There has been a renewed interest in income distribution and concern about rising inequality among publics and policy-makers, especially since the 2008 global recession (Berg, 2015; ILO, 2011, 2014a; Piketty, 2014; Ostry, Berg and Tsangarides, 2014; ADB, 2012; UNRISD, 2010; Gustafsson, Shi and Sicular, 2008; IILS, 2008). Between the early 1990s and the mid-2000s, which was a period of relatively rapid economic growth, the total income of high-income households expanded faster than that of low-income households in about two-thirds of advanced, emerging and developing economies (IILS, 2008). A similar pattern was seen in three-quarters of the OECD countries over the past two decades (Cingano, 2014). A recent study also shows that about half of the growth in overall income inequality is due to the growth in earnings inequality (ILO, 2014a). Inequality could also rise due to a combination of factors such as technological change, global- ization, industrial restructuring, change in bargaining power of labour and capital, weakened redis- tributive mechanisms, financialization, etc., which we do not explore in this chapter. This section analyses the trends in market and disposable income inequality to determine whether changing employment patterns have an influence on inequality.
In all countries under analysis, market income inequality
has remained high or increased since the mid-2000s …
The Gini coefficients for market income16 inequality are quite high in emerging and developing economies, followed by advanced economies and the EU.17 Looking at trends for advanced economies over the past decade, the disparity in the distribution of market incomes has risen in about 40 per cent of the countries, and in the remaining countries it has remained the same or has marginally declined, as in the case of Norway. In contrast, in the CEE countries the Gini coefficient for market incomes has fallen or remained stable in eight of the 11 countries under analysis, and it has risen in the others. In the emerging and developing economies, the Gini coefficient for market incomes has increased in two out of the nine countries under analysis, and has remained stable or has declined in the others (figure 2.7, panel A).18
The Gini coefficient of disposable income19 has declined in most of the countries over the past decade, except in Austria, Denmark, France, Mexico, Spain and Sweden 20 (figure 2.7, panel B). In the Latin American region, the reduction in income inequality is due to the reduction in wage inequality through well-designed minimum wage policies, public transfers to the poor21 and also through expansion of education (ILO, 2014a; Cornia, 2014; Ferreira et al., 2012; Lopez-Calva and Lustig, 2010). Both transfer systems and taxes have had a significant effect in reducing income inequality. In the aftermath of the global recession, several countries responded by introducing a number of social assistance schemes or expanding public transfers (Bonnet et al., 2012), which offset the inequality impact of high unemployment following the crisis.
16 Market income comprises labour income, capital income and private transfers. See Appendix B, figure 2B.1 for more details.
17 The analysis here is a point-to-point comparison which may be sensitive to the selection of years analysed, although every
effort was made to minimize this potential bias. Apart from establishing the trends in inequality, in this section we are much more interested in how different sources of incomes are associated with overall inequality.
18 Income inequality in India has also remained stable between 2004–05 and 2009–10 based on per capita consumption expenditure. In the Russian Federation the income inequality based on per capita net income has increased between 2005 and 2010 (Lee and Rusconi, 2014).
19 Disposable income is defined as market income plus social transfers (contributory and non-contributory) minus contribu- tions to social security and taxes. See Appendix B, figure 2B.1 for more details.
20 The rise in income inequality in Sweden is associated with the decline in trade union membership (OECD, 2011; Noah, 2012).
21 See discussion on Brazil in Section D.
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… a trend aggravated by the rising incidence of non-permanent forms
of employment as well as growing unemployment and inactivity …
Increases in market income inequality have been largely driven by changes in the distribution of wages and incomes in the majority of the countries. Labour income inequality has increased in all advanced economies except Malta, the Netherlands and Norway. However, in the majority of the CEE and emerging and developing economies, labour income inequality has declined, except for the Czech Republic, Latvia, Lithuania, Mexico, Slovenia and South Africa.
