CSB Working Paper, 2023, 2: The vicious entanglement of labour-market and income inequalities in Europe

Though labour-market earnings are the most important component of household incomes, the relationship between the two distributions remains underresearched. This contribution aims to examine this association with a descriptive analysis. We focus particularly on low-wage and high-wage employment which define two different but still interlinked types of the vicious entanglement. We present the results for the average EU country, as all 27 countries appear to largely share the same fundamentals. Th…

Though labour-market earnings are the most important component of household incomes, the relationship between the two distributions remains underresearched. This contribution aims to examine this association with a descriptive analysis. We focus particularly on low-wage and high-wage employment which define two different but still interlinked types of the vicious entanglement. We present the results for the average EU country, as all 27 countries appear to largely share the same fundamentals. Thereto we examine how ‘labour households’ (who depend primarily on wage earnings), are spread over the income distribution of all households and how the individuals providing those earnings are distributed over the overall distribution of hourly wages. Their household incomes appear to crowd towards the top while a significant share of those individuals crowd towards low wages. Thus, low pay is found all over the income distribution. This contrasts with the single-earner world and depends predominantly on ‘Additional earners’ (persons earning less than the main ‘Primary earners’ in their households), who are the defining constituent of the dual-earner world. Note though that the dual-earner world has much more
progressed in the labour market, as three quarters of earners share a household with one or more other earners, than in the income distribution as single-earner households still make up close to half of all labour households. Additional earners’ personal characteristics differ significantly but they sort almost identical effects on hourly pay – suggesting that the earner’s position in the household overrides all characteristics. Their low wages spread also over the entire wage distribution of corresponding Primary earners. Consequently, the
first element of mutually increasing inequalities is that middle- and high-educated Additional earners make up a large majority of low-wage employment. They mount strong job competition to the low educated based on qualifications, working time and the leeway offered by higher household incomes. A brief country comparison suggests a growing exclusion of the low-educated from employment as a result.
As the second element of inequality is that high-educated homogamy drives a modest share of households towards the very top of the income distribution, especially when these earners are also jointly high paid.
Another country comparison suggests that the rapid expansion of tertiary educational attainment reinforces both the second and the first type of entanglement. Clearly, the two distributions in incomes and wages should be considered in conjunction in analysis as
well as policy making. We conclude with a short discussion of the implications for wage formation as well as the role of education.