LSE - Small Logo
LSE - Small Logo

Panos Tsakloglou

May 18th, 2020

Distributional Changes in Turbulent Times

0 comments | 1 shares

Estimated reading time: 10 minutes

Panos Tsakloglou

May 18th, 2020

Distributional Changes in Turbulent Times

0 comments | 1 shares

Estimated reading time: 10 minutes

In the twelve years preceding the Lehman Brothers crisis (1995-2007), the Greek economy was growing at an annual rate 1.5% higher than the “old” EU15 countries.  One would anticipate that in the end of this period unemployment in Greece would be low.  This was not the case.  In 2007 Greece’s rate of unemployment was the fifth highest in EU27 and Greece was in the unenviable position to have the highest unemployment rates for both youth and females; a strong indication of a “segmented labour market”.

Social pending as a share of GDP rose rapidly in these years and reached the EU average. However, the structure of spending was very different in Greece than in most European countries. The share of pensions in total social spending in Greece was substantially higher, thus leaving limited room for the development of other social policies, while means-tested policies were playing a very limited role. As a consequence, the efficacy of social spending in reducing relative poverty in Greece was among the lowest in the EU and Greece’s relative poverty rate one of the highest in the Union.

Greece’s level of inequality was higher than in most European countries and was accounted primarily by disparities “within” rather than “between” socio-economic groups.  Unlike what was observed in most developed countries, income inequality in Greece was gradually but not continuously declining in the 35 years after the restoration of democracy in the country.  Following the rapid improvement in the population’s living standards in these years, when poverty is measured using an “anchored” (fixed) poverty line all poverty indices record a sharp decline in poverty. When a “floating” (relative) poverty line is used, a decline is visible but far less pronounced. In earlier years, poverty was primarily an agricultural phenomenon while in later years it was mostly associated with old age. Nevertheless, throughout the period there was a very strong negative association between poverty and educational qualifications.

Greece’s growth model was based primarily on consumption that was largely financed by capital inflows from abroad. Lack of structural reforms after the collapse of the pension reform in 2001 led to a gradual erosion of competitiveness and the country ended the first decade of the 21st century with yawning “twin deficits” (budget and current account). After being cut of from international capital markets and in order to avoid unorderly default, Greece had to adopt three very painful Economic Adjustment Programs (2010, 2012 and 2015) in agreements with the EC, the ECB and the IMF. With one important exception (lack of devaluation) these programs were similar to typical programs financed by the IMF. Loans in preferential terms were provided in exchange for fiscal consolidation and structural reforms. Cuts in pensions and public sector wages played a prominent role in fiscal consolidation. Since there was no external devaluation, internal devaluation was attempted instead, through labour market liberalization policies and wage cuts in the private sector.

Although the combination of these policies led eventually to the elimination of the “twin deficits”, the social cost was enormous. The Greek crisis was the deepest and longest ever recorded in an OECD country in the postwar period. Output declined by over a quarter while the unemployment rate exceeded 27% at its peak. Since, to a considerable extent, fiscal consolidation was achieved through tax increases, the decline in the mean disposable income of the population was even larger (reaching a staggering 42% when measured from peak to bottom).

Considering the magnitude of these effects, one could anticipate that they would have been associated with significant distributional changes. In fact, throughout the decade several claims were made in the public discourse, both in Greece and abroad, regarding changes in inequality and poverty, without providing any hard evidence. Unlike what is frequently claimed, using the information of the EU-SILC it can be shown that aggregate inequality did rise in the early years of the crisis, but the increase was not very large. The trend was not continuous, and the recorded magnitude of the change was larger when the inequality indices used are relatively more sensitive to changes close to the bottom of the income distribution.  In recent years inequality declined and, in fact, in the end of the Economic Adjustment Programs the values of most indices were lower than at the beginning. The structure of inequality did not change substantially, either. The contribution of inequalities “within” socioeconomic groups remained substantially larger than the contribution of disparities “between” groups and, actually, in most partitions of the population the share of “between” groups inequalities declined.

