2/2023 What explains wealth inequality in Estonia? The role of wealth components, household size and regions
Occasional Papers of Eesti Pank 2/2023
Jaanika Meriküll and Tairi Rõõm
This paper analyses the wealth inequality of Estonian households, employing data of the Household Finance and Consumption Survey (HFCS). Income inequality in Estonia is close to the euro area average, but wealth is distributed less evenly than in most of the other euro area countries. Two of the most commonly used measures of wealth inequality are the Gini coefficient and the share of wealth belonging to the richest households. The inequality of net wealth is among the highest in the euro area according to both of these measures in Estonia. The three waves of the HFCS conducted in Estonia cover the years 2013–2021, during which time the estimated Gini coefficient of wealth inequality rose slightly from 0.70 to 0.71. The share of wealth owned by the top 5% of households increased from 43.3% to 47.7%. Although the point estimates of both inequality measures increased, these changes were not statistically significant.
We carry out a decomposition of wealth inequality to estimate which components of net wealth increase or decrease inequality and how the intertemporal changes in the structure of wealth have affected it. An increase in the value of the household main residence had an equalising effect on wealth, whereas growth in the share of business wealth and an increase in the loan burden had the opposite impact. The positive and negative effects of these changes were of the same magnitude and their net effect on the Gini coefficient of net wealth was close to zero. We complement the analysis of the effects of different wealth components by looking at the impact of two demographic trends on wealth inequality in Estonia, the first being internal migration from rural areas to Tallinn and its surrounding regions and the second the increase in the share of single-member households. Although these demographic changes have been substantial, our estimations show that they had no significant impact, since the wealth inequality in wealthier regions and among single-member households did not differ substantially from that in other regions or households.
Most of the wealth components in the Estonian HFCS data are register-based and register data are collected at the individual level, so wealth inequality can be measured at two different levels of disaggregation. We exploit this feature of the dataset and estimate wealth inequality at the individual level in addition to household-level estimates. Wealth inequality estimates at the individual level are higher than household-level estimates – the Gini coefficient of net wealth is larger by about 0.05. The wealth components and demographic trends have similar effects on wealth inequality at both levels of disaggregation.
JEL classification: D31, G51, D13
Keywords: Estonia, net wealth, wealth inequality, decomposition, wealth inequality within households
The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank or the European Central Bank.