A detailed analysis of different sources of income (see Appendix B for methodology) shows that labour markets are central to the evolution of market income inequality (Appendix C, table 2C.1). For households headed by permanent employees, income inequality ranges between 0.26 (Denmark) and 0.57 (South Africa) in the most recent year for the countries under analysis.
0.8
Gini coefficient
0.4 0.6
Panel A. Market income inequality
0.8
0.2
Gini coefficient
Panel B. Disposable income inequality
Advanced economies and EU developing economiesEmerging and
Advanced economies and EU developing economiesEmerging and 0.2 0.4 0.6 J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J Portugal United Kingdom Italy
Ireland Belgium Greece
Netherlands Austria Finland United States France Denmark Norway Luxembourg Malta Spain Sweden Switzerland Cyprus Iceland Rep. of Korea
Hungary Poland Estonia Lithuania Slovakia Bulgaria
Czech Republic
Slovenia Latvia Romania
South Africa
Brazil
Uruguay Argentina Turkey Mexico Philippines Viet Nam
China J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J United States Portugal Greece Italy
United Kingdom Rep. of Korea
Spain
Switzerland
Ireland Cyprus Malta
Luxembourg
Belgium Norway Austria Finland Iceland Netherlands Denmark
France Sweden Latvia
Lithuania Estonia Bulgaria Romania Hungary Poland Slovakia
Czech Republic
Slovenia
South Africa
Brazil Mexico
Philippines Argentina Uruguay Viet Nam Turkey China
Mid-2000’s JMost recent
Mid-2000’s JMost recent
0
0
2.7
Figure
Market and disposable income inequality, mid-2000s and latest year available
Source: ILO Research Department estimates based on household surveys (see Appendix A, table 2A.1).
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When households with temporary employee heads are included, inequality increases in all advanced economies. In CEE countries, inequality among employee heads has declined in all countries except Bulgaria and Latvia since the mid-2000s (Appendix C, table 2C.1). An increase in real minimum wages and annual growth rates of over 5 per cent in Estonia and Romania (European Commission, 2015) could be responsible for the decline in inequality in these countries.22 Among the emerging and developing economies, inequality among employee-headed households has declined since the mid-2000s in Argentina, Brazil, Uruguay and Viet Nam. Different factors are responsible for this trend. For example, in Argentina, the expansion of employment during economic recovery was a significant factor, while rising minimum wages and promotion of collective bargaining may also have contributed to the decline (Gasparini and Cruces, 2010). The increase in minimum wages was also important in reducing income inequality in Brazil (Lustig et al., 2012), and the restoration of wage councils and increase in real wages could have led to a reduction in income inequality in Uruguay (Amarante et al., 2011).
When households with self-employed heads are included in the measurement, inequality is higher in all countries except for some CEE countries (Bulgaria, Hungary, Latvia and Lithuania), Cyprus and Iceland. The increase in labour income inequality is comparatively high in emerging and developing economies, where high proportions of workers are self-employed and work in sectors with low productivity. Inequality increases by more than three percentage points in one-third of the countries when households with unemployed heads are included (Appendix C, table 2C.1).23 Likewise, when economically inactive households are included in the analysis, income inequality increases by more than 10 percentage points in over 90 per cent of the countries (Appendix C,
table 2C.1). We include unemployment benefits and retirement pensions at a later stage, as part of the contributory social transfers. However, if one were to account for them at this point, then that increase in inequality would be comparatively lower.
22 On the other hand, it is also possible that increased participation of women in the labour force over the past decade could further widen the labour income distribution. This is because women are more engaged in part-time work than men, which could widen the wage gap (Eurostat, 2011).
23 In Greece, Ireland, Portugal and the United Kingdom the high labour income inequality and the increase since the mid- 2000s could be due to low employment rates. Also, the share of part-time workers is quite high in Ireland and the United Kingdom (European Commission, 2015). Another reason could also be the presence of multiple-earners and no earners in the household, which could lead to an increase in labour income inequality, an issue requiring further exploration. Source: ILO Research Department estimates based on household surveys (see Appendix A, table 2A.1) and Eurostat.
