# **6. THE ROLE OF EDUCATION AND LABOR MARKET PARTICIPATION RATES**

31. So far, our analysis has focused mainly on the role of public policy in redistributing incomes across people. In this section, we examine the role of two other key variables, namely differences in (i) labor force participation rates and (ii) differences in education levels, in explaining differences in inequality across households, regions, and countries. We start first by illustrating in more detail some of the main differences in income distributions across EU8 countries (Table 7).

**Table 7: Distribution of equivalized disposable incomes in EU8 countries**

|**Population**<br>|**T**<br>|**otal disposab**<br>|**le income ac**<br>|**cruing to the**<br>|**group (exp**<br>|**ressed as a**<br>|**share of the na**<br>|**tional aver**<br>|**age)**<br>|
|---|---|---|---|---|---|---|---|---|---|
|**Sub-group**|**Slovenia**|**Czech R.**|**Slovakia**|**Hungary**|**Estonia**|**Poland**|**Lithuania**|**Latvia**|**EU8 Group**|
|p05|32%|36%|29%|17%|19%|20%|16%|10%|24%|
|p10|48%|50%|46%|39%|37%|35%|32%|29%|40%|
|p15|56%|57%|54%|47%|45%|43%|41%|37%|48%|
|p20|62%|62%|60%|53%|50%|49%|47%|42%|54%|
|p25|68%|67%|65%|59%|54%|55%|53%|47%|59%|
|p30|73%|71%|69%|63%|60%|60%|57%|52%|64%|
|p35|77%|75%|73%|68%|64%|65%|63%|57%|68%|
|p40|82%|78%|77%|72%|69%|70%|68%|62%|73%|
|p45|86%|82%|81%|77%|74%|76%|73%|68%|78%|
|p50|90%|86%|85%|82%|80%|81%|79%|75%|83%|
|p55|94%|91%|89%|86%|87%|87%|85%|81%|88%|
|p60|99%|95%|93%|91%|94%|94%|91%|89%|94%|
|p65|105%|101%|98%|97%|101%|101%|99%|97%|100%|
|p70|111%|107%|103%|103%|109%|108%|107%|107%|107%|
|p75|117%|113%|109%|110%|118%|117%|117%|118%|115%|
|p80|124%|120%|116%|118%|130%|128%|129%|129%|124%|
|p85|133%|131%|126%|129%|143%|142%|144%|145%|136%|
|p90|146%|144%|139%|145%|161%|162%|169%|166%|154%|
|p95|166%|165%|161%|176%|196%|195%|208%|207%|183%|
|p100|232%|269%|327%|366%|310%|312%|323%|382%|310%|
|Total|100.0|100.0|100.0|100.0|100.0|100.0|100.0|100.0|100.0|
|Gini index|0.239|0.249|0.279|0.321|0.327|0.328|0.348|0.383||

_Source:_ World Bank staff calculations based on data from the 2006 EU Survey of Income and Living Conditions 32. A few words are in order to describe the content of this table. The EU8 countries are presented in order, from left to right, based on their prevailing level of income inequality (Gini coefficient)—i.e. Slovenia in the first column has the lowest inequality while Latvia in the next-to-last column has the highest income inequality. The total population of each country is divided into 20 equal groups ordered by level of income—thus the group p05 contains the poorest 5 percent of the population of each country, p10 the next 5 percent, and so on. Finally, each cell in the table expresses the average income of that particular population sub-group as a percentage of the prevailing national average income. Thus the table shows the poorest 5 percent of Slovenia’s population (i.e. the p05 group) to have an average income of 32 percent of the national average, while the corresponding share for the richest 5 percent (i.e. the p100 group) is 232 percent. By contrast, the spread of these shares in Latvia is much higher—10 percent and 382 percent respectively.

33. There are several interesting points to note. First, the table clearly illustrates the relatively large size of the middle class in each country—defined as people earning between 75 percent and 125 percent of the national average. For example, among EU8 countries taken as a group (last column), roughly 40 percent of the population (from p45 to p80 inclusive) has total disposable incomes falling within this range (the respective country shares range from 30 percent in Latvia to 50 percent in Slovenia). Second, average incomes of the poorest 5 percent in Hungary, Poland, and the Baltic 18