Part I - Situation and trends

2 Social Cohesion

2.2 Poverty

There has been growing concern about the issue of social cohesion over the past few years. Disparities between social groups and the overall dispersion of income seem to have widened in the 1980s and early 1990s, and this is often attributed to economic developments, in particular, globalisation, increasing competition on world markets, the information revolution and the resultant restructuring of the economy, as well as demographic trends and changes in society. The trend seems to have slowed down or even reversed itself since the mid-1990s, but disparities between social groups remain unacceptably high.

Social cohesion is not only an important goal in its own right, but it is also a key factor contributing to economic success. Regions which are unable to mobilise the economic potential of large sections of their population are handicapped in the increasingly competitive global market place, while disparities can breed social unrest which itself can damage economic performance.

Poverty: high, especially in the cohesion countries

There are various definitions of poverty. The UN millennium summit, for example, defined an absolute measure of poverty as a state in which someone has less than $1 a day to live on. Few people if any in the EU are in this position, though given price levels and the nature of the economy and society in the Union, a sum of significantly more than this would be necessary to prevent someone living in absolute poverty here. What this sum should be is very difficult to define. Partly because of this, it has long been decided that a relative measure is more relevant for assessing poverty in the Union, in the sense that this is more indicative of deprivation in relation to the living standards of people generally. Accordingly, the focus tends to be on the proportion of the population with incomes below a certain level relative to the average, though again there is scope for disagreement about the appropriate level to take¹.

In practice, the main measure of poverty used in the EU at present is the Eurostat definition: the percentage of people with an income of 60% or less of the median income in the country in which they live². Although this means that the poverty line, in terms of absolute values, differs between countries, it is indicative of relative deprivation in the country concerned.

Using this measure, 18%, or more than one in six, of people in the EU had an income below the poverty level in 1996. This proportion does not seem to have changed much in recent years, though the figures which exist on a comparable basis are only for the period 1994 to 1996, which is too short to determine much about changes. While early indications are that the proportion might have declined since 1996, this remains to be confirmed.

The countries in which the proportion of people with poverty levels of income is lowest are Denmark, Luxembourg, the Netherlands and Austria (and probably Finland and Sweden as well, though they did not participate in the 1996 European Community Household Panel survey on which the figures are based). Not only are the poverty rates in these four countries only around 11-12%, but this is relative to a national income which is higher than the EU average (see Graph 6 : percentage of the population living below the poverty line).

At the other extreme, the countries where the poverty rate is highest are Portugal and Greece, in which 21-22% of the population have income below the poverty line. This understates the scale of the problem in an EU context, since these two countries have the lowest level of median income in the Union. A further point of interest is the persistence of poverty, as indicated by the proportion of people with income below the poverty line in each of the three years for which comparable data are available. This is clearly more important than the figure for a single year, which may reflect only a temporary state of affairs for some of those concerned. Persistent poverty in the EU is slightly less than half the figure for a single year, 7% of the people covered between 1994 and 1996 having an income below 60% of the median in each of these three years, as opposed to 17% in 1996 (the figure being lower than that quoted earlier because not all the people were surveyed every year).

There is some tendency for the persistence of poverty to be disproportionately higher in countries with high poverty rates in 1996. In Denmark and the Netherlands, persistent poverty affected only 3% of the population, only a quarter of the proportion in 1996, which means that not only is poverty low in these two countries, but for most, it is a temporary state of affairs. Conversely, in Portugal, which had the highest level of poverty in 1996, more than half (12% of the population) were affected by persistent poverty, while in Greece, the figure was only slightly less (10% of the population). The main exception to the general relationship is the UK, where the proportion with income below the poverty line in 1996 was relatively high (19%), but where only 7% of people had income below this level in each of the three years.

For the candidate countries in Central Europe, there are no comparable data available. The studies which have been undertaken, however, suggest that the figures might be higher than in the EU as income dispersion has widened over the 1990s due to the reduction in employment and a decline in real wages of the less skilled. They also show that poverty in rural areas, on which research has been carried out, is a serious problem (see Box 'Rural income and poverty in the candidate countries').

Factors linked to poverty: unemployment, low education and one parent families

The causes of poverty are numerous, but here are a few factors which are strongly associated with low income, particularly on a persistent basis (See table A.5 , in annex).In the EU, six categories of people are at particular risk of having a poverty level of income: the unemployed, lone parent families, those with low education, those in retirement, families with many children and those of working-age not in employment (because of disability, for example).

A number of people fall into more than one of these groups. For example, a large proportion of the unemployed have low education. The first three characteristics, however, are the most noteworthy. In the EU as a whole - though not necessarily in individual Member States - the unemployed and lone parents are three times more likely than people generally to fall below the poverty line, reflecting in both cases the loss of income from employment (a disproportionate number of lone parents are not in work). Many of these and others with low incomes have low educational attainment. Moreover, the information revolution is likely to mean that poor education will become a more important determinant of poverty in the future.