Unlike inequality that is (almost) always treated as a relative concept, poverty can have both “relative” and “absolute” dimensions. The former corresponds to poverty measured using poverty lines that change with the reference distribution (in other words, this approach aims to answer the question “how poor am I vis-à-vis the rest of the population?”), while the later relies on the use of poverty lines “anchored” in time in terms of real purchasing power (in other words, this approach aims to answer the question “is my standard of living higher or lower than some years ago?”). The most widely cited poverty estimates are those produced regularly by Eurostat that refer to the share of the population falling below a relative poverty line. Using this approach, poverty in Greece increased marginally in the early years of the crisis and declined afterwards. However, despite its popularity, the poverty rate is not a good index of poverty. It is sensitive to neither the average distance of the poor from the poverty line nor to the inequality in the distribution of resources among the poor. If other indices of poverty that do not suffer from such deficiencies are used instead of the poverty rate, they show that even using relative poverty lines, poverty rose very  substantially in the early years of the crisis before starting a gradual decline that did not lead to levels lower than those before the crisis. When the poverty line is “anchored”, the estimate of the poverty rate at its peak rose by almost 150%, while the estimates of distribution-sensitive poverty indices truly shot up, in some cases almost quadrupling, and still remain far above the pre-crisis levels.

The most dramatic changes observed during the crisis are related to the composition of the poor and the contributions of various socioeconomic groups to aggregate poverty. In the public discourse it is regularly claimed that the main victims of the crisis were the pensioners. Pensions were, indeed, cut several times in the framework of fiscal consolidation efforts.  However, on average, pensions declined substantially less than average income and, furthermore, in total, pensions cuts were anything but uniform, as often claimed in the public discourse. High pensions were cut very substantially, whereas the cuts of low pensions were far more modest. As a result, the relative position of the pensioners in the income distribution improved considerably during the crisis, comparatively few of them fall below the (relative) poverty line and even when they do so, they are not located far below it. Consequently, their contribution to aggregate poverty declined sharply, although their population share rose. On the contrary, the ranks of the poor were swelled by unemployed and the members of their households. In fact, the more sensitive the poverty index to the existence of very low incomes, the higher the recorded contribution of the unemployed to aggregate poverty.

Greece’s social model can explain to a considerable extent these results. Greece is arguably a typical case of “Mediterranean male-breadwinner welfare state” and the family is acting as a “social shock absorber”. Even though before the crisis youth and female unemployment rates were very high, unemployment insurance quite was inadequate and provided for a limited period of time, while there was no benefit of last resort, if at least one family member – usually, the male breadwinner – had a formal attachment to the labour market, extreme cases of poverty and deprivation were avoided through internal redistribution of resources among family members. When the crisis erupted, Greek households were found without an appropriate social safety net. Many household heads lost their jobs and a considerable proportion of the population was left with very limited financial resources; the “male breadwinner model” collapsed. To a large extend, this explains the sharp increase in the contributions of groups of households with unemployed members to aggregate poverty.

It should be noted that one of the notable changes in social policy in the crisis years was the strengthening of the “social net”, mainly though means-tested policies. Some of these policies were ad hoc and were activated only when resources were available, while others are of a more permanent nature. Some of them were in the form of money transfers, while others were transfers in kind.  A number of means-tested benefits were introduced (family benefits, long-term unemployment benefits, housing subsidies, fuel subsidies, ad hoc measures such as “social dividends”, school meals and food cards, and, above all a Minimum Income Guarantee scheme) that mitigated extreme poverty and reduced aggregate inequality. Nevertheless, Greece’s level of inequality and poverty remain substantially higher than the EU average and it seems that the best way to reduce them is through growth-accelerating policies that will gradually lower the unacceptably high unemployment rate. This effort is, unfortunately, complicated by the recent eruption of COVID-19 pandemic that is expected to lead to yet another GDP decline and unemployment increases, at least in the short term.

 

A research seminar on the topic took place on 10 March 2020 at the LSE, organised by the Hellenic Observatory. For more information please visit the event page.

 

Note: This article gives the views of the author, not the position of Greece@LSE, the Hellenic Observatory or the London School of Economics.

 

Print Friendly, PDF & Email

About the author

Panos Tsakloglou

Panos Tsakloglou is Professor in the Athens University of Economics and Business, Greece

Posted In: Crisis | Economy

Leave a Reply

Your email address will not be published. Required fields are marked *

Bad Behavior has blocked 156 access attempts in the last 7 days.