Income inequality in Ireland: the devil is in the detail

Progessive tax system lessens disparity in incomes before tax and benefits are applied

The gap between the top 10 per cent and the bottom 10 per cent  – in disposable income terms– was at its lowest recorded level in 2019, just prior to the pandemic, and 16 per cent lower than it was in 1987.

The gap between the top 10 per cent and the bottom 10 per cent – in disposable income terms– was at its lowest recorded level in 2019, just prior to the pandemic, and 16 per cent lower than it was in 1987.

 

After three decades of rapid economic growth, Ireland now has the highest rate of income inequality in the EU. While true, this statement is a little misleading. I’m referring to market income inequality – income before taxes and benefits are applied.

Seen through this lens, Ireland is a very unequal society with top earners making steep multiples of what’s been generated at the lower rungs of the economic ladder.

A recent study by the Economic and Social Research Institute (ESRI), which examined the distribution of market income in Ireland in 2019 found that 36 per cent of households reported incomes of less than €15,000 per year while 10 per cent had earnings of more than €60,000 a year.

Households

When the State’s progressive tax and benefit system kicks in, however, the number of households reporting disposable incomes of less than €15,000 falls to just 12 per cent while the number of households with earnings above €60,000 drops to 3 per cent. In other words, tax smooths a significant kink in the earnings curve.

In terms of the distribution of disposable income – which adds benefits and subtracts taxes from market income – we’re very close to the EU average.

Ireland also appears to be one the few developed countries that has avoided an increase in this measure of inequality in recent decades.

The gap between the top 10 per cent and the bottom 10 per cent – in disposable income terms – was at its lowest recorded level in 2019, just prior to the pandemic, and 16 per cent lower than it was in 1987.

The narrowing of the gap was driven by strong employment growth over the period – the 2008 financial crisis being an exception – and the State’s progressive tax and benefit system.

That said, these measures of income inequality are somewhat crude and hide the distribution of household assets and liabilities across income groups and age categories. They don’t, for instance, take account of the fact that stagnant wages and higher housing costs have left many young workers here financially worse off than their parents.

Earnings have flatlined for young people entering the Irish labour market and many are earning less – in real terms – than their counterparts did in the 1990s and 2000s. Their situation is compounded by higher housing costs fuelled by rapidly rising rents.

It’s not exactly clear why we have such a high income disparity at the pre-tax stage.

Trends

“Despite a rich literature exploring trends and the nature of income inequality in Ireland, our understanding of the reasons underlying such high levels of market income inequality is limited,” ESRI economist Barra Roantree says in the aforementioned ESRI report.

But there are two schools of thought. The first centres on the distribution of income across households, or more simply, the fact that so many households have little or no positive market income.

As of 2019, up to 15 per cent of individuals lived in a household with no market income. The reasons for this are likely to predate the more recent period of strong growth.

The other possible reason centres on the make-up of the economy itself, the juxtaposition of high-paying, high-tech industries with more low-paying sectors like retail and farming. IT workers typically command bigger salaries and the gap between them other workers is growing, a reflection of the global economy generally.

But there are other factors at play. There is an increasing trend for big companies to farm out a lot of its low-paid work to third parties or to low-cost jurisdictions, meaning their wage profile is higher than it might have been in an era before outsourcing.

Though multinationals have a big impact on the Irish economy, they have a relatively low employment footprint – so it’s unlikely that this trend is playing a big role here.

A bigger factor is the rise in female participation in the Irish workforce. The share of women aged 25 to 64 in paid work more than doubled from 31 per cent in 1987 to 67 per cent in 2017.

The rise in the employment rate of women has, however, been concentrated in households where there is also a higher-earning man, which may have compounded existing disparities between high and low-earning households.

Challenges

Income and/or wealth inequality looks set to be one of the defining challenges – alongside climate change – of the next decade. It has been rising in many countries and seems to be at the core of the much of the breakdown of establishment politics.

In the last 30 years, the wages of the top 1 per cent in the US have grown by 154 per cent, while the bottom 90 per cent has seen growth of only 17 per cent. As the branches of the economic tree move further and further apart, it will, in theory, become harder and harder to climb them.

Mobility is a key dynamic in society. If the opportunities to move up become more limited or there’s is a perceived bias against the middle and lower classes, politics is likely to get more fractious.

We’ve already seen this in the US and the UK with Trump and Brexit and to a certain extent here with housing.

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