Social Europe

Towards a more inclusive Europe by 2020

GINI mid-term conference Budapest23 March 2012

László Andor

Commissioner for Employment, Social Affairs and Inclusion

Cartoon by Nicholson from “The Australian” newspaper: www.nicholsoncartoons.com.au

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Structure

1. Different types of inequality and trends

2. EU response to inequality• Europe 2020 Strategy and the European Semester• Cohesion policy• Social experimentation

3. Challenges in the context of 2020• Coping with the crisis• Discrepancies between EU headline and national

targets• Addressing inequality's causes or its consequences?

4. Conclusion

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The scourge of inequality

"An imbalance between rich and poor is the oldest and most fatal ailment of all republics."

—Plutarch "there should exist among the citizens neither extreme poverty nor, again, excessive wealth, for both are productive of great evil"

—Plato

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Inequality's many facets• Absolute income, relative income, (un)employment…

• Education• early school-leavers: range from 4.9% (CZ) to 36.9%

(MT); in ES 10 pp more males than females

• Health• Unmet need for healthcare (too expensive): 5% in

lowest quintile, 0.3% in top quintile• Life expectancy of tertiary-educated CZ male: 80 years

against 62 years for CZ male with basic education

EU-27 (now) EC-9 (mid-1970s)GDP/head (PPS EU= 100) 45 to 133 92 to 113 (IE 56)Unemployment 4.0% to 23.3% 2.9% to 9.6%Gini 24 to 37 24 to 36

Soc. exp. (% of GDP) 11% to 30%21% to 29% (excluding IE and IT)

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EU trends - income inequality

Degree of inequality (Gini)

•UK: back to historical high

•IE: historical low (increase in 2010 after long descent)

•IT: comparable to 1980

•EL: comparable to 1967

Source: UN-SWIIDv3

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Trends in net income inequality in BRIC, Mediterranean countries, USA and Japan (Gini)

Over the last 30 years:

- Significant decrease from very high levels:Brazil and most Mediterranean countries

- Increase in countries with lower levels of inequality -- Russia, China, Israel and USA

Current level of income inequality in USA, BRIC and Mediterranean countries is still considerably higher than in Europe

Source: UN – SWIID v3

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Inequality and civic engagement

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2. EU response to inequality

Europe 2020 and the European semester

Cohesion policy

Social experimentation

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Europe 2020: integrated strategy for smart, sustainable and inclusive growth

Three EU targets most related to inclusive growth:• Raising employment rate (20-64 age group) to 75%• At least 20 million fewer people at risk of poverty or social

exclusion • < 10% early school-leavers & at least 40% with tertiary education

qualification

Supported especially by three flagship initiatives:• Agenda for New Skills and Jobs• Youth on the Move• European Platform against Poverty and Social Exclusion

• Aim of the Platform: "to ensure social and territorial cohesion such that the benefits of growth and jobs are widely shared, and people experiencing poverty and social exclusion are enabled to live in dignity and take an active part in society."

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10

2011: 1st European Semester priorities

Prerequisites for growth: • Rigorous fiscal consolidation• Correcting macro-economic

imbalances• Stability of financial sector

Mobilising labour markets:• Making work more attractive• Reforming pension systems• Getting the unemployed back to

work• Balancing security and flexibility

Frontloading growth:• Tapping the potential of the

Single Market• Attracting private capital• Cost-effective access to energy

2012: 2nd European Semester priorities

Pursuing growth-friendly fiscal consolidation

Restoring normal lending to the economy

Promoting growth and competitiveness

Modernising public administration

Tackling unemployment and the social consequences of the crisis• Mobilising labour for growth• Supporting employment,

especially among the young• Protecting the vulnerable

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2012 in detail: protecting the vulnerable

• Continue improving the effectiveness of social protection systems

• Implement active inclusion policies• Ensure access to services to support integration

into the labour market and society• Monitor distributional impact of reforms• Pay attention to the needs of the most vulnerable

in any tax shift

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Cohesion policy after 2014 – potentially stronger impact on inequality

• Alignment of cohesion policy with Europe 2020

• Thematic concentration, including on: • Employment & labour mobility

• Social inclusion & combating poverty

• Education, skills & lifelong learning

• Minimum 25% share for ESF within cohesion policy

• Minimum 20% share of ESF in each MS for social inclusion

• More effective: conditionality, stronger focus on results

• More efficient & accessible: simplification for beneficiaries

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Spawning and spreading new solutions: social experimentation

• Testing innovative solutions for addressing social challenges:

• First on a small scale, with impact evaluation

• Then scaling up, if they prove effective

• €100 million proposed in the Commission-managed Programme for Social Change and Innovation 2014-2020

• E.g. Revenu de solidarité active in France, first tested in 33 out of the 101 "départements"

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3. Challenges with an eye to 2020

Crisis and inequality – what future?

