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MICRESA - Poverty in Europe: steps to reduce it

Background

Reducing poverty and exclusion is one of the EU’s key social objectives. Faced with increased risk in the labour market, diversification in the capital market and the fragmentation of the traditional family, individuals must design fresh strategies to avoid poverty or the risk of social exclusion.

The MICRESA project was about the design and evaluation of the public social and fiscal measures. It covered all 15 countries that were members of the EU at that time. The tax-benefit micro-simulation model EUROMOD was used, so some of the project tasks involved the development and updating of this model. EUROMOD allows the application of various sets of indicators at national level, aggregated to the level of the EU or disaggregated to regional level. They can be applied to existing policies, prospective actual policies or policy ideas under development or designed for illustrative purposes. Policies can be designed to have a particular (first-round) budgetary effect, including budget-neutrality. They can be applied to populations with current characteristics or under changed conditions (such as after inflation, earnings growth or increased employment). This is especially important in view of the need to link the social inclusion process with the European employment process.

Work undertaken

During its lifetime, the project’s work was refocused in response to developments in EU and national social policy-making. As specific targets for poverty reduction were not adopted at the EU level, the project dwelt less on the achievement of targets and more on the process of the development of EU social policy. Increased consideration was also given to the analytical requirements of such a process and the potential roles for EUROMOD within it.

In the research on poverty within regions, inequality rather than poverty became the focus. Regarding the effects within households, a more focused exercise was carried out, in combination with a detailed review of the theoretical literature. New focuses, in response to evolving policy concerns at the EU level, included pensions and ‘making work pay’.

Major additional pieces of work, not anticipated at the outset, included an investigation of the effects of macro-level changes on social objectives. This research aimed to document the ways in which tax-benefit parameters are adjusted in response to macro-level changes such as inflation, and to explore how actual practice impacts on poverty indicators, given changes in underlying incomes. A survey of actual practice and a detailed investigation of the effect of inflation in a selection of countries were carried out. In addition, the effect of increasing unemployment, earnings growth and changing earnings inequality across the EU-15 countries was studied and, at a technical level, methods for updating ‘old’ survey data to represent the population at a later date were explored.

Key outcomes / conclusions

MICRESA’s main findings with implications for policy were:

  • An assessment of the relative redistributive and poverty-reducing effects of national tax-benefit systems depends on which components are included in the ‘system’. Including the effect of taxes can be important, through the counting of tax concessions as quasi benefits or through accounting for the taxation of benefits. Whether public pensions are included as part of the transfer system, and contributions as part of the tax system, can have a large impact on conclusions from cross-country comparisons.
  • Different paths for reform are necessary to achieve common objectives across countries. Examination of pension reform scenarios under budgetary constraints in four countries showed that the variations in the fiscal and distributive effects of a given reform can be very significant, due to different starting points in terms of inequality, poverty and previous pension arrangements.
  • Labour market conditions in one country may make the adoption of a policy from another country inappropriate and even damaging. For example, in France or Germany, the application of the British Working Families Tax Credit would have a net negative impact on employment since the strong decrease in the participation of married women (with working partners) would not be offset by a positive effect on single parents.
  • Replacing the minimal child-targeted social transfer systems of the countries of Southern Europe with child benefits ‘borrowed’ from Northern European systems would reduce child poverty significantly.
  • Even when the rate is low, inflation can have a significant effect on both the equalising and the revenue-generating properties of income tax and social contribution systems. More broadly, the rates of unemployment, earnings inequality and real income growth can influence the effectiveness of tax-benefit systems in reducing the risk of poverty. If relative poverty rates are to be used as generally accepted indicators of the outcomes of policy, then it is important that these differential sensitivities between countries are fully understood.
  • National tax-benefit systems appear particularly efficient at inequality reduction in a country’s poorer regions but much less so in its richer ones. Since some of the new forms of poverty are associated with richer and more urban regions, this calls for further intervention at the level of the regional governments. At the same time, ‘similar’ regions in Europe, in terms of economic performance and levels of original income inequality, achieve quite different degrees of income inequality once the redistributive role of the national tax-benefit system is accounted for.This may provide an argument on equity grounds for EU intervention in the design of tax-benefit policies.

