1. Income inequality and the effect of public policies in the European Union: what happens with enlargement? 2. Inequalities, Employment and Income Convergence: Evidence from Regional Data Papers by: 1. Figari, Paulus, and Sutherland (FPS) 2. Galbraith and Garcilazo (GG) Comments by: Lars Osberg Economics, Dalhousie University

Common Focus: Determinants of Inequality within the European Union  FPS: impacts of tax/transfer policy on inequality & relative poverty EU15 → EU19  GG: pay inequality (within/between regions) & unemployment rates for 187 European Regions  Motivating Concern: “Social Cohesion” & Inequality in a possibly fragile federation A shared problem of EU, Canada & others  Quibble: both papers have rhetoric of “social cohesion” but only data is income inequality Is it vertical or horizontal equity that matters more for a sense of common citizenship?

FPS: Income inequality and the effect of public policies in the European Union: what happens with enlargement?  15 pre-2004 EU states plus Estonia, Hungary, Poland and Slovenia  Methodology: EUROMOD static micro-simulation model  direct taxes, social contributions, cash benefits simulated in a comparable way using tax-benefit rules in place + info in survey datasets

Income Concept & Measurement  Pre-Tax Income [1]“market income” = pre-tax gross earnings (not including employer social insurance contributions) + self-employment income + capital income + private pensions & transfers [2]“market income plus public pensions”  Adjustments modified OECD equivalence scale top and bottom coded/truncated Eurostat PPP indexes for GDP  5% confidence intervals - nonparametric bootstrap.  1000 for each country & 250 for EU

Income inequality before and after taxes and benefits - Gini coefficient

Diversity within the EU  Public pensions play widely varying role in reducing inequality  Tax/transfer systems Reduce inequality to differing degrees  Netherlands, Southern European, Estonia & Anglo-Saxon redistribute the least Change inequality ordering  EU-15:Gini (market income → PDI) = 0.50 → 0.30 inequality reduced by 39%  EU-19:Gini (market income → PDI) = 0.52 → 0.33 inequality reduced by 35% Did enlargement imply a “big” change?

Income inequality before and after taxes and benefits – Ge(0) & Ge(1) indices  Generalized Entropy Indices Ge(0) – low-end sensitive Ge(1) – more top-end sensitive  Rankings change But not much  EU19 inequality > EU15 inequality always  Taxes and benefits reduce inequality by ?? EU-15  Ge(0) by 66%  Ge(1). by 49% EU-19:  Ge(0) by 60%  Ge(1) by 45%

Sensitivities GINI DPI EU15 Euro0.31 EU 15 PPP0.3 EU19 -Euro0.36 EU19 -PPP0.33  Top & Bottom coding make little difference  Equivalence scale Income per capita or OECD ? – slightly less decrease in Gini

Inequality Decomposition  EU-15 Essentially all of EU15 inequality in market income + public pensions explained within countries  EU-19 More (2-14%) of total EU19 inequality explained by inequality between countries

Which tax and benefit components make a difference? Household income composition: whole population

A buried gem!  “Overall, market income at 100% of disposable income in Figure 4a means that direct taxes and cash benefits balance each other” Implication: the consumptive activities of the state are entirely financed by indirect taxation

Household income composition: bottom decile group

“Similar” individuals are not treated “similarly” by the state in EU nations.  Does horizontal equity matter for a sense of common citizenship in a European polity? “Similar” treatment does NOT require identical treatment  Net Fiscal Residuum similar?  “reasonably comparable levels of public services at reasonably comparable levels of taxation”  36(2) Constitution Act of Canada, 1982

Income poverty rates - Before & after taxes and benefits ( Poverty line = 60% of national median equivalised household income )

Means tested benefits often target poverty gap – but to differing degrees!

Comments (LO)  FPS recognize “rules ≠ reality” Nontake-up of benefits, evasion of taxes imply EUROMOD = idealized picture  UK & other Anglo nations Big news is the exploding share of top 1% Survey based micro-data can only track trends among ‘the middle 90%’  Can social cohesion survive the increasingly conspicuous consumption of the top 1% ?  Quantitative impact & sociological impact? ‘Social Cohesion’ & quantitatively small stereotypes Addition of small, poor nations cannot move aggregate stats much – but can affect politics

GG - Inequalities, Employment and Income Convergence: Evidence from Regional Data  Focus: relationship of pay inequality & unemployment rates for 187 European Regions inequality between 16 industrial sectors in each region & between regions  Is there a tradeoff between cohesion and competitiveness ? No Less inter-industry pay inequality generally associated with lower regional unemployment  Time effects & European Macro-environment Maastricht Treaty (1992)  4 percentage point increase in unemployment rate Euro (1998)  General reduction in unemployment Lisbon Treaty (2000)  Increase in unemployment

Methodology: Theil Decomposition  Time series payroll data Wages & Employment LO: FT or PT? Time period? Wage Concept ? 16 Industries in 187 regions Theil’s entropy measure decomposed into:  Between sectors, within region component  Between region component Contribute to inequality ‘from below’ or ‘from above’?

Within-Regions Between-Sectors Theil’s T Statistic, 1998

Regional Contribution to the Europe- wide Theil’s T Statistic, 1995

Regional Contribution to the Europe- wide Theil’s T Statistic, 2000

Between-Regions Component and Within-Regions Theil’s T Statistic, 1998

A Model of Regional Unemployment  UN = a +B 1 Theil + B 2 RelWage + B 3 GDPG + B 4 PopUn24 + D i Country + D j Time  Reduced form model of regional unemployment rates 2 ‘supply’ and 2 ‘demand’ variables  Supply relative size of regional population of young workers Inter-industry inequality of wages (Theil) in region  Demand growth of regional GDP average wage rate of the region  + Country and Time specific Fixed Effects assumes common EU business cycle -

Coefficient Estimates: Linear Model - ( )  Relative regional wage rate not significant  More inequality between industry wages – more unemployment

Country Fixed Effects in European Unemployment

Time Fixed Effects in European Unemployment

GG Conclusions:  “ Positive impact of pay inequality on unemployment suggests that promoting cohesion in the structure of pay in lagging regions could lead to a catching-up process leading to territorial cohesion”  Counter to argument that “pay flexibility’ is needed  Specific Suggestions: “raising minimum wages, targeting industrial development policies in poor areas, active labor market polices for the unemployed, policies to improve workers’ skills such as on-the-job training, adult education, and assistance programs for people at the bottom” “expanding university enrollments is perhaps the proven effective route to reducing youth unemployment”

Comments - LO  Specific policies not part of modelling  Very much a reduced form model of regional unemployment rates + causal interpretation Is it believable? What is causality?  Very large coefficients on regional GDP growth % point change U rate (all) if +1% growth GDP Causality ? – is this good news or bad (if true)?  Inter-industry wage differentials are small part of level of pay inequality & trend to greater individual earnings inequality BIG NEWS – rising share of top 1% in Anglo nations “Middle 90%” - much less change in income shares but increased residual unexplained variance in individual earnings