INCOME INEQUALITY AND THE LABOUR INCOME SHARE: PATTERNS AND DETERMINANTS

1
INCOME INEQUALITY AND THE LABOUR INCOME SHARE
PATTERNS AND DETERMINANTS
EUROPEAN COMMISSION DIRECTORATE GENERAL ECONOMIC
AND FINANCIAL AFFAIRS Directorate B Economic
Service and Structural Reforms Unit B3 Labour
market reforms

• CMTEA, 39th edition
• Iasi, 26 September 2008

2
INTRODUCTION

• MOTIVATION
• OUTLINE
• Income inequality patterns. - Distribution of
  H. disposable income
• - Wage dispersion
• Determinants of income inequality. - Labour
  income share
• The relationship between the various concepts of
  inequality
• a unifying framework.
• Policy implications.

3
PATTERNS (I) the distribution of household income

• CROSS-COUNTRY DIMENSION

• Gini Index on household-equivalent disposable
  income

• Source Luxembourg Income Study.

4
PATTERNS (II) the distribution of household
income

• CROSS-COUNTRY DIMENSION

• Impact of public redistribution of income
  inequality Public redistribution
  and public expenditure 1998

• Source Immervoll et. al (2005).

5
PATTERNS (III) the distribution of household
income

• TEMPORAL DIMENSION 20th century.
• Trend towards greater equality until the 1980s
  followed by increasing inequality thereafter.
• Strong equalising effect of public
  redistribution
• Increase in income inequality tends to be larger
  in terms of factor income.
• Disposable income inequality smoother than factor
  income inequality.

6
PATTERNS (IV) wage dispersion

• Source OECD Earnings database.

7
PATTERNS (V) the labour income share

• Preferred measure of the LS Askenazy (2003).
• Basic measure
• 1st refinement Adjust by the labour
  income of the self-employed
• 2nd refinement Impute to each
  self-employed compensation per employee of its
  own activity branch

8
PATTERNS (VI) The labour income share


9
PATTERNS (VII) The labour income share

• In the policy debate, declining LS are often
  interpreted as reflecting episodes of wage
  moderation.
• It is generally wrong to interpret movements in
  the LS as exclusively stemming from wage
  moderation/acceleration.
• Shift-share analysis

10
PATTERNS (VIII) The labour income share
11
PATTERNS (IX) The labour income share

• What if the sectoral and employment composition
  were kept constant at their 1970 levels?
• Euro area

12
DETERMINANTS Common trends

• Globalisation
• INEQUALITY IN DISPOSABLE INCOME
• Capacity of the state to redistribute
• WAGE DISPERSION
• Trade specialisation (Stolper-Samuelson)
• Off-shoring of intermediate inputs
• Immigration
• Skill-biased technological change
• Country-specific features
• LABOUR MARKET INSTITUTIONS Levy and Temin
  (2007), Gordon and Dew-Becker (2008), and Checchi
  and García-Peñalosa (2008).

13
A UNIFYING FRAMEWORK

• Appealing work (CG-P, 2008) Gini Index is
  expressed as a function of the unemployment rate,
  wage dispersion and the LS.
• higher unemployment rate increases
  inequality
• LMIs higher wage
  dispersion increases inequality
• higher LS reduces inequality
• Main uses
• Elaborate a stylized story to account for income
  inequality patterns.
• Examine the effect of LMIs on overall income
  inequality.

14
A UNIFYING FRAMEWORK TO INEQUALITY

• Elaborate a stylized story to account for income
  inequality patterns.
• CASE STUDY the UK
• Examine the effect of LMIs on overall income
  inequality.
• Empirical evidence is mixed.
• Wage-setting institutions more effective at
  reducing income inequality than EPL.

15
POLICY IMPLICATIONS

• SOURCES OF INCREASED INCOME INEQUALITY
• Labour shares
• They have not been declining everywhere in EU15
  economies.
• Where they were, this is not necessarily due to
  wage moderation.
• Wage dispersion
• Overall wage dispersion has increased almost
  everywhere.
• Cross-country differences in contributions of
  dispersion at the top and the bottom.
• SBTC accounts for changes in wage dispersion.
• LMIs have an impact on income inequality through
  the LS, the UR and the wage dispersion, the sign
  of which is ambiguous a.t empirical evidence
• except for what concerns the choice between EPL
  and wage-setting institutions and the tax wedge.
• Public redistribution has a strong equalising
  effect in mature economies. Current debate is on
  principles to enhance efficiency of
  redistributive policies.