Social Conditions and Growing Inequality in Europe:Is Growing Inequality in Europe an Issue?
Walter Hanesch

• 1 Introduction
• 2 Income Distribution in Western Europe
  • 2.1 Inequality in equivalent disposable household income
  • 2.2 Earning inequality and earnings mobility
  • 2.3 Other factors affecting income distribution
• 3 Poverty in Western Europe
• 4 Perspectives and Options
• References:

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Social Conditions and Growing Inequality in Europe:
Is Growing Inequality in Europe an Issue?
Walter Hanesch

1 Introduction

This contribution describes and discusses income distribution and its development in Europe:

• The data presented on income distribution in the European Union is based on two recently published surveys from the European Union and from the OECD. This data reveals that there is growing inequality in income distribution in many European countries. Inequality has, therefore, become an issue of growing importance in Europe. In this context, selected data on low-paid employment as a main factor of earnings inequality will be presented.

• Against the background of growing income inequality, the problem of poverty has also become an issue of concern in many European states. Therefore, selected data on this problem will be presented.

• Causes and consequences of the development of income disparity and poverty from a comparative European-American perspective will be discussed.

2 Income Distribution in Western Europe

2.1 Inequality in equivalent disposable household income

In Europe as well as in the USA, income distribution has received increasing attention over the past decade. During the period of fast growth between 1950 and 1975, rapid increases in real income were accompanied by either stability or some narrowing in overall income distribution in Europe. In the following two decades, not only did the growth of average real

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incomes decelerate, but in a number of countries, income distribution appears to have widened.

The recently implemented European Community Household Panel (ECHP), a multidimensional household survey, presents data on income distribution in 12 member states of the European Union for the first time for the year 1993 (EUROSTAT 1997). This analysis of income distribution is based on disposable household income; the concept covers all market incomes, plus monetary social transfers, minus income taxes and social insurance contributions. As is usual, the varying size and composition of households has been taken into account by adjusting the household income with a so-called equivalence scale (the modified OECD scale: 1.0 for the first adult, 0.5 for every other adult in the household and 0.3 for every child younger than 14). After adjusting income for household size and composition, we have the equivalent disposable household income. It is important to keep in mind that the results of surveys on income distribution are strongly influenced not only by the quality of data but by the methodology of measuring inequality.

In Table 1, the households are arranged in groups of 10% or "deciles", In none of the twelve member states were income shares proportionately distributed in 1993:

• The 20% poorest households received between 6% (Greece, Spain, Italy and Portugal) and 12% (Denmark) of total household income,

• The 20% richest households received between 33% (Denmark) and 46% (Portugal).

• For the European Union as a whole, figures were respectively 6% and 41%.

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Table 1

Household net income distribution in EU 12, 1993

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The distribution of income shares in Table 1 shows great differences in the degree of inequality in the different member states. The income distribution can be summarized by the so-called Gini coefficient; this coefficient varies from 0 (no inequality) to 1 (total inequality).

As measured by the Gini coefficient in Table 1,

• Portugal appeared to have the highest degree of inequality in the EU (0.42 compared to 0.35 for the EU average), Greece (0.38), United Kingdom and Italy with both 0.37 followed.

• Denmark with 0.5 was the lowest under the EU average; Germany with 0.3 was also in the lower range.

This first picture of income distribution gives the impression that Europe - although only a small continent - shows not only a great variety of income levels but also a wide range of income inequality.

Another survey on income distribution, recently published by the OECD, presented data on the development of income distribution in thirteen OECD member states, and among them, in nine European states between the mid-eighties and the mid-nineties. This survey on "Income Distribution and Poverty in Selected OECD Countries" (OECD 1998), was based on national survey data. The survey examines income distribution on the basis of the same income concept as the aforementioned EU survey, but uses a different equivalence scale.

In Table 2 we can see the changes in income distribution measured by the Gini coefficient between the mid-eighties and the mid-nineties:

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• If we look at the Gini coefficient levels in the mid-nineties (the Gini indices have been multiplied by 100), we find the same structure as in the survey of the European Union: while the Gini levels in the Scandinavian countries are relatively low, the levels of inequality in the Continental countries are in the middle range. The levels of inequality in the Southern European countries are relatively high.

