SECTION of DOCUMENT:
[page-number of print ed.: 40 = blank page]
Social Conditions and Growing Inequality in Europe:
This contribution describes and discusses income distribution and its development in Europe:
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
[page-number of print ed.: 42]
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:
[page-number of print ed.: 43]
[page-number of print ed.: 44]
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,
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:
[page-number of print ed.: 45]
Trends in inequality: Gini coefficients in Europe and the USA
Equivalence scale = 0.5
Source OECD 1998a: 35
[page-number of print ed.: 46]
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:
[page-number of print ed.: 47]
[page-number of print ed.: 48]
[page-number of print ed.: 49]
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
[page-number of print ed.: 50]
pay was defined as earning less than two-thirds of the median earnings. According to the OECD survey (see Chart 2);
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):
[page-number of print ed.: 51]
[page-number of print ed.: 52]
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
[page-number of print ed.: 53]
(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:
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.
[page-number of print ed.: 54]
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%).
[page-number of print ed.: 55]
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.].
[page-number of print ed.: 56]
Chart 3 shows that:
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).
[page-number of print ed.: 57]
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:
[page-number of print ed.: 58]
Table 8 also offers information about the poverty rates of these household groups:
Source EUROSTAT 1997
[page-number of print ed.: 59]
A last aspect of this analysis concerns the labor market status of the reference person of the households. Table 9 shows that
If we look at the poverty rates for these groups, the ranking is different:
[page-number of print ed.: 60]
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;
[page-number of print ed.: 61]
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:
[page-number of print ed.: 62]
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
[page-number of print ed.: 63]
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:
[page-number of print ed.: 64]
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.
[page-number of print ed.: 65]
[page-number of print ed.: 66]
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.
[page-number of print ed.: 67]
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.
OECD 1996, Employment Outlook 1996, Paris.
OECD 1997, Employment Outlook 1997, Paris (1997a).
OECD 1997, Labour Market Policies: New Challenges. Policies for Low-Paid Workers and Unskilled Job Seekers, Meeting of the Employment, Labour and Social Affairs Committee at Ministerial Level held at the Chateau de la Muette, Paris, on Tuesday 14 and Wednesday 15 October 1997, Paris (1997b).
OECD 1998, Income Distribution and Poverty in Selected OECD Countries, by Jean-Marc Burniaux et al., Economics Department Working papers No 189, Paris (1998a).
OECD 1998, Family, Market and Community. Equity and Efficiency in Social Policy, Paris (1998b).
© Friedrich Ebert Stiftung | technical support | net edition fes-library | Juli 2000