Dissemination

Co-operation with the OECD, UNICEF and some national governments on EUROMOD use; EUROMOD Working Papers series; academic papers and conference participation; website.

Publications' list

  • Berger, F., ‘Le systčme socio-fiscal luxembourgeois: analyse de son évolution entre 1998 et 2002 ŕ l'aide de cas-types’, Population et Emploi, 2-2003.
  • Förster, M., Fuchs, M., Immervoll, H. and Tarcali, G., ‘Social Inclusion in Larger Europe: All About Money? Uses, Limitations and Extensions of Income-based Social Indicators’, Eurosocial 71/03. Also published as: ‘Közpolitika-vŕltozások vs. a társadalmi-gazdasági környezet megváltozáza: mennyire érezékeny a jelenlegi európai teljesitmény a makrogazdasági környezet változására?’ Kapocs, February 2003.
  • Immervoll, H. and O'Donoghue, C., ‘What Difference does a Job Make? The Income Consequences of Joblessness in Europe’, in ‘Resisting Marginalisation: Unemployment Experience and Social Policy in the European Union’, Oxford University Press, 2004.
  • Immervoll, H., Levy, H., Lietz, C., Mantovani, D. and Sutherland, H., ‘The sensitivity of poverty rates in the European Union to macro-level changes’, Cambridge Journal of Economics.
  • Sutherland, H., ‘Indicators for Social Inclusion in the European Union: the impact of policy changes and the use of microsimulation models’, Politica Economica, 18 (1), 2002.
Full titleMicro-level analysis of the European Social Agenda: combating poverty and social exclusion through changes in social and fiscal policy
Project AcronymMICRESA
Contract number01-00099
Project TypeRP
ProgrammeKA
Keywordssimulation model, poverty, income, social policy, tax policy, poverty targets, inequality, socioeconomic change, work incentives, gender, households, policy impact, policy options
Main contractorUniversity of Cambridge
Department of Applied Economics
Sidgwick Avenue
CB3 9DE Cambridge
United Kingdom
Phone: +44 1223 335 264
Fax.: +44 1223 335 299
Scientific Coor.Sutherland Holly
holly.sutherland@econ.cam.ac.uk
Websitehttp://www.econ.cam.ac.uk/dae/mu/micresa.htm
Partners' List
  • Daničle Meulders
    DULBEA-ETE,
    Brussels, Belgium
  • A. B. Atkinson
    Nuffield College
    Oxford, United Kingdom
  • Gert G. Wagner
    DIW,
    Berlin, Germany
  • Hans Hansen
    Danish National Institute of Social Research
    Copenhagen, Denmark
  • François Bourguignon
    CNRS - ENS – EHESS
    Paris, France
  • Carlos Farinha Rodrigues
    CISEP/ISEG
    Lisbon, Portugal
  • Panos Tsakloglou
    CERES
    Athens, Greece
  • Paolo Bosi
    Prometeia Calcolo Srl
    Bologna, Italy
  • Klaas de Vos
    CentER Applied Research, Tilburg University
    The Netherlands.
  • Tim Callan
    ESRI
    Dublin, Ireland
  • Heikki Viitamäki
    Government Institute for Economic Research
    Helsinki, Finland
  • Magda Mercader Prats
    Universitat Autňnoma de Barcelona
    Spain
  • Bengt Eklind
    Ministry of Health and Social Affairs
    Stockholm, Sweden
  • Michael Förster
    European Centre for Social Welfare Policy and Research
    Vienna, Austria
  • Pierre Hausman
    CEPS / INSTEAD
    Luxembourg
  • Vincenzo Atella,
    Tor Vergata University
    Rome, Italy
Start Date2001-10-01
End Date2004-09-30
EC Contribution€1 149 981
EC Scientific OfficerAndrea Schmolzer