Distribution of market income

The distribution of market income, obtained either from employment, trading activities or capital (i.e. from financial investment), is a prior determinant of the distribution of household disposable income, which depends also on the extent of redistribution through the tax and transfer system. The more unequally is market income distributed, the greater the degree of redistribution required to achieve a given degree of equality in disposable income. The distribution of market income, therefore, has significant implications for policy on taxes and benefits.

The most important source of market income for the average household are earnings from employment. The distribution of this is governed by supply and demand factors in the labour market as well as institutional factors, such as the nature of labour relations. The relationship between the distribution of earnings of individuals and that of market income depends not only on labour market factors (such as the extent of part-time working) but also on the composition of households and the extent to which all members of household are employed, as well as on the distribution of income from self-employment and capital. The relationship is, therefore, complicated in that several factors are at work which can either offset the impact of earnings inequality on the distribution of household income or reinforce it.

Summary of findings

The distribution of gross earnings among full-time employees is most unequal in Latvia, Portugal and Estonia and least unequal in Denmark, Belgium and Slovakia. The inclusion of earnings of part-time workers tends to increase inequality, most significantly in Malta, Sweden and the Netherlands.

The inequality of earnings declined in most countries over the period 2004-2008, the only exceptions being Germany, Austria, Ireland, Estonia and the Netherlands.

Earnings vary significantly between men and women, between those with different levels of education and by experience, or of time in work.

As households are assumed to share income from employment equally between their members, what ultimately matters for income inequality is the study distribution of earnings between households. The degree of inequality of this in 2008, measured on an annual basis, is highest in Portugal, Romania and Luxembourg. This however does not take account of the fact that some households do not have income from employment at all, as no-one of working age is in work. The proportion of people who live in workless households was largest in Hungary and Belgium followed by the UK, Romania and Poland. Between 2004 and 2008, the share of those living in workless households declined in most countries, mirroring the increase in the employment rate, though generally by much less than this.

Market income of households also includes income from self-employment and capital, which are typically both much smaller than wages and salaries. The inclusion of self-employment income reduces overall income inequality between households, while the inclusion of income from calital increases it in all cases. The distribution of market income overall is most unequal in Romania and Portugal and least so in Cyprus and Slovakia.