This document analyzes how inequality in Ireland changed during the Great Recession from 2007-2012. It finds that demographic changes and changes in the labor market increased inequality, while changes in market incomes and the tax-benefit system decreased inequality. A decomposition analysis showed that population aging slightly increased inequality, while polarization of employment and a weaker link between education and incomes increased it. However, policy interventions reduced inequality overall. The results also showed variability depending on the order of analysis.

1. Decomposing the Drivers of Changes in Inequality during the
Great Recession in Ireland
Cathal O’Donoghue, Jason Loughrey
Head, Teagasc Rural Economy and Development Programme
Denisa Maria Sologon
Luxembourg Institute for Social and Economic Research
1

2. Objectives of Presentation
 Impact of the crisis has been multi-
dimensional
 Labour Market
 Incomes
 Prices
 Tax-Benefit System
 Decompose Components
50
52
54
56
58
60
62
64
2000 2005 2010 2015 2020
EmploymentRate 500
550
600
650
700
750
800
850
900
AvEarnings
• Lost most of the employment gain of Celtic Tiger
• Disproportionately Young or Male
• Employment rate of women under 35 higher than men in 2011
• Big falls in share of construction (50% fall in share amongst males)

3. Price and Wage Inflation and Policy Updating (2007-2014)
80
85
90
95
100
105
110
115
120
2006 2008 2010 2012 2014 2016
CPI Old Age Single UA Single
Tax Credit Industry Hotel & food
Financial Public admin Health
• Benefits growing faster than CPI
• Earnings mainly growing less than CPI

4. Change in Inequality
0.25
0.27
0.29
0.31
0.33
2002 2004 2006 2008 2010 2012 2014
Disposable (Data)
Equivalised Disposable Income (parametric equivalence scale, 0.5)
• Gini fell over 3 points between 2005 and 2008 with onset of crisis
• Rose Again to 2010, before falling slightly
• Focus of Study 2007 (pre crisis) and 2012 (“end” crisis – lowest employment) 
fall in inequality

5. Decomposition: Methodology

6. Decomposition
 Cowell and Fiorio (2011)
 A priori approaches (Shorrocks 1982, 1983)
 Factor
 Sub-Group Decomposition
 Combination-Shapeley (Chantreuil and Trannoy, 1999; Shorrocks, 1999)
 Nested Shapeley (Chantreuil and Trannoy, 1999)
 Micro-Ecnometric Explanatory models
 Single Equation (Fields and Yoo, 2000); Redmond and Kattuman (2001)
and Morduch and Sicular, 2002)
 Non Parametric Approach (DiNardo et al., (1996)
 Parametric Systems of Equations (Oaxaca (1973), Blinder (1973),
Bourguignon et al. 2001, 2008)

7. Methodological Approach
 Disposable Income
 Tax-Benefit System T(), B() modelled using Tax-Benefit Microsimulation
Model
 Single Equation Model
 Then use Shorrocks Factor Decomposition
 Parametric System (Income Generation Model) describes the generating
process for market income




1
1
M
m
m
ii YY where
mm
i
m
i XY  , For m = 1,…, ,
i
M
iY 1

8. Methodological Approach
 Estimate system of equations representing
 Z Demographic and Data Sampling Error
 Ii() Presence of Income Source I
 Yi() Level of Income Source I
 For each Dataset (Year), Z, Swap
 Presence of Income – Labour Market Characteristics
 In-work, Employee, Unemployment Retirement, Job Characteristics
(Occupation, Industry, Sector, Contract), Has Capital Income, Has
Pension, Has Other Income etc.
 Level of Income Source (Employee, Self-Employment, Farm, Capital,
Pension, Other)
 Tax-Benefit System
 24 = 16 possibilities for two years
 Order matters – Use Shapeley Decomposition to get average impact

9. Population and Market Drivers

10. Summary Statistics Distributional Drivers
 Reduction of those of pension age and a substantial increase of those of
working age at the bottom of the distribution.
 This is accompanied by a large increase in those with children in the bottom
quintile. For those with the youngest children, there is an increase also at the top
60%, thus a hollowing out of the youngest children in the middle of the
distribution.
 For those in work, the share decreased across all quintiles, but given re-
ranking, the share halved in the bottom two quintiles, consistent with the
working age story.
 Overall, education levels rose, with the share rising in particular at the
bottom of the distribution with younger higher educated workers losing
employment.
 The industries with the largest fall in employment shares were agriculture
and construction, while commerce and the other sectors having the largest
increase in share.
 Employment income, capital and other income,  more concentrated;
 Self-employment less concentrated

11. Policy Drivers

12. Budget Constraint for a married couple with children 2007-2013
(Adjusted for CPI)
20000
25000
30000
35000
40000
45000
50000
55000
60000
0 20 40 60 80
Hours per Week
DisposableIncomeperYear
2007
2008
2009
2010
2011
2012
2013
2014
• Budget Constrain lower and flatter reflecting reduction in living standards and
more redistributive system

13. Redistributive Impact of Policy
Change in Gini due to Taxes and Benefits
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
2002 2004 2006 2008 2010 2012 2014
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
Benefits Tax
Equivalised Disposable Income (parametric equivalence scale, 0.5)
• For population, tax and benefit system more redistributive due to both greater
targeting and expenditure due to demand

14. Results 1: Fields Decomposition

15. Fields Decomposition
 Explanatory power of the model is
relatively high in 2007 at about 50%
 Declined about 15% between 2007
and 2012
 Reflecting the asymmetric impact of
the economic downturn
 Coefficients Change
 Demographic not sign. Except
pension age (+)
 Relationship between educational
attainment and income reduces
over the period, reflecting the
reduction in the more highly
educated younger population
 Urban-rural gap decreasing slightly
 Differences (unclear) in terms of
occupation and industry
2007 2012
Demography 0.1 5.1
Work 72.1 83.5
Education 25.1 9.7
Spatial 2.7 1.7
Share of Observed Variability Accounted
for by components

16. Results 2: Oaxaca-Blinder-Bourguignon Decomposition

17. Education-Income Drivers – Equation Coefficients
 Reductions in the relationship between Education and
 Presence of Employment
 Level of Employment Income
 Level of Other Income (Female)
 Presence and Levels of Occupational Pensions (Male)
 Increases in the relationship between Education and
 Presence and Level of Capital Income
 Presence of Other Income
 Presence of Occupational Pensions (Female)

18. Change in Inequality
• Decomposing inequality
changes into effects 2007-2012
• Market Income and
Demographic changes have
been pushing inequality
upwards
• Labour market structure
and policy have been
pushing in the other
direction
-0.025
-0.02
-0.015
-0.01
-0.005
0
0.005
0.01
0.015
0.02
Change
Demographic Labour Market
Market Income Tax-Benefit
Av. Change in Inequality due to
components

19. Shapeley Decomposition
• Shapeley – average 16 potential
pathways
• Large Variability
 Market income and TB unambiguously
reducing
 Demography and Labour Market mixed
Range Change in Inequality
due to components
Pathways from 2007 to 2012
Labour
Market
Market
Income
Policy
Demo-
graphy

20. Summary and Conclusions
20

21. Key Lessons
 Change in population structure has been slightly inequality
increasing due to increase in education level
 Polarisation of Employment increases inequality
 Reduced link between education and employment and
increased share of higher education narrows inequality due to
the distribution of market income
 Policy effects have been inequality reducing
 However intra-distributional changes more nuanced
 Conclusions for demography and market sensitive to order
of analysis