Components of income inequality and its change in EU countries, 2004-2010

This paper aims to assess the contribution of different income sources and population characteristics to income inequality and it’s change during the 2004-2010 period in EU Member States. The analysis uses EU-SILC data to study the components of income inequality and its change both during years of economic growth (2004-2007) and during years of economic slowdown (2007-2010). The study analyses the contribution of different income sources by using the Shorrocks decomposition method and the role of different population characteristics using a regression-based method. The analysis shows that between 2004 and 2007 inequality of market income declined, most importantly in countries with important gains in employment, while between 2007 and 2010 market income inequality was rising in the majority of the countries. During the years of economic growth inequality of disposable income was also on the decline in most of the countries, while during the crisis years it increased more moderately pointing to an important redistributive effect of government taxes and transfers. Market income had an inequality increasing effect during the 2007-2010 period in Denmark, Cyprus, France and the UK, but in most of these countries (except France) government taxes and transfers moderated this effect. During the years of economic growth Poland and Estonia experienced the largest fall in inequality of disposable income. Changes in income differences by levels of work intensity contributed to inequality decline in both countries. The role of education level proved to be different however, having an inequality decreasing effect in Estonia and an inequality increasing effect in Poland. Between 2007 and 2010, the largest increases in inequality of disposable income were found in Ireland, Spain and Slovakia. In the case of Spain and Ireland the variables studied in the analysis did not contribute to explain this increase, while in the case of Slovakia almost the entire increase in inequality is the result of the inequality increasing effect of increasing income differences by levels of household work intensity.