Decomposition of inequality by population sub-groups

The way that income is distributed across society over time is the result of a complex set of processes, which involve various demographic and economic factors and their interaction with the social welfare system in place. The concern here is to assess the effect of individual and household characteristics on income distribution.

The focus is on income from employment, since this is the most important source of income for most households. The income from employment of households depends above all on the extent to which household members are in work and, if so, whether they work full-time or part-time. It also depends on factors related to the distribution of wages, like education level or age, which is related to labour market experience. In addition to factors related to income from employment the importance of household structure also has to be considered. Demographic characteristics of the household, such as whether or not household members are over retirement age or there are dependent children in the household, are also affecting household income.

The aim here is to examine the extent to which inequality in the distribution of income is a result, on the one hand, of differences in the income of households with different compositions in terms of household structure, work intensity and the age and education level of the household head, and, on the other, of differences in income between households with similar characteristics. The change in contributions of different factors between 2004 and 2008 is also examined.

The contributions of the different factors to inequality are estimated using a regression-based decomposition method (see the section on Methodology). The contribution takes two forms - proportionate, or the relative amount of overall inequality accounted for by a particular factor, and absolute, which is defined as the effect on the Gini coefficient (i.e. how much it contributes to the overall value of this). The contribution of a given factor depends on the difference between the average incomes of those with the characteristic in question and the relative number of the people concerned (their share of total population).

Summary of findings

A number of household characteristics (age of the head of household, their education level, the household’s structure and work intensity) affect the extent of inequality in income distribution. Differences in the age of the household head tend to have less effect less than that of the other factors. The effect is largest in France and Sweden and only slightly smaller in Denmark, while in Latvia, Lithuania, Poland and Ireland, the effect is less than in other countries. The effect of differences in household structure is largest in the Nordic countries, especially in Sweden, together with the Netherlands. The effect is smallest in Greece and is also below average in the other Southern countries, except for Italy.

The education of the household head is particularly important in Portugal and Romania, where it accounts for around a fifth of overall inequality, and also plays a larger role than average in Cyprus and Greece as well as in Poland, Slovenia and Hungary. By contrast, it accounts for relatively little of differences in income in Sweden and Denmark. The work intensity of the household has the largest effect in Bulgaria, Belgium, Latvia and Malta and a relatively small effect in Greece, Romania, Luxembourg and France.