EurWORK European Observatory of Working Life

Income gap widened during economic boom

About

Country: 
Ireland
Author: 
Tony Dobbins (IRN)

In a publication issued in October 2002, the independent research body, the Economic and Social Research Institute (ESRI), confirmed that the gap between the highest and lowest earners in Ireland widened during the years of economic boom between 1995 and 2001. Although absolute or consistent poverty has declined, relative poverty is still prevalent

In October 2002, the Economic and Social Research Institute (ESRI), an independent research body, published a paper examining the distributive impact of budgetary tax and welfare policy in Ireland during times of high and low economic growth, across successive governments and five successive national social partnership agreements, over a 20-year period. The article, 'The distributive impact of budgetary policy: a medium-term view', by Tim Callan, Mary Keeney, and John Walsh appeared in the ESRI publication Budgetary perspectives 2003.

The benchmark used by the ESRI is to index tax and welfare benefit parameters, as provided for in yearly state budgets, in line with wage growth. It concludes that the 'distributive shape of budgetary policy varies considerably not just from year to year, but across three- to five-year periods covered by partnership agreements, governments or spells of high and low growth. During Ireland’s recent growth spurt budgetary policy acted to reinforce income gains for the higher income groups, while involving losses for those in the lower income groups. Results for low-growth periods were more mixed, with a favourable treatment of low-income groups in the 1980s contrasting with an unfavourable treatment in 1992-3.'

Table 1 below indicates the distributive impact of Irish budgets during four low- and high-growth periods for each of the five quintiles of income distribution in the population. The income gap was found to be at its widest during the recent boom (1995-2001).

Table 1. Distributive impact of Irish budgets during low- and high-growth periods
Average growth Year of budgets Change in disposable income (%) by quintile
. . Bottom 2nd 3rd 4th top all
0.2% 1983-6 -5.8 -8.5 -10.4 -7.2 -7.1 -7.7
2.4% 1987-9 4.2 -2.5 -1.9 -0.2 1.0 0.1
2.6% 1993-4 -2.1 -2.4 -1.0 0.6 2.0 0.5
8.2% 1995-2001 -1.9 3.1 11.8 13.7 12.5 10.5

Source: ESRI.

According to the ESRI: 'During the high growth period (1995-2001), budgetary policy led to gains of 12% or more for the top 60% of tax units, as against a loss of 2% for the bottom 20% of tax units and a small gain for the second quintile.'

What of the periods of low growth? The results are rather different for the 1980s – when growth was low for most of the decade – and for the 1992-3 budgets. During the 1983-6 period, budgetary policy led to income losses for all income groups as efforts were made to reduce budget deficits. Losses were smallest for the lowest income quartile. During the 1987-9 period, the incomes of the poorest quintile increased relative to average incomes. During the 1992-3 period, however, low growth was not associated with favourable treatment for low income quintiles.

Impact of partnership

The ESRI also examine the impact of budgetary policy across Ireland's five different social partnership agreements since 1987 – the timing of this impact is crucial, as it is influenced both by concluded agreements and the ongoing negotiation of an agreement.

Under the Programme for National Recovery (PNR), 1987-90, there were, the ESRI claim, very substantial gains for the bottom income quintile (8.3% to 10.6%), as some of the key recommendations of the Commission on Social Welfare were implemented – notably increases focused on the lowest rates of social welfare payment. The lower to middle distribution quintiles experienced losses, while the top quintile experienced above average gains (2.6% to 4.3%) for this period.

Under the Programme for Economic and Social Progress (PESP), 1991-3, overall gains were modest, but highest for the top quintile at 1.7%. Differences arising from the timing of impact of partnership agreements were sharpest under the Programme for Competitiveness and Work (PCW), 1994-6. The 1994-6 budget period saw gains for the bottom two quintiles (1.2% to 2%) somewhat above the average, whereas they experienced losses during the 1995-7 budgets (-1.9% to -1.0%).

Under Partnership 2000, 1997-2000 (IE9702103F), the bottom quintile experienced either losses or below average gains (-2.6% to 4.5%), while the top three quintiles saw gains at or above the average rate (6.7% to 10.9%). Finally, for the current agreement, the Programme for Prosperity and Fairness (IE0003149F), considering budgets affected by the published final agreement (those for 2001 and 2002), gains are greatest for the bottom quartile (6%), and lowest for the top quartile (3.8%). Significantly, however, if negotiation of the PPF is taken into account - and thus the 2000 budget is also included – then, the impact is almost reversed: gains of 3.3% for the bottom quintile, rising to gains of 7% for the top quintile.

The ESRI also conducted a similar analysis based on the distributive impact of budgets - in terms of the effect on five different income quintiles - for which different governments were responsible, outlined in table 2 below.

