Abstract
This paper presents a framework for studying international differences in the distribution of household income. Integrating micro-econometric and micro-simulation approaches in a decomposition analysis, it quantifies the role of tax-benefit systems, employment and occupational structures, labour and financial market returns, and demographic composition in accounting for differences in income inequality across countries. Building upon EUROMOD (the European tax-benefit calculator) and its harmonised datasets, the model is portable and can be implemented for cross-country comparisons between any participating country. An application to the UK and Ireland—two countries that have much in common while displaying different levels of inequality—shows that differences in tax-benefit rules between the two countries account for over one third of the observed difference in disposable household income inequality. Demographic differences play negligible roles. The Irish tax-benefit system is more redistributive than UK’s due to a higher tax progressivity and higher average transfer rates. These are largely attributable to policy parameter differences, but also to differences in pre-tax, pre-transfer income distributions.
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Acknowledgments
This research is part of the SimDeco project (Tax-benefit systems, employment structures and cross-country differences in income inequality in Europe: a micro-simulation approach) supported by the National Research Fund, Luxembourg (grant C13/SC/5937475). Emilia Toczydlowska and Carina Toussaint provided invaluable research assistance. The results presented here use EUROMOD version G2.0+. EUROMOD is maintained, developed and managed by the Institute for Social and Economic Research (ISER) at the University of Essex, in collaboration with national teams from the EU member states. We are indebted to the many people who have contributed to the development of EUROMOD. The process of extending and updating EUROMOD is financially supported by the European Union Programme for Employment and Social Innovation ‘Easi’ (2014-2020). The results and their interpretation are our responsibility. We are grateful for comments from Francesco Andreoli and Stephen Jenkins and from participants to the International Microsimulation Association conferences 2015 and 2017, the “Inequality in the Labour Market 2015” workshop , APPAM 2016, ECINEQ 2017, EALE 2017, and the SimDeco workshop 2017 on “Understanding international differences in income inequality”.
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Sologon, D.M., Van Kerm, P., Li, J. et al. Accounting for differences in income inequality across countries: tax-benefit policy, labour market structure, returns and demographics. J Econ Inequal 19, 13–43 (2021). https://doi.org/10.1007/s10888-020-09454-7
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DOI: https://doi.org/10.1007/s10888-020-09454-7