• The Anglo-Saxon countries, which had relatively high Gini levels in the European Union survey, were not represented in the OECD selection of European countries. Instead of this, the USA are shown with a Gini level, which is in the same range as the Southern European states.

• Between the mid-eighties and the mid-nineties the degree of inequality has increased in almost all European countries (exceptions were Denmark and France). In the most European countries absolute as well as relative increases were even stronger than in the USA.

Table 2

Trends in inequality: Gini coefficients in Europe and the USA

Equivalence scale = 0.5

Source OECD 1998a: 35

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Table 3 gives a survey of the overall trends in income distribution which is derived from national studies and differs to some degree from the results presented before (i.e. they show a stronger increase of inequality). But the overall trend to be concluded from this survey is that while between the mid-seventies and the mid-eighties inequality was declining, this trend was reversed between the mid-eighties and the mid-nineties.

Chart 1 provides additional details on which quintile groups have been most affected by the changes in income distribution at the aggregate level. Gains and losses are shown for Germany and the United States:

• It can be seen that in the USA during the last decade, the first quintile (i.e. the lowest income group) and the top quintile were able to increase their income shares, while the three middle income groups were confronted with a loss of income shares.

• In Germany, the two lowest quintiles were the losers in the income development over the last decade, while the two top income groups profited most from growing inequality.

• In general, a distinction can be made with countries like the USA, where the largest losses in income shares occurred in the three "middle-income quintiles" leading to a "hollowing out" of the middle; such patterns were found in Belgium, France, Finland and Sweden.

• By contrast, countries can be identified where changes in distribution largely occurred at the extremes of the distribution, with progressively smaller movements around the median; besides Germany this was the case in Denmark, Italy, the Netherlands and Norway.

• To sum up, there is no specific European level of income inequality and there is no common European pattern of change in income distribution.

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2.2 Earning inequality and earnings mobility

In many European countries, as well as in the USA, the broad post-war trend towards narrowing income distributions has been reversed since the beginning of the eighties. An important factor in the widening of the income gap has been the increasing inequality in earnings distribution. The importance of this factor shall be demonstrated for the United States and Germany.

Table 4 indicates the development of the earnings dispersion in the USA and Germany, measured by the ratio of median earnings to the bottom decile earnings (see OECD 1996): While in the USA this D5/D1 ratio showed a trend towards more inequality, the earnings distribution in Germany showed the reverse.

Source OECD 1996: 61,62

An indicator for unequal earnings distribution is the extent of low paid employment. In another recently published OECD survey on "Labor Market Policies" (OECD 1997b), low

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pay was defined as earning less than two-thirds of the median earnings. According to the OECD survey (see Chart 2);

• in the USA, one quarter of all full-time workers are low paid in the sense that they earn less than two-thirds of median earnings compared with less than 15% in Germany.

• This pattern mirrors differences in earnings dispersion because countries like the USA with greater earnings inequality have a higher incidence of low-paid jobs.

• Over the last two decades, the incidence of low pay in most European countries has not increased greatly, while it has tended to drift upwards in the USA.

For social policy conclusions there is a difference whether low pay is only a transitional phenomenon with many workers moving up the earnings ladder as they gain experience or new skills, or whether it persists over time. The earnings mobility of low paid workers between 1986 and 1991 has been analyzed in an OECD survey (see Table 5, OECD 1997a: 36):

• If low paid workers working full-time in both years 1986 and 1991 are first considered, in the USA 58.1% of the low paid in 1986 remained in this position in 1991, while 41.1% moved up to a higher earnings position. So while the persistence of low pay status was high in the USA, in Germany only 26% remained in a low-paid position, and 74% moved up the earnings ladder.

• If we include those workers who left full-time jobs (in the USA 30.4%), 40.5% remained in a low earnings position. 70.9% of all low paid earners in 1986 were without a job or in low paid jobs in 1991. In Germany 40.5% left full-time work and 15.5% stayed in low pay. Therefore, only 56% were without a job in 1991 or remained in a low paid job.

• Similar results occur if we look at movements into low paid employment.

