An empirical analysis about the impact of income components on inequality in European countries

In this work we use data relating to the year 2012 of the European Union Statistics on Income and Living Conditions (EU-SILC) to analyze and compare the impact from income components, taxes and social contributions on inequality among households in four major euro area countries: France, Germany, Italy and Spain. To this aim we first aggregate, for each household, gross income components into four main components which reflect roughly speaking: (i) employee income, (ii) income from self-employment, (iii) social transfers and (iv) residual income components. Next, we evaluate the contribution from each income component to inequality in the distribution of gross household income as measured by Zenga’s point and synthetic inequality indexes. At this step we apply a very simple decomposition rule which gives rise to readily interpretable results. Finally, to assess the impact from taxes and social contributions, we subtract the latter from gross household income and evaluate the inequality indexes on the distribution of net disposable household income as well.