Unravelling the facts, and myths, of Irish inequality

ANALYSIS:Contrary to popular opinion, Ireland is in line with the European average in terms of income equality

The gap between rich and poor narrowed a little in 2011. But new income equality figures, published yesterday, show that despite this seemingly positive development, there is in fact nothing to cheer about. The more equal spread of income happened despite an increase in most measures of misery, such as the proportion of people in deprivation.

Because of this apparent paradox, and because factors affecting income equality are many and complex (and thus often muddled), it is worth noting briefly how the spread of earnings is gauged before analysing what has been happening to income equality in Ireland in recent years.

The best measure of income equality was invented a century ago by Corrado Gini, an Italian sociologist and statistician. According to his “Gini coefficient”, a country scores 100 if all income goes to just one person. At the other extreme, if everyone has an equal slice of the pie the score is zero.

Yesterday’s numbers show that Ireland registered a Gini coefficient of 31.1 in 2011. This is, as it happens, identical to the figure for the EU as a whole.

As Europe is by far the most equal part of the world and as Ireland is average in Europe, this makes Ireland an unusually equal country by global standards (it is emphatically not a very unequal society, as those who ignore the evidence sometimes declare with great certainty).

To understand why this is so, one has to look at the great many factors influencing income distribution. These include a country’s level of economic development, attitudes to meritocracy, conditions in the jobs market, the tax system, the size and nature of the welfare state, family structure, migration patterns and much else besides.

As with any complex social phenomenon, disentangling the effect of each factor is impossible and no analysis can be definitive. But since the State’s statisticians began producing the current Gini coefficient series in 2004, some broad patterns are discernible.

The headline Gini figures show that in 2004-06 Irish incomes were a little less equal than the average across the EU. This is likely to be explained by the boom conditions of the time.

Those best-positioned to do well in a fast-growing economy – entrepreneurs whose incomes are closely linked to their businesses’ profits, shareholders who earn dividends (closely linked to big-company profitability) and those for whom bonuses make up a large part of their salaries – tend to enjoy faster earnings growth than those on fixed incomes, such as the salaried and pensioners.

Bigger falls

But just as high earners do best in a boom, they tend to experience bigger falls in their incomes during a crash. This is exactly what happened when the economy headed south. For three consecutive years from 2007, Irish incomes became more equal as the depression took its toll, and by 2009 they had become a little more equal than the EU average.

There were specific reasons why many previously high earners were hit disproportionately hard by the slump. As lots of small and medium-sized companies went to the wall, the numbers working for themselves fell by even more than the numbers of waged employees. The self-employed who remained in business experienced a severe squeeze on profits, and therefore their incomes, as spending in the economy fell sharply. And those who owned shares in the indigenous financial institutions no longer earned dividends as the banks imploded.