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Modelling the Impact of the Macro-Economic Change on Inequality: Ireland

Modelling the Impact of the Macro-Economic Change on Inequality: Ireland. Cathal O’Donoghue, Jason Loughrey Teagasc Rural Economy and Development Programme (REDP) Karyn Morrissey University of Liverpool. Rapid Growth to 2007 Big Fall post 2007 GNP pc fell to 2000 levels in 2011.

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Modelling the Impact of the Macro-Economic Change on Inequality: Ireland

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  1. Modelling the Impact of the Macro-Economic Change on Inequality: Ireland Cathal O’Donoghue, Jason Loughrey Teagasc Rural Economy and Development Programme (REDP) Karyn Morrissey University of Liverpool

  2. Rapid Growth to 2007 • Big Fall post 2007 • GNP pc fell to 2000 levels in 2011 • Expenditure Increase 2007-2009 up 15% • Fall in Tax Revenues 2007-2010 down 33% Macro-economic Indicators GDP pc & GNP pc Both in Constant Prices (€per capita) Public Finance Source: CSO National Accounts

  3. Lost most of the employment gain of Celtic Tiger • Disproportionately Young or Male • Employment rate of women under 35 higher than men in 2011 • Big falls in share of construction (50% fall in share amongst males) Employment Rate and Real Wage

  4. Resulting Budget Constraint is lower and flatter • Poorer, but more equal Budget Constraint for a married couple with children 2005-2011(Adjusted for Wage Growth)

  5. Price and Wage Inflation and Policy Updating (2007-2011) • Benefits rose by faster than CPI (UA – Jobseekers Allowance, OACP – State Pension (Insurance) • Significant earnings growth heterogeneity

  6. Change in Gini Coefficient • Gini rose to peak in 2005, falling over 3 points between 2005 and 2008 with onset of crisis • Research Question – what drove fall in Gini (labour market participation, earnings variability, tax-benefit policy)? • What is the impact of later economics and policy changes Equivalised Disposable Income (parametric equivalence scale, 0.5)

  7. Challenges • Fast moving economic situation • Significant policy changes  need quick analysis • However data often produced at a lag of two years • However other data sources (LFS, Admin Data) more quickly available • Reweighting tools in this fast moving environment may not give us enough control to adapt to the component changes • Solution apply a “dynamic” microsimulation model

  8. Methodology • Historical Simulation – micro data contains changes in all components simultaneously • Estimate a system of equations representing labour market states and income sources • Use Micro-simulation model to simulate each stage in turn on each micro population for historical years • See Bourguignon, F., Fournier, M, Gurgand, M. (2001) • Forward Simulation • Simulate income distribution from last data year using system of equations (dynamic microsimulation model) using official statistics based calibration totals • See O’Donoghue and Li (2012) • Simulate Disposable Income using Tax-Benefit Model In-work Capital Income Employee Self-Employed Retired Unemployed Inactive Part-time Farmer Non-Farmer SE Student Farm Y Public Contract SE Earnings Part-time Occupation Industry Earnings

  9. Validation of Tax Benefit Model • Compare Simulated Tax-Benefit System with Actual Data • Assume 100% take-up as normal in microsimulation models • Trend broadly the same, although overall fall slightly less steep Equivalised Disposable Income (parametric equivalence scale, 0.5)

  10. Changing one component at a time in all possible orders and taking average Gini – report the average difference in the Gini • Market Income Distribution Changes increasing inequality • Structure of labour market also reducing inequality • Demographic Structure U - shaped • Tax-Benefit Changes reduce inequality Annual Change in Inequality 2003-2008 due to Components Equivalised Disposable Income (parametric equivalence scale, 0.5)

  11. However the direction of individual components can vary depending upon the order in which the analysis takes place • 24 pathways Results Path Dependent (2004)

  12. Use Shapely measure to average all possible transitions • However some variability, particularly data and labour market participation Shapely and Variability of Change Labour Market Data-Demographic Market Income Tax-Benefit

  13. Projection of Labour Market, Market Income and Policy • In order to project we use alignment or calibration • Firstly comparing history with alignment  similar trend by higher inequality due to different employment rates between micro data and external data • Project using the same calibration totals Equivalised Disposable Income (parametric equivalence scale, 0.5)

  14. Impact of Different Years • Starting simulation in different years • U-shaped trend is similar • But level depends upon starting point • Impact of Demographic change and Sampling Error Equivalised Disposable Income (parametric equivalence scale, 0.5)

  15. Projecting • We observe continuing increase in Gini due to Market Income • However counter-balanced by increased redistributive effect of benefits • Partially composition, partially more progressive Redistributive Forces 2003-2011

  16. Conclusions and Next Steps • Initial Crisis  inequality reducing • However subsequently widening in 2011 • Labour Market and Market income  Largely inequality increasing • Policy  Inequality reducing • Assess overall Welfare impact • Incorporate impact on price • Less important distributionally than impact on overall purchasing power • Analyse Gender dimension • Differentiate Demographic Change from Sampling Variability • Intergenerational Change • Adjust for housing cost changes • Imputed rent has gone down, but housing costs have gone up

  17. Thank You

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