Abstract
The European Union’s Lisbon strategy goal of tackling poverty was a notable failure, while the Europe 2020 strategy’s poverty target is out of reach. Both strategies were based on variants of the ‘at risk of poverty’ indicator, which has an inappropriate and misleading name. We demonstrate theoretically and empirically by cross-section, time series and panel cointegration evidence that the ‘at risk of poverty’ indicator essentially measures income inequality, not poverty. Our calculations show that even after taking into account the positive impact that expected economic growth should have on material deprivation and low work intensity, the Gini coefficient of income inequality would have to fall by 3.5 points in each EU country if the Europe 2020 poverty target is to be reached, which is implausible. The ‘at risk of poverty’ indicator does not satisfy standard axioms set in the literature, while the huge differences between national poverty thresholds make the EU-wide poverty aggregate pointless. The political agreement between EU member states expressed the goal of reducing poverty, not inequality. There are good reasons to aim for lower income inequality, but a political agreement would be needed to set an inequality goal and corresponding policies.
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Source: prepared on the basis of the figure on page 26 of the Annex of European Commission (2014) using data from the Eurostat dataset ‘Intersections of Europe 2020 Poverty Target Indicators by age and sex [ilc_pees01]’
Source: Author calculations
Source: Panel A is updated from Darvas and Tschekassin (2015) using the Eurostat datasets ‘At-risk-of-poverty rate by poverty threshold, age and sex—EU-SILC survey [ilc_li02]’ and ‘Gini coefficient of equivalised disposable income—EU-SILC survey [ilc_di12]’. Additionally, Panel B uses data from the Eurostat dataset ‘S80/S20 income quintile share ratio by sex and selected age group—EU-SILC survey [ilc_di11]’
Source: Eurostat’s ‘Gini coefficient of equivalised disposable income—EU-SILC survey [ilc_di12]’, ‘At-risk-of-poverty rate by poverty threshold, age and sex—EU-SILC survey [ilc_li02]’ and ‘Severe material deprivation rate by age and sex [ilc_mddd11]’ databases
Source: Eurostat for actual data (solid line), author calculations for projections (symbols)
Source: Eurostat for 2006–2015; author calculations for 2016–2020
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Notes
The first 27 European Union members, predating Croatian membership.
The increase from 2000-07 was 6.4 million and therefore the global financial and economic crisis, which intensified in 2008, was not a major reason for this failure.
The equivalised disposable income is the total income of a household, after tax and other deductions, that is available for spending or saving, divided by the number of household members converted into equalised adults; household members are equalised or made equivalent by weighting each according to their age, using the so-called modified OECD equivalence scale. See: http://ec.europa.eu/eurostat/statistics-explained/index.php/Glossary:Equivalised_disposable_income.
Furthermore, European Council (2010) allowed member states “to set their national targets on the basis of the most appropriate indicators, taking into account their national circumstances”. Nine countries adopted a different indicator: Bulgaria: at risk of poverty; Germany: long-term unemployed; Denmark: persons living in households with low work intensity; Estonia: at risk of poverty; Ireland: combined poverty, defined as those severe materially deprived who are also at risk of poverty; Latvia: at risk of poverty and/or living in households with very low work intensity; Netherlands: people aged 0-64 living in a jobless household; Sweden: percent of women and men aged 20-64 who are not in the labour force (except full-time students), the long-term unemployed or those on long-term sick leave; United Kingdom: numerical targets from the 2010 Child Poverty Act and Child Poverty Strategy 2011-14, which are in turn different versions of the ‘at risk of poverty’ rate (source: http://ec.europa.eu/europe2020/pdf/targets_en.pdf and the accompanying national documents). None of these nine countries made their choice on the basis of the near equivalence of the ‘at risk of poverty’ rate and the Gini coefficient of income inequality that we demonstrate in our paper and in fact five of the nine countries adopted a version of the ‘at risk of poverty’ rate.
See for example the World Bank’s’Measuring Poverty’ page: http://go.worldbank.org/0C60K5UK40.
The Cambridge Dictionary (http://dictionary.cambridge.org) defines poverty as “the condition of being extremely poor,” and poor as “having little money and/or few possessions”.
We also performed the calculations using the Weibull distribution, which led to qualitatively the same results. These results are available from the author upon request.
The 30 countries considered include the first 27 EU member states plus Iceland, Norway and Switzerland, three countries for which Eurostat publishes the two indicators, using the same methodology as for EU countries.
http://ec.europa.eu/social/main.jsp?catId=750&langId=en, accessed on 27 April 2017.
We note that European Parliament (2014) also called for better measurement: “43. Calls, therefore, for objective indicators of ‘poverty’ to be used for the measurement of Member States’ poverty rates so as to help identify those at risk of exclusion; 44. Recalls, however, that a poverty indicator provides no direct evidence of the experience of social exclusion, and therefore calls for improved measurement of perceived social exclusion in order to reach a better understanding of the reasons for social exclusion and of which groups are particularly affected”.
Bhalla (2002) calls this regression method the ‘Simple Accounting Procedure’ (SAP), yet we find the name ‘Lorenz-curve regression method’ more accurate.
Eurostat publishes income data at current-price purchasing power standards (PPS) in its dataset ‘Mean and median income by age and sex - EU-SILC survey [ilc_di03]’, which is comparable across countries in a given year, but not across time. In order to approximate mean income at constant-price PPS, we deflate current-price PPS data with the EU28 harmonised index of consumer prices using the Eurostat dataset ‘HICP (2015 = 100) - annual data (average index and rate of change) [prc_hicp_aind]’.
Source: ‘Gap between actual and potential gross domestic product at 2010 reference levels (Percentage of potential gross domestic product at constant prices)’ from the European Commission’s AMECO dataset (May 2017 version).
There is a single exception, mean income is not significant when lagged dependent variable is included and fixed effects are not included. It is significant in all other specifications.
For all but three countries, 2015 is the latest year for which the necessary EU-SILC related data (mean income, ‘at risk of poverty’ rate, ‘at risk of poverty or social exclusion’ rate, Gini coefficient of income inequality) are available. The three countries for which 2016 data is also available are Finland, Hungary and Latvia and therefore for these country we make projections for 2017–2020. We have collected our dataset in May 2017.
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Acknowledgements
The author is grateful for valuable comments and suggestions of four anonymous reviewers, Mária Herczog, Ágota Scharle, several Bruegel colleagues and seminar participants at the Faculty of Social Sciences of Eötvös Loránd University, and to Inês Goncalves Raposo for excellent research assistance.
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Darvas, Z. Why is it So Hard to Reach the EU’s Poverty Target?. Soc Indic Res 141, 1081–1105 (2019). https://doi.org/10.1007/s11205-018-1872-9
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DOI: https://doi.org/10.1007/s11205-018-1872-9