Drivers of Income Inequality in Ireland and Northern Ireland

The distribution of income differs in Ireland and Northern Ireland. Differences in demographics, working patterns, wage levels and the tax-benefit system all contribute to these differences and could prove a barrier to increased co-operation on the Shared Island of Ireland. Using harmonised microsimulation models for Ireland (SWITCH) and Northern Ireland (UKMOD), we identify the drivers of the differences in income distribution between Ireland and Northern Ireland. Using a decomposition technique, we isolate the relative contributions of market income differences - attributable to demographics, labour market participation and wage levels - and the tax-benefit system to differences in income distribution in the two jurisdictions. In a final step, we simulate the implementation of the Irish tax-benefit system in Northern Ireland and vice versa. This exercise indicates the potential costs and distributional effect of harmonising the direct tax and welfare system across the two jurisdictions.