Measurement and decomposition of Lithuania's income inequality

Nerijus Černiauskas,Andrius Čiginas

doi:10.1080/1406099x.2020.1780693

Abstract

ABSTRACT Even though Lithuania’s household income inequality is among the highest in the European Union (EU), little empirical work has been carried out to explain such disparities. We investigate it using the EU Statistics on Income and Living Conditions sample microdata. We confirm that income inequality in Lithuania is high compared to the EU average. Our decompositions reveal that the number of employed household members in Lithuania’s households affects income inequality more as compared to the EU. It is related to a larger labour income, and self-employment income, in particular, contribution to inequality in Lithuania. Moreover, taxes, social contributions, and transfers reduce income inequality in Lithuania less than in the EU. Specifically, income taxes and social contributions are less progressive while transfers constitute a smaller share of income in Lithuania than in the EU. Income taxes and social contributions are effectively regressive for the self-employed in Lithuania.

Highlights

Income inequality in Lithuania has been one of the largest in the European Union (EU) and is still growing
Our results suggest that household income inequality in Lithuania is one of the highest in the EU and this finding is robust to various statistical tests
We have run three statistical tests and found that income inequality in Lithuania is in all cases one of the highest in the EU

Summary

Introduction

Income inequality in Lithuania has been one of the largest in the EU and is still growing. We have investigated why household income inequality is higher compared to other countries using univariate factor and subgroup decompositions that decompose inequality into parts. These decompositions are purely statistical: they do not incorporate agent responses to any covariate. Factor component decomposition decomposes inequality measure by disaggregating it into mutually exclusive and exhaustive income components, for example, labour and capital income Two versions of this method are well known: the natural decomposition as in Shorrocks (1982) that focuses on the decomposition of the variance and the Lerman and Yitzhaki (1985) that is used to decompose the Gini coefficient.

Definitions and data on income

Inequality

Subgroup inequality

What factors can explain income inequality in Lithuania?

Conclusions

Findings

A Subgroup decompositions

B Factor decompositions