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Demographic Change and the European Income Distribution. ESRI DISCUSSION PAPER SERIES IZA DP No. 11440, March 2018
This paper assesses the effect of key demographic changes (population ageing and
upskilling) that are expected by 2030 on the income distribution in the EU-27 and examines
the potential of tax-benefit systems to counterbalance negative developments. Theory
predicts that population ageing should increase income inequality, while the effect of
up-skilling is more ambiguous. Tax-benefit systems may stabilize these expected changes
though this is largely an empirical question given their typically complex nature. We use
a decomposition technique to isolate the effect of projected demographic change on
income inequality and poverty from the reaction of the labor market to this demographic
change through wage adjustments. Our results show that demographic change is likely to
lead to increasing inequality while related wage adjustments work mainly in the opposite
direction. Changes to projected relative poverty are minimal for most countries. With a few
exceptions, EU tax-benefit systems are able to absorb most of projected increase in market
income inequality