently around €15,000 for a single person (or €32,000 for a 2+2 family).  This income would be at around the 90th percentile of the global income distribution.

The interactive tool can be used to make find some unusual comparisons.  There is the example of South Africa where, in the 2011 data, the average income of the top five per cent was comparable to the income of the top 5 per cent in Ireland but where the bottom five cent were amongst some of the lowest incomes in the world.  Or Nigeria where the average income of the top five per cent is lower than the income of the bottom five per cent in Ireland.

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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.

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:

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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