The Plight of Triple Precariousness: Low Income, Low Wealth and Inadequate Liquidity

Existing research on poverty and inequality relies predominantly on data measuring people’s income from work and social transfers. Due to the absence of a fully developed analytical framework as well as severe data constraints, few studies on financial well-being and precariousness include the wider financial resources on which people may rely on, such as savings, inheritances or real estate. At the same time, a small and entirely separate literature exists that focuses on the distribution of such wealth components. But the joint study of income and wealth and its distribution across the population remains a largely uncharted area. Although the topic is recently gaining increasing prominence in the literature, evidence remains largely missing, especially outside the US. 

In a detailed analysis of the Belgian case, using the Eurosystem Household Finance and Consumption Survey (HFCS), we study the bottom of the joint distribution, i.e. where low income and low wealth go hand in hand. For this the analytical framework of among others Jäntti et al. (2013) will be extended by incorporating an analysis of the composition of wealth covering such aspects as heterogeneity, liquidity, risk, volatility and the debt-to-asset ratio. Building on this framework we develop the hypothesis that households at the bottom of the distribution are in a ‘triple precariousness’. With this concept we refer to the fact that households earning a low income often also accumulate a low level of wealth and the little wealth they do own is inadequately liquid, complicating the depletion of their assets in times of need. Our empirical testing of this hypothesis shows that it is only confirmed for households at active age, while elderly households are often found to combine low income with modest to high net wealth. Moreover, we identify the main socio-demographic drivers of triple precariousness to be a young age, low education, unemployment, lone parenting, migrant background and renting of the main dwelling. We argue that all this has far reaching consequences for social policy design and poverty calculation.

The paper proceeds as follows. It starts by discussing the derivation of the hypothesis of triple precariousness and why we deem Belgium to be an interesting case to test it. The country is known to have a relatively high income poverty rate compared to other Western countries. Moreover, evidence on its distribution of wealth is relatively scarce and outdated (e.g. Rademaekers & Vuchelen, 1999; Van den Bosch, 1998), mainly as a consequence of a lack of available data. However, it appears that median net wealth per capita and homeownership are rather high in international comparison and wealth accumulations seem to much more evenly spread than in other countries (Arrondel et al., 2014). Calculations on the HFCS indicate that only about 4 percent of Belgian households have a negative or nil net worth. In other words, a large part of income poor households appear to have accumulated assets of some kind. However, wealth accumulations among poor households typically remain at low levels, largely as a consequence of high indebtedness (Kuypers et al.). In the case of elderly households evidence indicates that they often combine low incomes with moderate to high wealth holdings (De Decker & Dewilde, 2010). Therefore we expect to find the triple precariousness mainly among households at active age. Since the HFCS data are new, a discussion of the content and features of the dataset is the topic of the second part.

The paper then moves on to empirically test the first part of the hypothesis. In other words, it analyses whether income poor households can overcome their financial precariousness by drawing on their wealth accumulations. We find that income poor households at active age are typically also poor in terms of their asset holdings. Elderly households, on the contrary, are more often found to combine a low income with median to high net worth levels. However, not only the level of net worth is important, there are also good reasons why we should look at its composition. Testing the second part of the hypothesis involves a detailed comparison of asset portfolios along the extended analytical framework between households that have both low income and low wealth with those of households that are richer in at least one of the two dimensions. The results show that the asset portfolios of income and asset poor households are relatively homogeneous, illiquid, non-risky and non-volatile compared to those of their richer counterparts and the debt-to-asset ratio is significantly higher. The combination of these two empirical findings confirms our hypothesis on the existence of a triple precariousness for households at the bottom of the distribution.

Approximately nine percent of Belgian households are found to be in triple precariousness. The last part of the paper identifies the main socio-demographic drivers. We show that households who generally belong to the group of triple precariousness are those with a young, low educated, unemployed, lone parent, migrant and/or tenant reference person. In particular tenure status is found to have an extremely high impact on the risk of being in triple precariousness.

References:

Arrondel, L., Bartiloro, L., Fessler, P., Linder, P., Mathä, T. Y., Rampazzi, C., et al. (2014). How do households allocate their assets? Stylised facts from the Eurosystem Household Finance and Consumption Survey . ECB Working Paper No 1722.

De Decker, P., & Dewilde, C. (2010). Home-ownership and asset-based welfare: the case of Belgium. Journal of Housing and the Built Environment, 25(2), 243-262.

Jäntti, M., Sierminska, E., & Van Kerm, P. (2013). The joint distribution of income and wealth. In J. C. Gornick, & M. Jäntti, Income inequality. Economic disparities and the middle class in affluent countries (pp. 312-333). Stanford: Stanford University Press.

Kuypers, S., Marx, I., & Verbist, G. (Unpublished manuscript). Joint patterns of income and wealth inequality in Belgium.

Rademaekers, K., & Vuchelen, J. (1999). De verdeling van het Belgisch gezinsvermogen. Brussels Economic Review, 375-429.

Van den Bosch, K. (1998). Poverty and assets in Belgium. Review of Income and Wealth, 44(2), 215-228.