Exploring inequality decomposition by income source at EU level

In Chapter 3, Stefano Filauro and Alessia Fulvimari analyse how the inequality contributions of different income sources developed in two specific periods: the crisis years (2008–2013) and the subsequent recovery (2013–2008). To do so, they carry out an inequality decomposition by income sources, and present evidence for the overall changes of the inequality contributions of market income sources, social transfers and taxes. They find that during the crisis years labour income shares fell in a number of countries but they slightly increased in the subsequent recovery. In turn, as the development of shares and inequality contributions is highly correlated, the disequalising role of labour income declined in the first period and subsequently slightly increased in the recovery period on average across the EU. These trends were the result of different, but at times reinforcing dynamics of earnings and self-employment income. The disequalising role of capital income has declined in countries where it has a large share and where it was possible to use reliable data derived from registers. The equalising role of taxes has somewhat reduced in a majority of EU countries over these periods. However, all in all, there are markedly heterogeneous trends in the inequality contributions of the different market and welfare sources across the EU. The authors also highlight the current limitations of this exercise. Indeed, they could only analyse within-country changes of the inequality contributions, as this requires fewer assumptions about data reliability than comparing the levels of the inequality contributions between countries. Varying reliability of capital income and the difficulty of deriving earnings net of social contributions prevent them from carrying out a comparison of shares and inequality contributions for the different income sources between countries.