The focus of this paper is on the impact of the Great Recession on Ireland’s income distribution–both directly and via the way policy has responded1. Annual micro-data on the Irish income distribution have been available since 1994–but during most of this period the economy was growing strongly. During the recessions of the 1970s and 1980s, microdata on the income distribution was not available on an annual basis making it difficult to track the impact of recession and associated policy responses on the evolution of income distribution. Nolan (1999) examined the distribution of household income in Ireland in 1987, when Ireland was experiencing a recession, and 1994, when Ireland was emerging from recession. Between these years, he found that the bottom decile slightly increased its share of equivalised household disposable income at the expense of the middle and top deciles. The Gini coefficient, however, was largely unaffected, remaining at 0.32 in both years. O’Neill and Sweetman (2001) came to a similar conclusion, irrespective of whether income or expenditure was used as a measure of resources.
A recent international study by Jenkins et al. (2013) conducted a large scale comparison of the effect of the early years of the Great Recession on 21 OECD countries. Although the recession was the deepest macroeconomic downturn since World War II, and there was substantial heterogeneity in the depth of the recession across countries, Jenkins et al. showed that for most of the countries studied, there was little change in household income distributions in the first two years of the downturn. In addition, the report presented some evidence from six detailed case study countries that elderly people were relatively well protected over the first two years of the Great Recession. Perri and Steinberg (2012) explored the impact of the Great Recession on economic inequality in the United States. They found that the lowest quintile fared worst in terms of earnings and wealth, losing about 30 per cent of earnings and 40 per cent of wealth. However, they suggest the tax and transfer system offset most of these losses for the bottom quintile, so that expenditure on nondurables for this lowest 20 per cent did not change significantly relative to other groups. Similarly, Larrimore et al. (2013) found an "unprecedented importance" of the direct effects of temporary tax and transfer policies for supporting median and bottom-quintile income during the Great Recession in the US.
In order to understand the context in which the recessionary forces were operating in Ireland, it is necessary to keep in mind the broader backdrop. Over the years 1994 to 2007, economic growth in Ireland was among the highest in the OECD (see Figure 1 for the rise in GDP per capita). The period 1994 to 2000 saw an annual average growth rate in real GDP of over 7%. This growth was accompanied by sustained increases in the numbers in employment, rising from 1.2 million in 1994 to 2.1 million by 2007. Unemployment fell to just over 4% in 2000 and remained around this level until 2008 (Figure 1). Ireland had long been a country of net emigration, but this trend reversed as significant numbers of Irish emigrants returned and immigrants from other countries were attracted to Ireland.
Ireland’s economy entered recession in 2008, and by 2010 GDP per capita had fallen by more than 13 per cent, while unemployment soared to almost 14 per cent. This scale of economic deterioration was driven by three main factors:
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The effects of worldwide recession on a small and very open economy, compounded by
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a dramatic collapse in property prices and in activity and employment in the construction sector, upon which the Irish economy had become heavily reliant, and
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a banking crisis whereby the Irish government was required to come to the aid of banks which were deeply exposed by the extent of their property-related lending.
Each of these factors contributed to a fiscal crisis, with tax revenues collapsing while increased unemployment led to greater demands on the welfare system. The banking crisis resulted in the government guaranteeing both investors and bondholders and led to unsustainable yields on Irish bonds as government debt grew. These unsustainable yields led to the Irish government seeking a financial ‘bailout’ from the EU, the ECB and the IMF in 2010.
The nature of the recession, and in particular the severity of the downturn for the construction industry, has contributed to a sharp differential in the evolution of the male and female unemployment rates. Figure 2 shows that the unemployment rates for men and women were similar, at about 4 to 5 per cent, for the years 2003 to 2007. By 2011, the male unemployment rate had risen by 13 percentage points, while the female unemployment rate had risen by about half that much.
What about developments in wages for those in employment? On average, there was a small rise in hourly earnings over the 2008 to 2012 period, but there is a great deal of diversity across sectors. There were falls of 4 to 5 per cent in public administration and defence, and in finance and insurance. At the other extreme, there were increases of 6 per cent for those in manufacturing, and 2 per cent for those in wholesale and retail. Wages in public sector organisations were reduced first by via a ‘Pension Related Deduction’ (PRD), introduced in 2009, whereby the first €15,000 of annual earnings were exempt, but a 5% levy was paid on the next €5,000 of earnings, 10% paid on earnings between €20,000 and €60,000 and 10.5% on earnings above €60,000. Later, in 2010, an explicit pay cut for public sector workers was implemented, with a reduction of 5% on the first €30,000 of salary, 7.5% on the next €40,000 and 10% reduction on the next €55,000. New entrants were also to be hired on salaries 10% lower than the level payable to current staff. The evolution of average wages in the public sector has also been affected by compositional shifts. For example, a policy of incentivized early retirement, made available to those aged over 50, may have removed from the payroll more of those with above average wages, thereby depressing average wages. A further complication is that the system of incremental pay scales means that the composition of the workforce as between those (typically older) at the top of their scale and those who would benefit from annual increments can affect the extent of observed increases in pay.
As well as the cuts to public sector pay, the deterioration in the economy and in the government’s fiscal position led to a variety of tax and benefit changes between 2008 and 2011. Looking first at the taxation side:
○ An income levy, payable on gross income (excluding social welfare payments) was introduced in 2009 at an initial rate of 1% on annual income up to €100,100 and 2% on income in excess of that. These income levy rates were subsequently doubled, as was the Health Levy. Both levies were then replaced in 2011 by a "Universal Social Charge" (USC)–a new form of income tax, with exemptions for annual income below €4,004 and a progressive structure above this level with rates of 2%, 4% and 7%.
○ The income ceiling above which no further social insurance contributions were payable was first raised substantially, and then abolished in 2011.
○ In 2011 the standard rate band of income tax was reduced (from an annual €36,400 to €32,800) as were the main tax credits.
○ A €200 per annum charge on non-principal private residences was introduced in 2009 as was a flat-rate ‘household charge’ or property tax of €100 in 2011, both payable by the owner of the property. This was the precursor to a full scale value-related property tax coming into force in mid-2013.
○ Tax relief on pension contributions was also reduced, with the annual earnings limit for determining maximum tax-relievable contributions down from €275,239 in 2008 to €115,000 by 2011, while employee pension contributions also became liable for PRSI and the USC.
On the social welfare side, income support rates were actually increased in 2009. The Budget for that year was brought forward from December to October 2008, and the full scale of the problems was not yet evident. However, the Budgets of 2010 and 2011 then reduced the rates of support provided by most social welfare schemes applicable to those of working age, and made deeper cuts in the universal Child Benefit payment. Payments to young unemployed people were reduced very substantially. Rates of payment for old age pensions, however, have remained unchanged to date.