0.4
Gini coefficient
Advanced economies and EU developing economiesEmerging and 0.8
Market income inequality Contributory social transfers Non-contributory social transfers Taxes + contributions to social security Inequality in disposable income
–0.4 J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J J Ireland United Kingdom Greece
Portugal Denmark Spain
Italy Belgium United States Finland Austria Netherlands France Luxembourg Malta
Sweden Norway Cyprus
Switzerland
Iceland
Lithuania
Latvia
Hungary Estonia Poland Slovenia
Czech Republic
Bulgaria Romania
Slovak Republic
South Africa
Brazil Mexico Turkey Uruguay Argentina
Philippines Viet Nam
0
Disposable income inequality, latest year available
2.8
Figure
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… and which is partially offset by tax and benefit systems.
In the advanced economies and the EU, transfers and taxes have been effective in reducing the market income Gini coefficient – by between 12 percentage points in the United States and 31 per- centage points in Ireland. For example, the Gini coefficients of market incomes for Austria, Belgium, Finland and the United States are quite similar. However, differing redistributive policies lead to quite different disposable income Ginis, with Austria, Belgium and Finland showing much lower disposable income inequality than the United States, which has the highest disposable income inequality among advanced economies. Similarly, for Ireland, which has the highest Gini coefficient for market income among advanced economies, the Gini coefficient is reduced by 31 percentage points, largely due to transfers and taxes (figure 2.8).
The inclusion of contributory social transfers reduces inequality by between 9.8 (the United States) and 20.7 percentage points (Greece) among the advanced economies. These contributory social transfers largely include retirement pensions and unemployment benefits. The redistributive impacts of contributory social transfers have increased in most of the advanced economies com- pared with the mid-2000s, except for Austria, Luxembourg, Norway and Sweden. Non-contributory social transfers also have inequality-reducing effects in all the advanced economies. In the Nordic countries, Ireland and the Netherlands, non-contributory social transfers reduced inequality by between 4.9 and 10.3 percentage points, while in other countries the redistributive impacts are lower. In CEE countries, both transfers and taxes seem to have reduced the Gini coefficient by more than 20 percentage points in all countries. The inequality-reducing effects of contributory socialtransfers are particularly strong, notably in Hungary. Non-contributory social transfers have a comparatively smaller effect (figure 2.8; Appendix C, table 2C.1).
In the emerging and developing economies, transfers are relatively effective in reducing inequalities. Contributory social transfers in Brazil, Turkey and Uruguay and social transfers in Argentina are effective in reducing income inequality, while in South Africa non-contributory social transfers have a small effect in reducing inequality (figure 2.8). Yet, in many emerging and developing economies only a small proportion of workers have access to social protection (see Chapter 3 for more details). Extending the coverage of contributory social transfers to all workers would lead to a more substantial effect in reducing inequality.
Finally, taxes play a very important role in reducing inequality in all countries, except in Turkey and the United States (figure 2.8; Appendix C, table 2C.1). In the emerging and developing economies information on taxes is often not available, thus complicating the analysis.24
About one-third of the countries have been able to reduce
disposable income inequality despite the increase in temporary,
part-time and informal wage work
Over the past decade, the incomes of permanent workers have remained more or less stable in the majority of the countries under analysis. In contrast, the incomes of temporary workers or those in informal employment have fallen in the majority of the countries, which could lead to a widening of income gaps across the different types of work. To assess whether changes in the incidence of temporary, part-time and informal employees have led to an increase/decrease in inequality, coun- tries have been grouped into four categories depending on the trends since the mid-2000s in the incidence of temporary, part-time and informal employees, as well as the changes in inequality in disposable incomes during the same period.
