1. Income Inequality in Serbia Gorana Krstić, Faculty of Economics, University of Belgrade Conference: Understanding inequality in Southeast Europe: Taking stock and moving forward Zagreb, September 14, 2015

2. Structure of the paper Previous research on inequality in Serbia Comparability of income inequality measures based on different data sources What are drivers of income inequality in Serbia? Conclusions 2

3. Previous research on inequality in Serbia Previous research on inequality in Serbia has been modest Milanović (2003) explores inequality of consumption and income and the contribution of income sources to total income inequality, using 2002 LSMS Krstić et al. (2007) focused on inequality of labour market earnings using data from the LFS over 1996–2003 3

4. Previous research on inequality in Serbia Krstić and Sanfey (2011) analyzed the extent and evolution of informality and inequality 2002 -2007, LSMS Milanović (2012) in the preface to his book emphasised that the basic problem of Serbia is not inequality but low productivity and the low level of total income Krstić (2014) and Mijatović (2015) analysed income inequality measures based on new SILC data 4

5. Comparability of income inequality measures based on different data sources Income inequality in Serbia and EU, 2006-2010 20062007200820092010 Quintile ratio S80/S20 Serbia 6.96.55.55.2 … EU27 4.95.0 4.45.0 Gini coefficient Serbia 35.434.132.131.233.0 EU27 30.230.630.830.430.5 Note: Income in kind is excluded from total income. Source: HBS, SORS. Government of the Republic of Serbia (2012) Inequality in Serbia decreased over 2006-2009 and then started to increase, based on HBS data Inequality in EU27 was stable but lower than in Serbia However, inequality for Serbia and EU are not fully comparable due to different data sources 5

6. Comparability of income inequality measures based on different data sources Income inequality, Serbia and EU, 2012-2013 Source: SORS (2015), SILC, Report No. 366 and Eurostat data base. Gini coefficient for Serbia was 33 in 2010 based on HBS but 38 in 2012 based on SILC Data are not comparable Income sources are much better recorded in SILC than in HBS According to 2013-2014 SILC data, income inequality in Serbia is much higher than in the EU using both inequality measures 6

7. Comparability of income inequality measures based on different data sources Number of MSA and CA beneficiaries according to SILC and administrative data Source: FREN (2015) The number of beneficiaries of Monetary social assistance (MSA) and Child allowance (CA) is under-reported in SILC by 20-23%. Income inequality is slightly lower than SILC data shows 7 SILC* Administrative data** Difference no. of hhs% of all hhsno. of hhs% of all hhs Number of beneficiaries hhs MSA 67,195 2.787,3303.520,135 Number of beneficiaries hhs CA 161,988 6.5203,2948.241,306

8. Comparability of income inequality measures based on different data sources Gini coefficient 8 Source: Matković, G., Krstić, G. i B. Mijatović, (2015), Serbia Income and Living Conditions 2013, RSO.

9. What are drivers of income inequality? High percentage of persons (up to 60 years) who live in households with very low/low work intensity High proportion of people working in non- standard forms of employment (informal employment etc.) Weak redistributive role of social transfers, excluding pensions Almost non-existent progressive taxation of higher incomes and high labour taxes for low- wage earners 9

10. What are drivers of income inequality? The percentage of persons (up to 60 years) who live in households with very low work intensity was 18.2% in Serbia 10 Source: Matković, G., Krstić, G. i B. Mijatović, (2015), Serbia Income and Living Conditions 2013, RSO.

11. What are drivers of income inequality? 11 Source: Matković, G., Krstić, G. i B. Mijatović, (2015), Serbia Income and Living Conditions 2013, RSO.

12. What are drivers of income inequality? Low work intensity of household members means low income 12 Source: Matković, G., Krstić, G. i B. Mijatović, (2015), Serbia Income and Living Conditions 2013, RSO.

13. What are drivers of income inequality? However, only ¼ of the employed exposed to poverty risk live in households with low or very low work intensity 13 Source: Matković, G., Krstić, G. i B. Mijatović, (2015), Serbia Income and Living Conditions 2013, RSO.

14. What are drivers of income inequality? Type of employment is important High proportion of people working in non- standard forms of employment (informal employment etc.) According to SILC (self-declaration): ◦ self-employed comprised 24.8% of the employed (18-64) ◦ part-time employed was 15.8% of the employed (18+) According to LFS (ILO definition), 17.5% of the employed (15+) were informally employed 14

15. What are drivers of income inequality? 15 Source: Matković, G., Krstić, G. i B. Mijatović, (2015), Serbia Income and Living Conditions 2013, RSO.

16. What are drivers of income inequality? Self-employed and those in part-time employment had extremely high at-risk-of-poverty rate, 39.1% and 35.9%, respectively 16 Source: Matković, G., Krstić, G. i B. Mijatović, (2015), Serbia Income and Living Conditions 2013, RSO.

17. What are drivers of income inequality? Share of social transfers (excluding pensions) in disposable income in Serbia was 10%, which is higher than in EU28 (8.4%) and EU NMS (6.6%) Source: Eurostat database 17

18. What are drivers of income inequality? 18 But their redistributive role is weak Social transfers (ST), excluding pensions, reduced income inequality in Serbia from 42.6 to 38 Table. Ratio of pre- to post-transfer Gini coefficient and Gini coefficient (5 countries with highest and 5 countries with lowest ratio and Serbia) RatioGini coeff. FYR Macedonia1.0737.0 Italy1.0732.5 Greece1.0834.4 Bulgaria1.0835.4 Latvia1.0935.2 Serbia1.1238.0 Sweden1.3224.9 Finland1.3225.4 Norway1.3722.7 Denmark1.4127.5 Ireland1.5430.0 Source: Eurostat database.

19. What are drivers of income inequality? Within ST, monetary social assistance (MSA) and child allowance (CA) are designed to help low income hhs. Targeting of MSA is good, but coverage can be improved as only 12.8% of those in the bottom income quintiles received MSA (FREN, 2015) 19

20. What are drivers of income inequality? 20 Progressive taxation on higher incomes is almost non-existent in Serbia Labour taxes for low-wage earners are very high (Koettl, 2011) This is due to minimum social security contributions ◦ minimum base for calculation of social security contributions equals 35 percent of the average wage ◦ it is not adjusted for hours actually worked Incentives to work informally or become inactive are strong, which increases inequality

21. Conclusions SILC 2013-2014 revealed high income inequality in Serbia Serbia has the highest income inequality in the region and among EU countries Trends in income inequality cannot be observed over 2006-2013 due to incomparable data sources 21

22. Conclusions How can inequality be reduced? ◦ Increase work intensity of household members and/or better quality jobs ◦ Reform benefits aimed at  increased coverage of MSA and CA  increased incentives to find jobs in the formal sector ◦ Tax reform designed to increase incentives for formal sector jobs  lower labour taxes for low-wage earners 22