Finding jobs for the unemployed is the key to diminishing the risk of poverty

Nobody in Ireland has escaped pain in the current crisis, but some have suffered more than others. In particular, those who lost their jobs have been severely affected and their problems have been even greater where they have mortgages.

While public policy has played a role in modifying the impact of the crisis on households, the main effects have come from the changes in the economy itself. The dramatic increase in unemployment has significantly increased the numbers of families at risk of poverty and has contributed to the rise in what is called the “consistent poverty rate”.

When considering the impact of the crisis on the distribution of income, account must also be taken of the decline in real incomes of many of those working, including those working in the public sector.

There has also been a big impact on the incomes of a significant number of really high earners. Many of them were dependent on the property bubble for their livelihoods and the bursting of that bubble has seen a dramatic decline in their fortunes. Between 2007 and 2010 the numbers earning over €100,000 fell by almost 15 per cent, while the average income of those who were still earning over €100,000 fell by about 8 per cent.

While the underlying driver of change in the distribution of income (and in the numbers at risk of poverty) has been the changes in economic fortunes, public policy has also played an important role in modifying their impact on households.

Tax and welfare changes
Detailed analysis by the ESRI's Tim Callan and colleagues shows that the combined effect of changes in the tax and welfare systems between 2009 and 2014 has reduced the incomes of the richest 10 per cent of the population by 15.5 per cent.

For the poorest 10 per cent the decline in income as a direct result of public policy was 12.5 per cent. For the rest of the population it was between 11 and 12 per cent.

However, while changes in public policy did not have a major impact on the distribution of income, the operation of the existing welfare system, interacting with the wider changes in the economy, shielded an increasing number of people from the risk of falling into poverty.

While the “at risk of poverty” rate in 2011 was 16 per cent, CSO data indicate that, without welfare transfers, it would have been close to 50 per cent.

By contrast, in the boom years it would have been under 30 per cent without transfers. The resulting increase in welfare payments has contributed to the problems in the public finances.

The latest data for Ireland (for 2011) suggest that income distribution in that year was rather similar to what it was in 2007 and 2008.

For 2009, the first full year of the crisis, income distribution, as measured in this way, was the most equal it had been since the 1980s.

Callan and colleagues conclude that the overall changes in the distribution of income over the crisis years mask substantial losses for both the poorest and the richest 10 per cent of the population.

In the case of the richest 10 per cent of the population a significant contributor to the loss suffered has been the increase in taxation.

Less equal
In contrast to the Irish experience, where the distribution of income has not changed much over the course of the crisis, in the EU15 (the member countries of the European Union prior to the accession of 10 new states in 2004) income distribution has become less equal since 2008, especially in Spain.

The latest EU data also suggest that, while the distribution of income in Ireland in 2011 was not very different from that in France and Germany, it was significantly less equal than in the Netherlands or Sweden.

As the economy returns to growth, it is worth considering how an economic recovery will affect the distribution of income and the numbers at risk of poverty and how public policy will influence income inequality through the tax and welfare systems.

A key challenge for the welfare system in the coming years will be to support those in need without creating poverty traps. This means that policymakers must ensure that the tax and welfare systems operate together so that a move from unemployment into employment leaves people significantly better off.

Back to work
As the economy recovers, a key factor affecting income inequality and the numbers at risk of poverty will be the rate at which those who are unemployed find their way back into work.

If the economy could be returned to full employment by the end of the decade it would have a major impact in reducing the numbers currently at risk of poverty and it would also be likely to contribute to a more equal distribution of income.

In the case of the tax system, marginal tax rates for many individuals have greatly increased as a result of the crisis.

Research from the 1980s, when such rates were even higher, suggests that very high marginal rates could be extremely costly: for example, a rise in marginal rates would be likely to disproportionately affect women and their participation in the labour force.

In turn, this would lead to a significant loss of output and an overall welfare loss. However, there are other ways to use the tax system to redistribute income apart from increasing marginal rates.

From a public policy point of view the most effective action that might be taken to reduce numbers at risk of poverty in the coming years would be measures which would hasten the fall in unemployment, for example by ensuring that those who are unemployed are favoured in accessing the new jobs that are created.

John Fitzgerald is Research Professor with the Economic and Social Research Institute

Tim Callan's work is available at: http://iti.ms/1m5sdAD and http://iti.ms/1m5ssLP.