Income distribution at EU level

Risk of poverty, as conventionally measured in the EU, is defined as having disposable income below 60% of the national median - i.e. of the country in which the people live. A similar approach is taken to the distribution of income which is also measured at a national level within the EU. But rather than considering each country separately, however, income inequality and the risk of poverty in the EU can be measured by taking the population in the different Member States together and examining people's position in the overall income distribution across the EU as a whole. The case for doing so  is that such a measure conforms to the view that the EU is a single social entity and that individuals have social rights as EU citizens, and not just as citizens of the Member State in which they live. Moreover, it is arguable that, as time goes by, when assessing their relative circumstances people will adopt an EU-wide perspective, rather than a national one.

The importance of adopting such a perspective is highlighted by the enlargements of the EU in 2004 and 2007, when countries with average incomes well below those of the EU-15 became members, but the average risk of poverty across the EU fell because it is defined on a national basis. Since the conventional indicators of inequality and poverty do not take account of income differences between countries, they are affected  and consequently convergence (or divergence) of income between Member States does not affect these measures. The objective of the EU, however, is not only to promote social cohesion within countries, but also to advance convergence between countries, that is, to reduce differences in living standards between the different Member States. Accordingly, there is a strong case for looking at EU-wide measures alongside national indicators.

The focus here is on both the overall distribution of income in the EU and the risk of poverty, measured in the conventional way by relating household income to the median, but this time defined at the EU level, by aggregating disposable income across Member States using purchasing power standards (PPS) to bring income in the different countries into equivalence (i.e. to adjust for differences in price levels as well as expressing monetary values in terms of a single currency). Income distribution is also measured in PPS-adjusted terms. This adjustment is not without its problems, since it takes account of differences in price levels between countries but not within countries (e.g. between urban and rural areas, or between the capital city and the rest of the country), which can be equally if not more important.

Importance of taking account of income and benefits in kind

An important element that indicators based on disposable income – whether defined in national or EU-wide terms – fail to take account of is income and benefits in kind. These vary considerably in importance between households, both in the same country and in different parts of the EU. It is a criticism of the national measures of the risk of poverty and income distribution that this element is ignored, since those at the bottom end of the income scale may well benefit more from income in kind (e.g. in the form of social services) than those further up the scale, though without hard empirical evidence (which is hard to obtain or even lacking) it is difficult to be sure.

It is possible, on the other hand, when measuring EU-wide income, to take account of differences in the scale of income and benefits in kind between countries, and since these differences are substantial, it is important to so. National accounts statisticians at the EU level have made this possible by estimating the monetary value of income and benefits in kind provided by governments in the form of social expenditure in EU Member States. These estimates are used here to adjust disposable income in each of the countries to include an allowance for income in kind. It is difficult to judge the reliability of the estimates, but they should give a broad indication at least of the variation in this element across countries.

The estimates are used to calculate the effect of adding the value of income in kind to monetary income in each country. The same adjustment factor is applied to the disposable income of all households in the country concerned. This, of course, does not represent reality, since some households undoubtedly gain more than others from this element. But since there is little evidence on which households gain more (or on how much more they gain), it is difficult to do more than adopt a simplifying assumption of this kind. The difference it makes to the results if income and benefits in kind are considered is shown here. It should be emphasised that these results are intended to give an indication only of the way in which this element affects comparisons between countries – i.e. how much it raises or reduces the income of those living in a particular country relative to the EU average. It takes no account of differences within countries of the importance to individual households of income and benefits in kind.

Summary of findings

The degree of inequality of income in the EU, taking the whole population together, is similar to that in the United States, despite the big difference in income levels between Member States (e.g. in Denmark or the Netherlands relative to Bulgaria or Romania). Thus no great difference is apparent in the Gini coefficient (0.36 for the EU, 0.37 for the US).

Income differences between countries are an important factor in the EU-wide distribution of income. The lowest average income is in Romania and Bulgaria, but other countries in Central and Eastern Europe also have income levels that are much lower than the EU average. The highest average income is in Luxembourg – almost eight times the average in Romania in 2008. Around 30% of the EU-wide inequality in income distribution is a result of income differences between countries, so that 70% (by far the greater part) is due to disparities in household income within countries.

In 2008, almost a quarter (23%) of the population in the EU had income below an EU-wide poverty threshold, defined as 60% of median EU income. The proportion of the population with income this low was largest in Romania and Bulgaria and only slightly smaller in Hungary, Poland, Lithuania, Slovakia, Latvia and Estonia. The figure was also above the average in Portugal, the Czech Republic and Greece. The largest number of people with income below the 60% threshold lived in Poland (around one in 5), while 17% were in Romania, just over 8% in Italy and a further 8% in Spain.