Papers by: 1. Figari, Paulus, and Sutherland (FPS) 2. Galbraith and Garcilazo (GG)

1. 1. Income inequality and the effect of public policies in the European Union: what happens with enlargement?2. Inequalities, Employment and Income Convergence: Evidence from Regional Data Papers by: 1. Figari, Paulus, and Sutherland (FPS) 2. Galbraith and Garcilazo (GG) Comments by: Lars Osberg Economics, Dalhousie University

2. Common Focus: Determinants of Inequality within the European Union • FPS: impacts of tax/transfer policy on inequality & relative poverty EU15→EU19 • GG: pay inequality (within/between regions) & unemployment rates for 187 European Regions 1984-2003. • Motivating Concern: “Social Cohesion” & Inequality in a possibly fragile federation • A shared problem of EU, Canada & others • Quibble: both papers have rhetoric of “social cohesion” but only data is income inequality • Is it vertical or horizontal equity that matters more for a sense of common citizenship?

3. FPS: Income inequality and the effect of public policies in the European Union: what happens with enlargement? • 15 pre-2004 EU states plus Estonia, Hungary, Poland and Slovenia • Methodology: • EUROMOD static micro-simulation model • direct taxes, social contributions, cash benefits simulated in a comparable way using tax-benefit rules in place + info in survey datasets

4. Income Concept & Measurement • Pre-Tax Income [1] “market income” = pre-tax gross earnings (not including employer social insurance contributions) + self-employment income + capital income + private pensions & transfers [2] “market income plus public pensions” • Adjustments • modified OECD equivalence scale • top and bottom coded/truncated • EurostatPPP indexes for GDP • 5% confidence intervals - nonparametric bootstrap. • 1000 for each country & 250 for EU

5. Income inequality before and after taxes and benefits - Gini coefficient

6. Diversity within the EU • Public pensions play widely varying role in reducing inequality • Tax/transfer systems • Reduce inequality to differing degrees • Netherlands, Southern European, Estonia & Anglo-Saxon redistribute the least • Change inequality ordering • EU-15:Gini (market income→PDI) = 0.50 → 0.30 • inequality reduced by 39% • EU-19:Gini (market income→PDI) = 0.52 → 0.33 • inequality reduced by 35% • Did enlargement imply a “big” change?

7. Income inequality before and after taxes and benefits – Ge(0) & Ge(1) indices • Generalized Entropy Indices • Ge(0) – low-end sensitive • Ge(1) – more top-end sensitive • Rankings change • But not much • EU19 inequality > EU15 inequality always • Taxes and benefits reduce inequality by ?? • EU-15 • Ge(0) by 66% • Ge(1). by 49% • EU-19: • Ge(0) by 60% • Ge(1) by 45%

8. Sensitivities • Top & Bottom coding make little difference • Equivalence scale • Income per capita or OECD ? – slightly less decrease in Gini

9. Inequality Decomposition • EU-15 • Essentially all of EU15 inequality in market income + public pensions explained within countries • EU-19 • More (2-14%) of total EU19 inequality explained by inequality between countries

10. Which tax and benefit components make a difference?Household income composition: whole population

11. A buried gem! • “Overall, market income at 100% of disposable income in Figure 4a means that direct taxes and cash benefits balance each other” • Implication: the consumptive activities of the state are entirely financed by indirect taxation

12. Household income composition: bottom decile group

13. “Similar” individuals are not treated “similarly” by the state in EU nations. • Does horizontal equity matter for a sense of common citizenship in a European polity? • “Similar” treatment does NOT require identical treatment • Net Fiscal Residuum similar? • “reasonably comparable levels of public services at reasonably comparable levels of taxation” • 36(2) Constitution Act of Canada, 1982

14. Income poverty rates - Before & after taxes and benefits (Poverty line = 60% of national median equivalised household income)

15. Means tested benefits often target poverty gap – but to differing degrees!

16. Comments (LO) • FPS recognize “rules ≠ reality” • Nontake-up of benefits, evasion of taxes imply EUROMOD = idealized picture • UK & other Anglo nations • Big news 1980+ is the exploding share of top 1% • Survey based micro-data can only track trends among ‘the middle 90%’ • Can social cohesion survive the increasingly conspicuous consumption of the top 1% ? • Quantitative impact & sociological impact? • ‘Social Cohesion’ & quantitatively small stereotypes • Addition of small, poor nations cannot move aggregate stats much – but can affect politics

17. GG - Inequalities, Employment and Income Convergence: Evidence from Regional Data • Focus: relationship of pay inequality & unemployment rates for 187 European Regions 1984-2003 • inequality between 16 industrial sectors in each region & between regions • Is there a tradeoff between cohesion and competitiveness ? • No • Less inter-industry pay inequality generally associated with lower regional unemployment • Time effects & European Macro-environment • Maastricht Treaty (1992) • 4 percentage point increase in unemployment rate • Euro (1998) • General reduction in unemployment • Lisbon Treaty (2000) • Increase in unemployment

18. Methodology: Theil Decomposition • Time series payroll data 1984-2003 • Wages & Employment • LO: FT or PT? Time period? Wage Concept ? • 16 Industries in 187 regions • Theil’s entropy measure decomposed into: • Between sectors, within region component • Between region component • Contribute to inequality ‘from below’ or ‘from above’?

19. Within-Regions Between-Sectors Theil’s T Statistic, 1998

20. Regional Contribution to the Europe-wide Theil’s T Statistic, 1995

21. Regional Contribution to the Europe-wide Theil’s T Statistic, 2000

22. Between-Regions Component and Within-Regions Theil’s T Statistic, 1998

23. A Model of Regional Unemployment • UN = a +B1Theil + B2 RelWage + B3 GDPG + B4 PopUn24 + Di Country + DjTime • Reduced form model of regional unemployment rates • 2 ‘supply’ and 2 ‘demand’ variables • Supply • relative size of regional population of young workers • Inter-industry inequality of wages (Theil) in region • Demand • growth of regional GDP • average wage rate of the region • + Country and Time specific Fixed Effects • assumes common EU business cycle -

24. Coefficient Estimates: Linear Model - (1984-2003) • Relative regional wage rate not significant • More inequality between industry wages – more unemployment

25. Country Fixed Effects in European Unemployment

26. Time Fixed Effects in European Unemployment

27. GG Conclusions: • “ Positive impact of pay inequality on unemployment suggests that promoting cohesion in the structure of pay in lagging regions could lead to a catching-up process leading to territorial cohesion” • Counter to argument that “pay flexibility’ is needed • Specific Suggestions: • “raising minimum wages, targeting industrial development policies in poor areas, active labor market polices for the unemployed, policies to improve workers’ skills such as on-the-job training, adult education, and assistance programs for people at the bottom” • “expanding university enrollments is perhaps the proven effective route to reducing youth unemployment”

28. Comments - LO • Specific policies not part of modelling • Very much a reduced form model of regional unemployment rates + causal interpretation • Is it believable? What is causality? • Very large coefficients on regional GDP growth • -10.3 % point change U rate (all) if +1% growth GDP • Causality ? – is this good news or bad (if true)? • Inter-industry wage differentials are small part of level of pay inequality & trend to greater individual earnings inequality • BIG NEWS – rising share of top 1% in Anglo nations • “Middle 90%” - much less change in income shares but increased residual unexplained variance in individual earnings