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To sum up, the persistence of low paid employment was considerably higher in the USA than in Germany. Also when low paid "careers" are the focus, the average cumulative years in low paid employment in the USA at 4.1 was much higher than in Germany at 2.8 (see Table 6).

Source: OECD 1997b: 36

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⁽¹⁾ Continuously employed full time workers

Source: OECD 1997b: 37

2.3 Other factors affecting income distribution

Which factors affect the income distribution? The aforementioned OECD survey from 1998 analyzed the aggregate impact of different income sources on inequality. It attempted to identify which type of income contributed most to inequality, the extent to which transfers and taxes reduced inequality, and how these factors have affected inequality. For this purpose, income was divided into four components:

• labor earnings

• self-employment and capital income

• general government transfers

• taxes (direct taxes and social security contributions).

In all countries, total disposable incomes were more evenly distributed than market incomes, highlighting the re-distributive impact of taxes and transfers. Nevertheless, the middle and high income groups received a large share of total transfers. On the other hand, taxation in all countries was progressive in the sense that the lower income groups paid less in relation to their market income than the higher income groups.

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• At any point in time, earnings from labor, which were by far the largest fraction of disposable income, contributed most to overall inequality, although within-component inequality of earnings was lower than for capital and self-employment income.

• Taxes and transfers reduced inequality considerably, although there were wide differences across the various countries.

• Over time, greater inequality in labor earnings contributed most to the rise in inequality, mainly reflecting increased inequality among the earnings of the heads of household.

• In most countries, the re-distributive impact of taxes and transfers increased over time and moderated the increase in inequality at the level of market incomes. However, this was due to an increase in the share of taxes and transfers in total disposable income, rather than to increased progressiveness of the tax and transfer systems themselves.

The importance of the impact of taxes and transfers on income inequality can be seen (in Table 7) by the fact that inequality of market incomes was more reduced in Germany than in the USA, bringing the Gini coefficient in Germany from 43.6 to 28.2, compared to a decline in the Gini level from 45.5 to 34.4 (-35.3% versus -24.5%).

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3 Poverty in Western Europe

While income distribution is influenced by a great variety of components and factors and can be rated in different ways, a main problem, closely related to income inequality, is the existence of poverty. In this section, I will therefore present recently published data on poverty in Western Europe and will try to explain the latest development of this problem.

The European Community Household Panel delivers not only data on income distribution, but also on poverty. In the already mentioned publication of EUROSTAT (1997) the poverty line was defined - according to the conventions in the European Union - as 50% of the arithmetic mean of the equivalent disposable incomes of all households in a country [In former EUROSTAT publications the measurement of poverty was based on expenditure instead of income; see EUROSTAT 1995. EUROSTAT has tested also the "50% of the national median" method. The level was reduced, resulting in lower poverty rates and a slightly different ranking of the countries. The 50% threshold provides a certain continuity with estimates of poverty on the European level in the past.].
A household with an income lower than this poverty line was defined as poor (in Germany the poverty line was 1248 DM in 1993). Throughout the European Union, there were 57 million individuals living in almost 23 million poor households in 1993.

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Chart 3 shows that:

• The proportion of households below the poverty line reached 17% in the EU as a whole.

• The highest poverty rate was in Portugal (29%), followed by Greece (24%), the United Kingdom (23%) and Ireland (21%).

• At the other extreme, Denmark had the lowest poverty rate (9%), followed by Germany and Belgium (both 13%), Luxembourg and the Netherlands (both 14%).

• In the remaining countries (France, Italy and Spain), the rates ranged between 16% and 19%.

If individuals living in households below the poverty line are considered, the ranking was unchanged and the poverty rates varied from 6% (Denmark) to 26% (Portugal) (see Chart 4). The number of children living in poor households was over 13 million in the 12 member states, or 20% of all children in the Union. The highest proportions were in the United Kingdom (32%), Ireland (28%), Portugal (27%), Spain (27%) and Italy (24%) (see Chart 5).

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Results from longitudinal research have revealed extensive movement into and out of relative poverty with only small numbers of people staying permanently poor. An eight-country comparative study suggests that a rapid escape from financial poverty seems to be more likely in countries with low poverty rates (like many European countries) than in countries with high poverty rates (like the United States) (see Duncan et al. 1995).