The main characteristics of those with poverty levels of income differ between Member States, reflecting variations in both social policy and social structure. For example, the unemployed are at particular risk in the UK, where they are four times more likely to have low incomes than people generally, while in Denmark, they are only slightly more at risk than average. This reflects the more comprehensive and generous unemployment benefit system in the latter than the former. Nearly half (46%) of lone parents and their children have poverty levels of income, largely because they are not in paid employment, though the situation varies markedly from one country to another, reflecting, in particular, levels of childcare provision and support. The families concerned are most at risk in the UK and Ireland, where they are 5 or 6 times more likely than average to have income below 60% of the median. Conversely, they are at relatively low risk in Portugal, Spain, France Belgium and Italy - indeed, in Italy (where the risk of poverty is highest for large families), they are at no more risk than other households.

Links between education and earnings: the implications of a single market for graduates for cohesion countries

The link between education and income levels is of particular interest (See graph A.3 on earnings by level of education, in annex). While in all Member States, income increases significantly with educational attainment levels, people with university education or the equivalent tend to have similar income levels (adjusted for cost of living) across the EU, which suggests perhaps the emergence of a single market for graduates. Although many obstacles remain, such as a lack of transferability of qualifications or language difficulties, there are signs of increased international mobility among young graduates, in particular. A possible effect of this is a trend towards equalisation of graduate pay across countries, while earnings of those with lower qualifications continue to vary . The widening income gap which results in the less prosperous countries may put increasing pressure on social cohesion.

An uncertain long term trend

The factors underlying poverty levels of income give mixed messages for long term trends in social cohesion. On the one hand, continued economic growth and higher levels of employment may reduce the proportion of people with low income, insofar as the relative numbers without earnings from work are reduced. On the other, social trends mean that the number of lone parent families may continue to increase. Moreover, while education levels are rising across the EU, especially in the lagging regions, the growing dependency on information technology, and the high level of general education which is a precondition for being able to use this effectively, threatens to put those with low education levels at an increasing disadvantage.

Transfers : an important weapon in the fight against social exclusion

Social transfers (other than pensions), which account for 9% of total household income in the EU, make a significant contribution to maintaining social cohesion. Over half go to the poorest 20% of the population and make up over half their final income.

The effect of social transfers is evident if the proportion of people below the poverty line is compared with what it would be in the absence of transfers (See Graph 7, Population with income below the poverty line before and after transfers and Graph A.4 on Poverty and social protection transfers, in Annex). In most Member States, transfers (in this case including pensions, some of which are from private sources) reduce the poverty rate by 30-40%.³. In Denmark, the figure is higher, while in Italy and Greece, and to a lesser extent Portugal, social benefits have much smaller effects on the distribution of income, reflecting both their smaller scale and less targeting on those with the lowest incomes.

In the UK and Ireland, in both of which social transfers reduce poverty rates substantially, the high proportion of people with low income is to a large extent due to a wide dispersion of income before transfers, which in turn reflects the wide dispersion of wages (as revealed, for example, by the Eurostat, Structure of Earnings Survey for 1995).

Despite the contribution of social transfers to maintaining social cohesion, it should be emphasised that, retirement pensions apart, they tend to tackle the symptoms rather than the underlying causes of poverty. As such, they do not in themselves provide a long-term solution to the problem. It is therefore important for them to be accompanied by structural measures aimed at tackling the root causes, in particular, unemployment, low education and inadequate skills, a lack of childcare support facilities and so on, which will also help to increase the growth potential of the economy.

(see Box:Rural income and poverty in candidate countries)

1. There is scope for debate about whether the level of income taken should be in relation to average income in the EU or individual Member States or even regions. In practice, there are various problems with comparisons based on an EU-wide average income level, since the measure tends to be dominated by the large differences in average income between Member States rather than reflecting differences in the dispersion of income within these. In other words, a measure of poverty calculated in relation to average income in the EU largely indicates differences in national rather than individual levels of income. At the same time, irrespective of the merits or otherwise of measuring poverty on a regional basis, the data are simply not available to do so.
   
2. In the First Cohesion Report, the previous definition used by Eurostat was used to determine the poverty line, ie an income per head of 50% or less than the mean. In practice, for most countries the two measures give similar results. However, the new definition is preferable, especially for making comparisons over time, because the median is a more stable measure of average income than the mean in that, since it relates to someone in the middle of the income distribution, it is not affected by extreme values. The figures reported in the text are derived from the European Community Household Panel. It should be noted that data for Belgium are at present being revised.
3. It is interesting to compare this with the reduction in regional disparities due to transfers. The First Cohesion Report found that total government expenditure, including social spending, reduced interregional disparities in Member States by 10-30%, ie by less than the reduction achieved in interpersonal disparities, which are generally more of a focus of national policy.

Contents