The glass ceiling of poverty reduction. The dynamics of low wages, minimum income packages and median household incomes in rich European welfare states

Why is it that, in almost three decades since ‘Les Trentes Glorieuses’ (Fourastié, 1979), and despite growth of income, employment and high levels of social spending, even the richest and most developed welfare states in the world failed to make any further headway in the fight against income poverty? Although many European welfare states were quite successful in mitigating the adverse consequences of the crisis (European Commission, 2012; Hills, Paulus, Sutherland, & Tasseva, 2014; Moisio, Lehtela, & Mukkila, Forthcoming), for poverty researchers and policy makers alike this question should be a point of great concern: it is indeed for the first time in the history of welfare states that we no longer do observe any substantial progress towards the great and momentous post-war objective of eradicating poverty. In the social policy literature the question of why welfare states did not succeed in decreasing relative income poverty has mostly been adressed with a ‘pre-post’ approach, albeit in different forms (in its ‘basic’ version (see, e.g. OECD, 2008), in regression models (see, e.g., Vandenbroucke & Diris, 2014) and using micro simulation (see, e.g.,  Hills et al., 2014; Lelkes & Sutherland, 2009; Marx, Vanhille, & Verbist, 2012)).

Here we take a somewhat different perspective. We start from the hierarchy of the incomes in the fabric of the welfare state:  in general terms, the disposable income of low wage earners should be higher than the minimum incomes for jobless persons. So devised, minimim wages are to be considered as a ‘glass ceiling’ of poverty reduction. In order to get a better understanding of the reasons why welfare states no longer succeed in reducing relative income poverty, we thus need to know what are the links between the levels and dynamics of low wages, social benefits, poverty thresholds and median household incomes. We start from the conventional EU at-risk-of-poverty indicator defined as the number of individuals living in a household with an income below 60 per cent of equivalized median income (Atkinson, Cantillon, Marlier, & Nolan, 2002). So conceived, the reason for the failures of anti-poverty strategies lies in the fact that welfare states no longer succeed in pulling the incomes of the people at the botom closer to those in the middle. Besides employment levels and the distribution of jobs among households, this can be occasioned by three mechanisms: 1) median incomes of all households (including the elderly) increased faster than median individual incomes of the working age population; 2) low wages lagged behind median household incomes or 3) the growth pace of social benefits was slower than that of low wages. 

We focus on a limited set of vulnerable households with children, viz. working-aged couples and single parents who are either jobless or have only one low wage earner in the household. We analyse the most developed welfare states in the world[1]  where comparatively high minimum wages are in place and where income and wage inequalities are fairly low. We start from a double observation: a) low wages in general and minimum wages in particular constitute a ‘glass ceiling’ to vertical redistribution b) in all these countries the gross (labour) incomes of households with children living on a single low wage fall short the poverty threshold, and in most countries so do the net incomes. This suggests that the primary cause of household income poverty lies in the insufficiency of a single low wage for families with children. This points at a structural difficulty to reduce poverty through a more adequate and efficient social protection system. Our second observation is the decline of the adequacy of the minimum income packages for jobless households. Then we try to understand how this came about so we move from a mere description of these trends to an analysis of related factors: to what extent the erosion of minimum income protection for the working age population compared to median household incomes has been occasioned by changes in median household incomes (the denominator), to changes in low wages and/or to deliberate cuts in benefit levels? Within the context of these interrelationships, what was the impact of tax and benefit policies on the incomes available to low wage earners? In doing so, we attempt to distinguish  exogenous forces influencing wage levels at the bottom of the distribution on the one hand and deliberate protective and pro-employment policies on the other. We use survey data (ECHP 1994-2001 and SILC 2005-2008 2012) and standard simulations of disposable household incomes of typical households (Van Mechelen, Marchal, Goedemé, Marx, & Cantillon, 2011) in order to address these questions.

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[1] Namely Austria, Belgium, Germany, Denmark, Finland, France, The Netherlands, Sweden and The UK.

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