Tax-benefit systems, employment structures and cross-country differences in income inequality in Europe: a micro-simulation approach

The 2011 World Economic Forum identified income inequality as one of the "two most serious challenges in the world". Income inequality increased since the 1980s in most countries, and world income inequality has also increased. More striking, however, is the international variation in income inequality across countries, which is considerably larger than the variation in inequality over time in any country. Despite this, relatively little is known about the sources of the differences in household disposable income inequality across countries.
Furthermore, since 2008, Europe and most industrialized countries have been hot by a major economic crisis -the "Great Recession"- and persisting difficulties in re-gaining economic growth, reducing unemployment and balancing public budgets. Households have been facing an increased insecurity of employment, a slowdown in wage growth or wage freezes, and, later, cuts in public transfers and higher taxes. These factors have affected (and are still affecting) the distribution of disposable incomes to different degrees internationally, with countries showing different resilience to the economic crisis. Recent research has shown that, overall, tax-benefit systems have been able to cushion the impact of the economic crisis on household incomes, at least in the short-term. The main question now is whether consolidation measures and the contraction of the generosity of tax-benefit systems will be able to cushion impacts in the medium-term.
The aim of the proposal is first to explore further the nature of the cross-national differences in household disposable income inequality across a set of European countries, focusing in particular on he role of differences in tax-benefit systems, employment behavior and labour market structures across countries with different labour market institutions and welfare systems. Second, analysis will aim to assess how much these factors can help understand international differences in how household incomes have been hit during the crisis, both in the short-run and in the medium-term once fiscal consolidation measures are put in place. The question here is how the different tax-benefit systems and initial employment structures have lead to differential impacts of the crisis on economic inequality and how cross-country differences in inequality within the EU have evolved recently under the impact of economic shocks and austerity measures. While most of this research is descriptive and exploratory in nature, we also aim to account for potential short-run behavioral responses of individuals (in particular with respect to employment decisions) when looking at potential impacts of differences in tax and benefit systems.