Income Inequality: Crisis Pushes the Poor and the Young Even Further Behind

Feb 15, 2016, 19:01 ET from ING

LONDON, February 16, 2016 /PRNewswire/ --

-- Rising income inequality was an established trend prior to the financial crisis, but accelerated in many countries during the crisis years and subsequent period of austerity 

--Young people, often in part-time work or employed on short-term contracts, have suffered in particular from rising inequality. Between 2007 and 2013 the gap between the incomes of 16-24 year olds and of the over-65s grew by 9% in the Eurozone, and no less than 23% in the US 

--Falling employment, weak welfare systems, and fiscal austerity hit the poor particularly hard in the Eurozone peripheral economies. The absolute poverty rate rose to 33% in Greece in 2013 followed by Italy (15%), Spain and Portugal (both 13.5%)

A new report from ING, The Unequal Crisis, looks at income inequality in the US and EU over the 20 years running up to the financial crisis, and then tracks what happened during the period between 2007 and 2013. It finds that prior to the crisis, the disposable income available to the highest earners in these countries rose more quickly than for the lowest earners in three out of four OECD countries; thereafter, during the crisis years, this trend continued, other than in a relatively small number of countries.

During the crisis, income inequality increased almost everywhere, but the situation tended to be worse in the US. Indeed, in Europe as a whole, the lowest income groups did not fare much worse than the average. Even versus the highest incomes the cumulative gap was limited to 2% over 6 years, against 5.3% in the Eurozone, but there were national discrepancies. In most countries, they indeed fared worse, which led to higher inequality.

The incidence of poverty increased in almost all countries analysed (at least one measure of poverty increased everywhere except in Germany). In France and the Netherlands, all poverty measures show a similar result (a 1ppt increase in the poverty rate during the crisis period), but in Southern Europe (Portugal, Italy, Spain and especially Greece) changes in absolute poverty testifies of the consequences of dramatic income losses: in Greece the absolute poverty rate reached 33% in 2013 when the 2005 reference income is taken into account, followed by Italy (15%), Spain and Portugal (both 13.5%).

The study suggests certain people suffered disproportionately during the crisis. Most notably, younger people - 16-to-24-year-olds - saw their incomes grow much more slowly than older people in almost every country studied. In the US, the incomes of the 65+ increased on average by 4.5% a year between 2007 and 2013 while those of the youngest increased only by 1%, leading to a cumulative gap of 23% over six years. In the Eurozone, the disposable incomes of the 65+ increased on average by 3.5% a year between 2007 and 2013 while those of the youngest increased only by 2%, leading to a narrower cumulative gap of 9% over six years.

Workers on non-standard employment arrangements - those employed in part-time or contract roles, for example - were also particularly vulnerable to rising inequality (younger people were also more likely to be working on this basis). They were hit hard during the crisis and contributed as much as 9pp and 5pp to the drop in employment measured in Spain and Portugal, respectively, between 2007 and 2013.

ING's analysis suggests it could be possible to mitigate some of these effects via an efficient welfare state. The study found inequality rose more appreciably during the crisis in countries where the welfare state was less efficient; and this effect was often amplified by the austerity policies pursued by governments in response to the initial crisis.

Addressing the labour market is also crucial. While the recovery may bring higher growth and more jobs, the data shows this is generally not enough to get out of the growing inequality trend. The surge in self-employment and temporary or part-time jobs over the past two decades has in fact been a key factor behind the rise in inequality - a big challenge to the recovery is that while the poorer unemployed have had more chance of getting a job, their income growth has not necessarily kept up with averages.

Non-standard workers are often worse off in terms of many aspects of job quality. They tend to receive less training and, in addition, those on temporary contracts have more job strain and have less job security than workers in standard jobs. Earnings levels are also lower in terms of annual and hourly wages.

In contrast, in countries - such as Spain, Greece, France and the UK - where standard-work contributed most to employment growth before the crisis, income inequality narrowed. The study therefore suggests that the recovery cannot not only produce non-standard contracts, and an efficient labour market is needed where opting for a non-standard contract is either an individual choice or a step towards a more permanent, full time contract.

Julien Manceaux, Senior Economist at ING, said:

"The extent to which the incomes of the young and the poor fell behind the rest of the population in the wake of the crisis is striking, particularly in the US and Southern Europe. Although the rebound in employment in the last two years may have helped to narrow the gap, this is likely to be have been limited, in the absence of labour market reforms and more progressive welfare systems."

The report, 'The Unequal Crisis', is part of a series being produced for the Think Forward Initiative - a programme that brings together research and experts to gain a deeper understanding of the behavioural biases behind financial decision-making. The full report can be downloaded here.