Lack of ambition in national targets

Are we tackling the root causes of inequality?Employment package

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Quantiles of the household gross income distribution, UK

Quantiles of the household net income distribution, UK

Source: Blundell and Etheridge (2010) based on UK Family Expenditure Survey

Source: Blundell and Etheridge (2010) based on UK Family Expenditure Survey

Income inequality and crisisHistory: Inequality may widen during (Blundell and Hetheridge) and after (Atkinson and Morelli) recessions

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• Disposable income inequality did not increase in the early phase of the crisis (role of capital income, for instance) (ESDE, 2011; Jenkins et al., 2011)

• Medium to longer term effects may be harsher (ESDE, 2011) as a result of fiscal consolidation measures (Jenkins et al., 2011)

Is it different this time?

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Discrepancy between EU headline and national targets: Employment

Now: North-west versus the rest, EU-27 average: 69%

Target: raise employment to 75%

National commitments: 74%

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Poverty and exclusion

Now: South/East divide, 115 million at risk of poverty or social exclusion

Target: at least 20 million fewer

National commitments: 12 million

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Addressing inequality's causes or its consequences?

Preventing inequality•"Social investment" – education, health, social minimum, active ageing support, LLL …• Policies influencing original income distribution

• Labour market policy• Equal opportunities policy• Taxation and redistribution

Remediation• Much spending (incl. health & social protection expenditure), albeit necessary, addresses the consequences • Reducing existing inequality: taxation, redistribution

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Addressing the causes of inequality – social investment, in-kind services

• Beyond disposable income inequality: in-kind benefits reduce inequality by a further fifth

• Education, training and healthcare are investments!

• Source: ESDE (2011)

Distribution of in-kind benefits by quintiles

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Addressing the causes: labour market polarisation

Before the crisis

More jobs created in low- and high-wage segments

During the crisis

More jobs lost in middle-wage segments

Source: Eurostat EU LFS, Fernández-Macías (2010) Source: Eurostat EU LFS, Fernández-Macías (2010)

Net job creation 1998-2007

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1000

2000

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7000

8000

9000

Lowwages

Highwages

Net job creation 2008q2-2010q2

-3000

-2000

-1000

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Lowwages

Highwages

Source: Eurofound, ESDE

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Addressing the causes: in-work poverty

Source: DG EMPL calculations based on EU SILC 2009

Labour market reasons for in-work poverty:- Low wages (LV)- Low participation, low work intensity (DE)

Redistribution also matters:- benefits do not always compensate for cost of a child (ES)

Relative importance of factors for in-work poverty

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Addressing inequality more effectively - taxes

• 1995-2008: Big reduction in top income tax rates – EU average down from 47.3% to 37.8%

• Since 2008 increase in top income tax rate in EL, ES, PT, UK, …

• OECD (2012): Reducing income inequality while boosting growth?• Re-assessment of tax expenditures

that benefit mainly high-income groups

• Reduce distortive tax relief on capital taxation

• Annual Growth Survey 2012, Euro Plus PactSource: European Commission

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Addressing more effectively – taxes and transfers

• Correlation between social protection expenditure and redistributive effect of taxes and transfers

• Similar expenditure can go with big differences in inequality reduction

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Choosing fairer consolidation options

Greece

-11%-10%-9%-8%-7%-6%-5%-4%-3%-2%-1%0%

poorest 2 3 4 richest

Portugal

-11%-10%-9%-8%-7%-6%-5%-4%-3%-2%-1%0%

poorest 2 3 4 richest

Estonia

-11%-10%-9%-8%-7%-6%-5%-4%-3%-2%-1%0%

poorest 2 3 4 richest

Estimated impact of austerity measures on households by income quintile: changes to income components and VAT increases

• Measures affecting disposable income of households have been progressive in Greece, regressive in Portugal and relatively neutral in Estonia

• Taking VAT increase into account, the picture changes significantly for Greece, making austerity measures less progressive

• The effect of the crisis on household income, potentially very significant and regressive, is not represented in the graphs

• Source: Sutherland et al, 2011

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4. Summary conclusions• Fairness of reforms is crucial to social acceptance of policies

and stability of our democracies• Inequalities have many dimensions – to tackle them we need

a range of policies that address both the causes and the consequences:• social investment• fairer and more effective tax and transfer system

• Cohesion policy, employment and social policy and social innovation have an important role in preventing and mitigating inequality

• Research most welcome, e.g. on crisis impact, effects of interventions, trade-offs

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Thank you for your attention