Social benefits had a “mildly neutralising effect” on inequalities in spending power, narrowing the gap between the poorest and the wealthiest, a University of Malta study has found.
The study found that the top 20% of earners in Malta were obtaining a higher proportion of income - 37% - with the bottom 80% of the population sharing the remaining 63% of total incomes in 2018.
“Had there been no direct taxation and social transfers, income inequality would have been more pronounced among the poorest population. This shows that household composition, taxes, and social transfers play an important role in stabilising and redistributing income from the richest to the poorest,” the study concluded.
The research found that over the past 13 years, there were marginal increases in total income inequality at the upper end of the distribution.
Conducted in 2020 by Melchior Vella and Gilmour Camilleri under the auspices of the Centre for Labour Studies (CLS) at the University of Malta, the study analysed changes in income inequality and poverty in Malta between 2005 and 2018.
The study found that earnings are a huge contributor, resulting in almost three-fourths of inequality. Other income, including rental, interests and dividends from financial assets, is highly unequally distributed. However, it constitutes a small share of total income.
Researchers found that between 2010 and 2018, earnings exerted upward pressure on inequality as more people participated in the labour market with less evenly distributed market-driven earnings.
Although other income constitutes a relatively small share of total income, it was the main contributor to the increase in inequality between 2014 and 2018. As expected, this income is unequally distributed and reported by families with higher incomes.
Turning to social transfers, the researchers found that the effect of social transfers was boosted between 2014 and 2018. This helped to almost cancel out all the inequality pressures exerted by the market forces. This period was characterised by an arsenal of social measures, such as the introduction of the in-work benefit and tapering of social benefits and more generous means-tested benefit rates.
On the other hand, the reported changes in direct taxation reflect both the share of taxes to total income as well as how evenly distributed taxes were among households.
Taxes contributed to more inequality between 2005 and 2009, reflecting changes in tax parameters between 2007 and 2009, and then reversed in the following period. The contribution of taxes to overall inequality trended upward during recent years, coinciding with the widening of the tax bands for the middle- to upper-income class between 2013 and 2015.
Education
Whereas education explained almost 15% of inequality between households during 2005-2009, the rate increased to 25% between 2014-2018.
The study confirms that the income of individuals with tertiary education was much higher than those who are head of households with primary, secondary and upper-secondary education.
The study found the number of individuals who live with their parents until they are in their 30s to be rising, as is the number of women engaged in part-time or full-time external employment.
An examination of the difference between full-time/part-time employees, self-employed, unemployed, and inactive persons below and above retirement age revealed that labour status and work intensity are key determinants of income inequality.