The European Community Household Panel also delivers data for the analysis of the composition of poor households by social groups. Table 8 presents data on the household type of the poor:

• 36% of all poor households consisted of single persons (19% aged 65 or older)

• 9% included single parents

• 49% were couples with (31%) and without (18%) children

• Other households amounted to 6%

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Table 8 also offers information about the poverty rates of these household groups:

• Single parents with children younger than 16 had the highest poverty rate (36%), followed by

• Single person households aged under 30 (31%)

• Single person households aged 65 or over (27%)

• Couples with three or more children (23%)

• Couples without children, couples with one or two children and middle-aged persons living alone had the lowest poverty rates.

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A last aspect of this analysis concerns the labor market status of the reference person of the households. Table 9 shows that

• 35% of the households belonged to the working poor

• 13% of the households had an unemployed reference person

• 33% belonged to the retired

• 19% were economically inactive for other reasons

If we look at the poverty rates for these groups, the ranking is different:

• The unemployed had the highest poverty rate (46%), as did the

• Other economically inactive households (46%)

• Poverty rate of the retired was 22%

• The rate of the working poor was only 11%

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Because these results from the first wave of the European Community Household Panel are not comparable to the results of former poverty research of EUROSTAT, there is no available information about the development of the poverty problem in the European Union. So again, it is necessary to go back to the findings of the aforementioned OECD survey (see OECD 1998).

According to Table 10, the development of poverty rates in the time period between the mid-1980s and the mid-1990s showed no uniform picture in Europe. While countries like Belgium, Denmark, France and Finland were characterized by a declining poverty rate, in others like Italy, the Netherlands, Germany, Norway and Sweden, poverty was increasing. Poverty fell in the United States in the most recent period (1985-1995), although this fall did not offset the increase in the previous decade.

In general, these trends in poverty seem to reflect the patterns of change rather than the overall trends in income inequality;

• Countries where the largest losses in income shares occurred in the middle income quintiles and were characterized by a "hollowing out" of the middle, showed declining poverty rates (Belgium, France, Finland, and – in the last decade – the USA).

• Countries where changes in inequality largely occurred at the extremes of the distribution showed a tendency towards increasing poverty rates (Germany, Italy, the Netherlands, Norway).

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Source OECD 1998a: 52

4 Perspectives and Options

What are the main findings, and which conclusions and policy recommendations can be drawn from them?

According to the empirical findings on the levels and changes of inequality and poverty, it can be distinguished (see Chart 6) that:

• On the one hand, the Scandinavian and the Continental European countries with their highly developed welfare states show a relatively low degree of inequality and poverty.

• On the other hand, the Southern European and the Anglo-Saxon countries are characterized by a relatively high degree of inequality and poverty.

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Source: Hanesch

The effectiveness of the rudimentary Southern European and of the liberal Anglo-Saxon welfare regimes to reduce inequality and poverty seems to be rather low. But the development since the mid-eighties shows a narrowing in the levels of inequality and poverty, indicating structural problems in the employment system and reforms of the social protection systems, especially in the Scandinavian and the Continental European countries. In most of these countries, the importance of social insurance systems has been reduced through heavy benefit cuts and a tightening of benefit conditions, and social assistance schemes have become more and more important as a last safety net for growing numbers of the population. But even if there is some narrowing between the two groups of the Anglo-Saxon welfare regime on the one hand, and the Scandinavian and Continental European welfare regimes on the other hand, considerable differences in the levels of inequality and poverty are still obvious.

Traditionally, Germany could be characterized by its "social market economy" with a high level of state intervention and collective agreements between the "social partners" (trade unions and employer associations). This concept, which was created in the 1950s as a result of a broad political and social consensus, has enabled since then a high economic

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effectiveness as well as a high level of social equality and social cohesion. German reunification in 1989 imposed a large burden on the German welfare state. The social expenditure in West Germany was 30.4% of its GDP in 1989; for unified Germany in 1993 the figure was 34%. This increase mainly resulted from high transfers via the social insurance system from West to East.

