Accounting for Differences in Income Inequality across Countries: Ireland and the United Kingdom

Présentation de Philippe Van Kerm (LISER, Université du Luxembourg)

Philippe Van Kerm, LISER, Université du Luxembourg
En collaboration avec Denisa Sologon, Jinjing Li et Cathal O’Donoghue

Abstract: This paper proposes 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 prices and market returns, and demographic composition in accounting for differences in income inequality across countries. Building upon EUROMOD (the European tax-benefit calculator) and its harmonized datasets, the model is portable and can be implemented for any cross-country comparisons within the EU. 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 roughly half 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.

Keywords: income inequality, decompositions, cross-national comparisons, microsimulation, tax and transfer policy

JEL Codes: D31,H23,J21,J22,J31