Risk of poverty

The concern here is with the concept of poverty as defined in relative rather than absolute terms - with those who have a level of income below a certain threshold in relation to average income in the country in which they live. The people concerned are conventionally defined as being at risk of poverty, or of social exclusion, since, with their relative level of income, they may not be able to enjoy the standard of living of most people in the country in question. Their standard of living, however, may vary significantly, depending on the country in which they are living and its general level of prosperity: someone who has income below the at-risk-of-poverty threshold in one of the more prosperous EU Member States (such as Denmark or Austria) may have a significantly higher absolute level of income, and standard of living, than someone in one of the least prosperous countries (such as Romania or Bulgaria). Nevertheless, they might still share the experience of feeling excluded from society and of not being able to participate fully in it because of their relative income level.

Having a low level of income in relative terms, therefore, has been shown to reduce the self-reported well-being of people in the EU (Alesina et al., 2004). Moreover, the existence of a significant number of people in this position may provoke social unrest and possible conflict, as well as adversely affecting the economy and its development and threatening political stability. Accordingly, it is an issue of potentially high political importance.

The level at which the at-risk-of-poverty threshold is set is open to debate, since there is no strong case for taking one level rather than another. The convention in the EU at present is to take the threshold as 60% of median household disposable income, measured on an equivalised basis to allow for differences in the size and composition of households (using the OECD modified scale as the means of adjustment). The level of the threshold, however, is not the only issue for debate in this regard. Other issues concern the fact that income is defined in cash terms and excludes, for the most part, income and benefits in kind (such as production for own consumption or social services provided free of charge or on a subsidised basis) and is measured in annual terms, which means that neither accumulated wealth nor the possible fluctuation in income from year to year is taken into account, even though both tend to affect living standards.