Panel Paper: The Impact of Social Transfers on Income Poverty and Material Deprivation

Monday, June 13, 2016 : 2:55 PM
Clement House, 3rd Floor, Room 05 (London School of Economics)

*Names in bold indicate Presenter

Geranda Notten, University of Ottawa and Anne-Catherine Guio, Luxembourg Institute of Socio-Economic Research (LISER)
In 2010, European Union (EU) Heads of State and Government launched the Europe 2020 strategy and committed to lifting at least 20 million people out of poverty and social exclusion, i.e. from around 116.5 million down to 96.5. The EU social inclusion target is based on a combination of three indicators: income poverty (also referred to as ‘poverty risk’ or ‘relative poverty’), severe material deprivation and (quasi-)joblessness. According to the 2013 EU-SILC data, the number of people at risk of poverty or social exclusion is now 121.6 million of people; this a jump by more than five million since the adoption of the EU target which mainly results from the great recession and subsequent austerity policies implemented by EU Member States.

One of the commonly agreed EU social indicators is the income poverty before social tranfers. When compared with the income poverty after social transfers, this indicator allows assessment (crudely) of the impact of social transfers.This paper develops a similar approach by simulating the effects of social transfers on material deprivation, showing thereby the effects of social transfers that we miss by only considering their impact on income poverty. Using the 2008 and 2013 EU-SILC data, it focuses on four Member States (Germany (DE), Greece (EL), Poland (PL) and the United Kingdom (UK)), which have been chosen because they have different levels of living standards and redistributive capacity and beause the crisis affected their economies differently.

This paper estimates the income elasticity of material deprivation through multivariate regression. It finds that a 1 percent income transfer reduces the number of material deprivations by an order of 0.51 percent in Germany, 0.43 percent in Greece, 0.40 percent in Poland and 0.33 percent in the United Kingdom. The impact of (total) social transfers is substantial, reducing the average number of material deprivations among recipients by 2.2 in Germany and Greece and by 1.9 and 1.8 in Poland and the United Kingdom. The impact is larger for recipients that are less well off. The impact of social transfers on severe material deprivation is also large, ranging from 13 to 22 percentage point reductions. In comparison, the reductions in at-risk-of-poverty rates are larger, ranging from 26 to 30 percentage points. In percentage terms however, the reduction in rates is not necessarely larger for the income poverty indicator than for the material deprivation indicator, this depends on the country and the type of transfer.

In sum, our simulations show that social transfers can not only reduce cash poverty but they can also subtantially reduce the extent and depth of material deprivation. Changes in social transfers will therefore have a two-fold effect on Europe’s poverty reduction target.

Keywords: economic well-being, poverty, social exclusion, income, material deprivation, social transfers, Europe 2020 strategy, simulation

JEL: D31, I32, I38