Table 2. Distributive impact of Irish budgets during different governments
Budget years Parties in government Change in disposable income (%) by quintile
. . Bottom 2nd 3rd 4th Top All
1983-6 FG, Lab -5.8 -8.5 -10.4 -7.2 -7.1 -7.7
1987-9 FF 4.2 -2.5 -1.9 -0.2 1.0 0.1
1990-2 FF, PD 3.7 0 0.3 1.9 3.7 2.5
1993-4 FF, Lab 1.3 1.1 0.4 -0.4 -0.7 -0.1
1995-7 FG, Lab, DL -1.9 -1.0 2.0 3.0 1.9 1.6
1998-2002 FF, PD 2.3 6.4 11.5 10.9 10.6 9.7

Notes: FG = Fine Gael, Lab = Labour Party, FF = Fianna Fail , PD = Progressive Democrats , DL = Democratic Left.

Source: ESRI.

The 1983-6 period of Fine Gail/Labour Party government coincided with the period of low growth observed above, and there were substantial income losses across all groups. The 1987-9 Fianna Fail government’s budgetary policies benefited the bottom quintile. The 1990-2 Fianna Fail-Progressive Democrats budgets favoured those at the very bottom and very top of the income distribution ladder. The 1993-4 Fianna Fail-Labour budgets were broadly neutral, but favouring the bottom quintile. The 1995-1997 'rainbow coalition' (Fine Gail, Labour and Democratic Left) budgets involved losses for those in the bottom 40% of the income distribution, and small gains for those in higher income groups. Finally, the budgetary policy of the current Fianna Fail-Progressive Democrats government has involved substantial gains for the top 60% of the income distribution, and much more modest gains for the bottom income quintile.

CSO income data

The widening income gap between low and high earners that has occurred during the recent boom is confirmed by the results of the Central Statistics Office (CSO) 1999/2000 Household Budget Survey (HBS). A key conclusion of the HBS is that the average disposable income of households in the top two quintiles of the earning distribution (ie with a gross weekly income in excess of EUR 1,339.22) increased by over 61% between 1994/5 and 1999/2000, compared with an increases of 37% in the bottom two quintiles (ie with a gross weekly income below EUR 214.46). The ratio between the average weekly disposable income of households in the lowest income quintile (EUR 106.23) in 1999/2000, compared with those in the highest quintile (EUR 1,428.71), was approximately 13 to 1, compared with 11 to 1 in 1994/95.

The average gross weekly household income in 1999/2000 was EUR 666.72, which was 53% higher than the EUR 435.69 recorded in 1994/95. Much of the increase was accounted for by 'total direct income', which increased by 61% from EUR 362.64 to EUR 585.41 over the five-year period. State transfer payments recorded a much more modest increase, up 11% to EUR 81.32. According to the CSO, improved economic conditions were reflected in the fact that employees’ wages increased by two-thirds, whereas the average weekly contribution from unemployment benefits and assistance was almost halved from EUR 18.93 to EUR 9.91.

Commentary

The recent income data cited above indicate that the income gap between high and low earners has widened in recent years. Thus, although progress has been made in reducing absolute levels of poverty in Ireland, relative poverty is still in evidence.

The combination of very impressive job creation/low unemployment, the introduction of a national minimum wage in 2000 (IE0110103N), significant pay gains for low-paid workers, and tax cuts/tax credits targeted at the low paid, have undoubtedly contributed to an improvement in the absolute position of low-paid workers in Ireland in recent years. For instance, the level of consistent income poverty has declined significantly, and there has been a small reduction in the gender wage gap (IE0107170F). In short, the absolute position and living standards of the low paid have improved – certainly over the course of the current national agreement, the Programme for Prosperity and Fairness - as the minimum income floor has been raised, and employment has become easier to find in tighter labour market conditions.

Crucially, however, real income gains at the bottom of the income ladder may still be experienced as inadequate when expectations are fuelled by the experience of seeing those higher up the income ladder doing so much better. In view of this, as the Irish economic boom has gathered pace, there has undoubtedly been an overall increase in relative income inequality, in the sense that the relative gap between high- and low-income earners has widened. As matters stand, the lower rungs of the Irish income distribution ladder have a relatively low share of total income, while, in sharp contrast, the top rung of the income ladder possesses a very large relative slice of the total income 'cake'.

One reason often given for current income inequality in Ireland is that, on balance, tax cuts over the course of recent budgets have disproportionately favoured high earners, even though the low paid have also benefited. In relation to this, it is evident that the Irish model of social partnership – which has essentially been largely based on a wage moderation/tax reduction trade-off - has been predominantly geared towards economic growth and employment creation (indeed it has been termed 'competitive corporatism'), rather than incorporating any wealth redistributive function. Significantly, the redistribution of income from rich to poor through active state intervention is afforded higher priority in many other European countries than in Ireland – at least under the current Fianna Fail-Progressive Democrat government.

Finally, substantial increases in the cost of living during the recent boom have also had a more negative impact on the low paid relative to those on higher incomes, and deficiencies in public service provision - such as in the areas of housing, childcare, public transport, and healthcare (IE0207202F) – also have a disproportionate impact on the low paid, who have less purchasing power/disposable income (Tony Dobbins, IRN).