The US has always been known as a land of opportunity, but also of risk. European countries have made more stable social structures, in which the risk of catastrophe is smaller, but so is the opportunity to escape one's predetermined position in society. These stereotypes have become more relevant in recent years as the "Anglo-Saxon concept" of flexibility has become more influential in Europe. There is a growing fear that the globalization of the economy is making it harder to maintain all aspects of European-style social protection.

If the USA and Germany are compared over the last two decades, the two different strategies of economic and social policy towards managing the growing social problems can be distinguished:

• The German strategy can be characterized by the promotion of constant economic production and income growth on the basis of an even higher growth in labor productivity. The gap between the growth of production and productivity, which was only partly compensated by a reduction in average working hours, resulted in an increasing number of unemployed. The constantly growing, and relatively equally distributed, national and household income was therefore accompanied by growing labor market problems and economic exclusion, which lead to a need for greater welfare expenditures.

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• In the USA, a comparable growth in production was accompanied by a slower growth in labor productivity, which allowed an expansion in the number of employed and a reduction of unemployment. The other side of this development was stagnation in national and household income and a greater income inequality with growing income problems, mainly for low-skilled workers. While the losers of the recent development in Germany were and are the (long-term) unemployed, the losers in the USA were and are the working poor.

It is not possible to analyze in any detail the social and economic advantages and disadvantages of American versus German (or European) strategies. But it is important to note that in terms of their results, no one model produces ideal results. Europe's single largest problem is chronically high unemployment, while in the USA it is rising inequality and poverty. Quite clearly, the American model has enjoyed better performance in recent years in creating jobs and reducing unemployment, and hence one form of social exclusion. But its disadvantages are not just that it provides worse social protection for those who fall by the wayside, but also that it is based on a low-skilled and unproductive labor market. Even if the average member of the American population is still better off than the average European, this is only because more Americans work, and they have to work longer hours (see Chart 6).

Furthermore, the USA enjoys comparatively low unemployment, but a disturbing rise in jobs that pay below-poverty wages. Polarization and poverty may threaten the social order and thus burden the public sector on alternative expenditure accounts. The numbers for the American male prison population have reached a record level and are still rising, pushing up spending on prisons, law and order.

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On the other hand, the question arises as to what extent Europe will be obliged, willing and politically capable of importing American characteristics into its own model. This European model - especially in its Scandinavian and Continental version - apparently encompasses mechanisms that induce high productivity and this is welcome in a time of global competition. On the other hand, there is some urge to adjust it, given the high unemployment rate and the heavy social protection burden it yields, and the trend towards dualization of labor participation this engenders.

The recent elections in Saxony-Anhalt (one of the so-called "new states" in reunified Germany) have indicated that the future political and social stability of Germany will be dependent on the question of whether and how labor market exclusion and the polarization of economic perspectives and opportunities can be reduced.

A possible option could be a "social investment approach", including a shift of welfare state resources from passive income maintenance to active labor market policy and employment promotion, and further flexibilization and reduction of working time as a presupposition for the improvement of labor market opportunities for the unemployed.

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Berghman, Jos 1997, Western Europe: Current Practice and Trends, in Hirsch, Donald (Editor), Social Protection and Inclusion. European Challenges for the United Kingdom, Joseph Rowntree Foundation, York.

Duncan, Greg J. et. al. 1995, Poverty and social assistance in the United states, Canada and Europe, in K. Mc Fate, R. Lawson and W.J.Wilson (eds.), Poverty, Inequality and the Future of Social Protection, New York

EUROSTAT 1997, Income Distribution and Poverty in EU12 - 1993, Statistics in Focus. Population and Social Conditions, Luxembourg.

EUROSTAT 1995, Poverty Statistics in the late 1980s: Research based on Micro-data, Luxembourg.

Glatzer, Wolfgang and Richard Hauser 1998, The Distribution of Income and Wealth in European and North-American Society, Arbeitspapier Nr. 16, EVS-Projekt, Institut für Konjunktur, Wachstum und Verteilung, Universität Frankfurt, Frankfurt a.M.

Hanesch, Walter et al. 1994, Armut in Deutschland, Reinbek.

OECD 1995, Income Distribution in OECD Countries. Evidence from the Luxembourg Income Study, prepared by Anthony B. Atkinson, Lee Rainwater and Timothy M. Smeeding, Paris.

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