Income inequality: policy response from the EU perspective 5 October 2017 Aurimas Andrulis, DG EMPL
Structure of the presentation Policy context: why European Commission raised the issue of income inequality? Lithuania at a glance Policy response: options from the EU perspective
Policy context
General Increasing focus on the concept of inclusive growth and inequality in recent years (Piketty, OECD, IMF, ILO) High or rising inequality is becoming an issue in many countries Extreme inequality is bad for inclusive growth and for political systems (e.g. negative impact on economic output; eroding middle class, emigration, criminality, etc)
EU discourse Europe 2020 poverty targets are linked conceptually and mathematically to income inequality EC Annual Growth Survey 2017 referred to link between inequality and potential growth concept of "social fairness" European Semester 2016/2017 was the first cycle of systematic treatment of income inequality. For Lithuania, income inequality has been indicated even earlier. European Pillar of Social Rights: emphasis on equal opportunities (Principle 3)
Lithuania at a glance 1
The S80/S20 ratio (2016 or most recent data)
GINI (2016 or most recent data)
At-risk of poverty or social exclusion (2016 or most recent data)
Zoom in on income inequality in LT 18 16 14 12 10 S50/S10 ratio, 2015 data 10,4 11,2 16,5 1,4 1,2 1 0,8 S90/S50 ratio, 2015 data 0,8 1,2 8 6 4 2 0,6 0,4 0,2 0 0 Source: DG EMPL calculations based on Eurostat, EU-SILC
Where is income concentrated? LT stands out as a country where developments in market incomes suggest rising inequality is the result of income growth at the top of the distribution.* This is a combination of rising market incomes and the inability of the relatively flat rate tax system to curb rising incomes at the top of the distribution. *The S90/S50 income share ratio shows incomes among the top 10% grew fastest and were among the highest among EU countries in the years to 2015.
Policy response
What are the drivers of income inequality? Geography Weak wage-setting institutions Increasing share of single-headed households Distribution of savings and capital incomes Technology Globalization
Policy Levers Policy levers are always country-specific and will depend on many factors BUT, in general income inequality can be addressed In the short run, through changes in the taxbenefit system In the long run, through investment in education and skills, (reduces wage dispersion, increases employment)
Effect of the Tax-Benefit System on Inequality 60% % reduction in Gini from taxes and transfers (2014) 50% 48,0 40% 30% 32,6 39,5 20% 10% 0% Source: DG EMPL calculations based on Eurostat, EU-SILC
Effect of the Tax-Benefit System on Inequality 35,0 30,0 25,0 20,0 15,0 15,8 20,8 30,1 14 12 Impact of social transfers (pensions excluded) on GINI (difference in percentage points), 2015 data. 13 10,0 10 5,0 8 0,0 LV BG RO IT MT PL SI LU AT FR BE UK DK EL PT 6 5,5 Impact of social transfers (pensions included) on GINI (difference in percentage points), 2015 data. 4 2 4,2 0 EL LV BG EE SK LT MT EU FR NL LU AT BE FI IE Source: DG EMPL calculations based on Eurostat, EU-SILC
Policy Levers (Benefits) The design of benefit systems matters as much as the level of benefits Income supports should be tapered on re-entry into the labour market, to avoid inactivity traps Means-testing of benefits decreases inequality faster, but in some cases may create difficulties (stigma, administrative burden, etc)
Policy Levers (Taxes) Taxes play a lesser role in reducing income inequality than benefits In general, countries with flat tax systems have worse inequality outcomes
IE FR UK NL LU PT BE MT IT FI ES EL SI SK HR AT DK SE DE EE CZ LT RO PL LV BG HU EU-28 in % Progressivity of labour taxation (2016) 70 60 50 40 30 20 10 0 Tax wedge 50 % AW Tax wedge 167 % AW Source: European Commission tax and benefits indicator database based on OECD data (TAXUD)
Easy access to quality social services Access to social services is key to addressing inequality of opportunity Services addressed to families and children Early Childhood Education and Childcare Social Housing (e.g. "Housing First" strategies) Healthcare For further reference: see the European Pillar of Social Rights
Social dialogue As a general rule, countries with well-established wage bargaining at national, sectoral or company level have lower income inequality.
Education In the long run, education is the most effective means of reducing market income inequalities and creating equal chances BUT: easily accessible and good quality for all (non-inclusive education can in fact have adverse effect on equality of opportunities) For example, disadvantaged students are more than twice as likely (2.6) to score low in PISA science than students from other socioeconomic backgrounds 11.6% of difference in the science score can be explained through a student's socioeconomic status, which is worse than Estonia (7.8%), Latvia (8.7%) In all three PISA areas, students in Lithuania from rural schools perform worse than students from towns or cities.
Wiley Miller, www.gocomics.com/nonsequitur
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