Category 1 consists of countries where the incidence of temporary, part-time and informal employees has decreased and disposable income inequality has increased (see figure 2.9, cat- egory 1). This category comprises Denmark, Finland, Spain and the United States. The nature of institutions is quite different between countries in this category. Denmark and Finland have a high proportion of part-time work and their dependence on such employment has helped them to curtail the growth of temporary employment. Women constitute a substantial share of the part-time workers. On the other hand, Spain has reduced its temporary employment since the
24 For the emerging and developing economies under analysis, data on contributions to social security are available for Brazil, Turkey and Uruguay. Turkey and Viet Nam are the only emerging and developing economies under analysis where the data from the household survey also include information on taxes.
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global recession, and much of this employment has probably resulted in unemployment, causing income inequalities to rise.
Category 2 consists of countries where the incidence of temporary, part-time and informal employees and disposable income inequality have increased (see figure 2.9, category 2). In Austria, Cyprus and Sweden there was an increase in labour and capital income inequality compared with the mid-2000s. This increase was not offset by transfer and tax policies, resulting in higher disposable income inequality.
Category 3 consists of countries where both the incidence of temporary, part-time and informal employees and disposable income inequality have decreased (see figure 2.9, category 3). The group of countries in this category includes a large number of CEE countries and emerging and developing economies. A number of Latin American economies have in the past decade been able either to generate more employment opportunities as a result of economic growth and other macroeconomic policies, or to formalize informal workers through a number of innovative schemes (Berg, 2011; Gasparini and Cruces, 2010).
Category 4 consists of countries where the incidence of temporary, part-time and informal employees has increased and market income inequality has decreased (see figure 2.9, category 4). This group comprises the largest number of countries under analysis. In all the countries in this category except Malta, the Netherlands and Slovakia, there has been an increase in labour income inequality since the mid-2000s, partly as a result of an increase in the incidence of temporary, part- time and informal employees. However, contributory social transfers in all advanced economies played a much more important role in reducing disposable income inequality compared with the mid-2000s. Non-contributory social transfers were quite effective in reducing inequality in Greece, Iceland and Ireland. In some of the countries, taxes have also been effective in reducing inequality. For example, in the United Kingdom, the introduction of a 50 per cent marginal income tax rate in April 2010 on top incomes might have led to a reduction in inequality (Cribb et al., 2012). Similarly, in Iceland the capital income tax rate was increased from 18 to 20 per cent, which would have affected income distribution. The social security contributions have also been raised twice since the global recession in 2008 (Daniel et al., 2011). The analysis shows that despite an increase in the incidence of temporary, part-time and informal employees, disposable income inequality has reduced in a number of countries, largely through social protection policies and tax systems since the global recession.
4
–4
Change in the Gini coefficient for disposable income (% points) Change in the share of temporary, part-time and informal employees (% points) –8 0 –15 –7.5 7.5 J J J J J J J J J J J J J J J J J J J J JJ J J J J J J J J J J J J J J J J Category 1
Incidence of temporary, part-time and informal employees decreased; income inequality increased
Category 2
Incidence of temporary, part-time and informal employees increased; income inequality increased
Category 3
Incidence of temporary, part-time and informal employees decreased;
income inequality decreased Category 4 Incidence of temporary, part-time and informal employees increased; income inequality decreased Austria Belgium Cyprus Denmark Finland France Greece Iceland Ireland Italy Luxembourg Malta Netherlands Norway Portugal Spain Sweden Switzerland United States United Kingdom Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia Argentina Brazil Mexico Philippines South Africa
Turkey Uruguay Viet Nam
Advanced economies and EU Emerging and developing economies
2.9
Figure
Change in the share of temporary, part-time and informal employment and change in the Gini
coefficient for disposable income between the mid-2000s and the latest year available
Note: For all countries, two groups of employees are distinguished. For European countries, the distinction is between permanent and temporary employees; for the United States, the distinction is between full-time and part-time employees; for emerging and developing economies, the distinction is between formal and informal employees. Source: ILO Research Department estimates based on household surveys (see Appendix A, table 2.A1) and Eurostat.
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