The largest decrease in income inequality among EU member states in the
recent recession was registered in Romania, a 4.5 point drop in the Gini coefficient
between 2007 and 2010. The country experienced a severe economic downturn and
some of the toughest austerity measures among EU member states. I explain the
drop in inequality by analysing the gap between wage earners and individuals who
are self-employed or contributing family workers. Austerity cuts compressed top
wages in the public sector, while some categories of low income earners saw modest
increases in welfare payments. The drop in inequality thus reflects the austerity cuts
at the top of the income distribution and only modest gains for low income
households. Using 2011 Romanian Household Budget Survey data, I show the
impact of social insurance and social protection transfers on the Gini coefficient.
Using the same dataset, I run a simulation of how a set of redistributive policies
would achieve a further reduction in income inequality, to levels below the EU27
average. Throughout the analysis, I highlight methodological difficulties in
measuring income inequality in Romania. In particular, I show how the widespread
imputation of own production of agricultural products in Romanian household
income surveys significantly decreases income inequality indicators.