Income Inequality and Redistribution in Lithuania: The Role of Policy, Labor Market, Income, and Demographics

Abstract

We model the household disposable income distribution in Lithuania and explore the drivers of the increase in income inequality between 2007 and 2015. We quantify the contributions of four factors to changes in the disposable income distribution: (i) demographics; (ii) labor market structure; (iii) returns and prices; and (iv) tax–benefit system. Results show that the effects of the factors were substantial and reflected heterogeneous developments over two subperiods: changes in the tax and benefit system cushioned a rapid rise in market income inequality because of the global financial crisis during 2007–2011, but failed to do so during the subsequent years of economic expansion, when rising returns in the labor and capital markets significantly increased disposable income inequality. We also find that declining marriage rates contributed to the increase in income inequality in Lithuania.