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Inequality of Net Equivalized Income (Summary and Outlook)

The developments of inequality in net equivalized income can be summarized as follows.

Regarding the development of average net equivalized income from 1991-2010 two aspects stand out: First, only between 1997 and 2001/02, a phase of rising employment, did average net equivalized income increase, while it mostly stagnated otherwise. Second, mean and median net equivalized income moved parallel to each other in the first decade. During the second decade mean and median income diverged until 2005 and converged thereafter. 

Inequality of Market Equivalized Income (Summary)

This section documented the development of the distribution of market equivalized income and discussed the major factors driving inequality between 1991 and 2010. Subsection 4.1 summarized the development of income inequality. Here, we saw that while in the upper part of the income distribution – namely in the highest quintile of the income distribution – incomes steadily increased over the whole time span, in the lower half of the distribution this was not the case.In contrast to net equivalized income, aggregate concentration measures of market equivalized income reveal that income inequality rose overall since the early 1990s and over both decades. Moreover, in the second decade, between 2002 and 2005, we observe a strong increase in inequality. However, from 2006 onwards income concentration decreased. The consideration of decile ratios illustrated in more detail that, over the whole period, incomes around the 9th decile steadily increased relative to median income. The strong upward and downward movement of income inequality in the 2000s, however, is driven by income changes in the lower part of the income distribution.

Subsection 4.2 discussed the most relevant explanatory factors for changes in the distribution of market income. Subsection 4.2.1 addressed labor productivity and demographic changes. The latter primarily revealed declining household sizes and a dispersion of education within the labor force. These aspects represent slowly changing determinants of the distribution of market equivalized income that may have contributed to the trend increase of inequality in equivalized incomes and individual labor incomes. However, these factors cannot explain short-term fluctuations of income concentration, regardless whether inequality refers to individual, household or equivalized income. Subsection 4.2.2 further illustrated that, given the high concentration of capital income and the positive association of capital income shares and the level of household market income, increasing capital income shares may also have contributed to the trend of rising market income inequality. Finally, subsection 4.2.3 highlighted the major relevance of changes in the labor market for the evolution of the distribution of market income. Here we see that rising employment generally lowers market income inequality. This is visible during the two phases from 1997 to 2001 and from 2006 to 2009. Furthermore, the steady increase of atypical employment from 1991 to 2006 has contributed to the rise of market income inequality, and the halting of this increase that coincided with strong employment gains from 2006 onwards can explain the remarkable trend reversion, that is the only four years without any further increase of market income concentration since the German reunification. 

Redistribution Effects of the Tax and Public Transfer System (Summary)

A comparison of concentration measures for net equivalized income and market equivalized income illustrates how state redistribution evolved between 1991 and 2010. In the mid-1990s there was a brief period in which the effectiveness of government redistribution increased. However, from 1998 to 2009 governmental redistribution decreased steadily. Three explanations for this were presented above: First, the changes in the tax system, in particular the decrease of the maximum tax rate, contributed significantly to the decline in redistribution. Also, changes in property taxes affected redistribution. The increase in the wealth tax in the mid of the 1990s coincides with the short phase in which governmental redistribution increased significantly. The abolishment of the wealth tax helps to explain the declining redistribution thereafter. Second, frequent changes in the public transfer system, for instance with respect to child benefit and social security contributions, can help account for some changes in public redistribution. Finally, the labor market reforms and corresponding transfer adjustments of the 2000s exhibited a significant impact on redistribution. On the one hand, these changes promoted the further creation of atypical and marginal employment which is associated with additional labor income at the bottom of the income distribution, lowering market income concentration. On the other hand, it involved massive transfer cuts which counteracted the reduction of market income inequality vis-á-vis the concentration of net income. Taken together, both effects decreased the effectiveness of redistribution.  

Summary and Implications

In this study we discussed the development of income inequality in Germany from 1991 to 2010. The goal of our examination was to shed light on the main explanatory factors for the development of income inequality in order to better understand changes in the distribution of net equivalized income in Germany. To this end our analysis aimed at providing insights  into the circumstances under which inequality evolved and which trends in the economy are most likely to provide an explanation for changes in income concentration. 

The steady increase of inequality in market equivalized income observed during the whole time period can be explained by a number of demographic trends, such as declining household sizes and shifts in the educational structure but also by rising capital income shares, the increasing significance of atypical employment and the increasing wage spread among full-time employees. The trend increase of inequality in net equivalized income is caused by the steady increase in the concentration of market equivalized income and the decreasing redistributive effectiveness of taxes and public transfers. 

The slight acceleration of the increase in the concentration of market equivalized income in the first half of the 2000s was primarily due to rising unemployment, a pronounced increase in atypical employment and in the upper part of the income distribution also driven by a strong increase of capital income shares. The significant increase in the concentration of net equivalized income can be attributed to the accelerated concentration of market income and the reduction of the maximum income tax rate. Between 2006 and 2010 inequality of market equivalized income decreased due to the strong increase in employment and the fact that the proportion of atypically employed persons in the labor force did not rise further. Given the developments in the labor market, the fall in market income concentration as such is not surprising. However, it seems remarkable that inequality did not decrease any further. Morevover, in contrast to the fall in concentration of market equivalized income, wage inequality kept rising and the low-pay sector continued to expand. The decline in inequality of market equivalized income positively affected the development of the concentration of net equivalized income, which did not increase further in this period. However, due to the reduced effectiveness of the tax and public transfer system, inequality in net equivalized income did not fall and the risk of poverty rate remained high despite considerable job growth.

Die vollständige Studie finden Sie hier (pdf).