Post-crisis inequality in Greece

Posted by in Development, Economics, Politics

Tassos Giannitsis and Stavros Zografakis have produced a very significant report with detailed analysis of the impacts of the Greek debt crisis and subsequent EU policy response.

A key finding of their analysis is that the collapse of the Greek economy was followed not only by severe income losses, unemployment and poverty, but also by extensive internal shifts across and within low, middle and high income groups.

The report follows Piketty’s approach with households divided into three classes, the lower, middle and upper classes. Their approach differs by including the first six deciles in the lower class rather than five, since in Greece all six lower deciles are below the mean income used as a threshold by Piketty. As a result the middle class comprises only the next three deciles and the upper class includes the same top decile.

The average income of the lower class corresponds to about 40% of the mean income in the country. This class includes
all the poor households (the first 2-2.5 deciles below the official poverty line) as well as households that are above the poverty line (from the 3rd to the 6th decile).

The middle class comprises the next 30% of households (from the 7th to the 9th decile), and its population is half the population of the lower class (30% vs 60% of population). The households of the middle class have incomes that are three times higher than the incomes of the lower class on average. The threshold for classifying a household in the middle class is 2008 income of more than EUR 18,204.

The upper class, which is the top 10% of the population, has an income threshold of EUR 44,891 for 2008. The average income of the upper class is three times higher than that of the middle class and nine times higher than that of the lower class.

Analysis based on these three levels of income reveals there were large changes in inequality both within and across lower, middle and upper classes – ie in all classes there were significant groups who lost and gained, including large numbers with income changes so large they changed class.

From 2008 to 2012, the average income of the lower class increased by 1% in 2012 relative to 2008, that of
the middle class declined by 18.9%, while that of the upper class fell even more strongly (36.6%). While the net result suggests an overall flattening of the income distribution, the changes within and across classes meant much more severe impacts on groups in all three social classes.

Specifically, in the lower class 44.2% of households had an income increase (+61.9%), while 52% had a reduction (-37.8%). In the middle class, 21.6% of households had an increase (+30%) and 78.4% had a reduction (-31.6%). For the upper class, 14.8% of households had an increase of 33.5% in their income, whereas 85.2% had a decrease of 47.2%. The averages obscure both large reductions and large increases, creating winners and losers within each class during the crisis.

The report also contains detailed analysis of changes in income by income source, specifically wages, pensions, business/self-employment and capital income.

During the crisis a significant transformation of the “old” income groups occurred. The “new” income groups are different relative to 2008, while the thresholds have shifted downward.

The income of the “new” households of the lower class of 2012 has decreased by 34.2%. The corresponding income for the new middle and upper classes has fallen by 15.2% and 14.1%, respectively. The winners within the lower class have simply improved their incomes in 2012 without moving up to another class. Instead, part of the losers of the lower class, whose incomes on average halved (-51.5%), have fallen down from the middle class and in 2012 find themselves in the lower class.

In the middle class, only a small part of the winners come from the lower class, having an income gain of 39.8% on average. These households crossed the threshold and joined the middle class. Also, a part of the losers in the middle class come from the upper class. The upper class also includes households formerly belonging to the middle class. This is due both to increased incomes (by 50.1% on average) and the lower threshold (EUR 36,502, down from Page EUR 44,891).

Most households in the lower class of 2012 are now at a disadvantage, as they have lost quite a lot of what they used to have in the past and also have lost more than the other classes. The same picture holds for the middle class, where some households (a minority) have gained, while the majority (63.3%) have suffered major adverse shocks. Generally, six tenths of those included in each class have experienced a severe deterioration of their position.

Turning to income composition, the main differences between 2008 and 2012 are summarised
as follows:
– The share of wages/salaries fell in 2012, both in the lower and the middle classes (by 4 and 7 percentage points respectively, while the share of pensions increased). Also, the shares of income from independent activities and commercial activities declined.
– The wage share increased in the upper class of 2012 and so did the pension share, while the share of investment income shrank. The upper class, from a class of rentiers, has become a class of highly paid employees and pensioners, who also receive income from capital.

However, significant changes are also noticed among the households of the wealthiest decile. As seen in Table 13.4, in P90-95, i.e. in the lowest 50% of the top decile, the share of wages declines, while the shares of pensions and capital rise. In the next 40% (P95-99) the share of pensions mostly increases, with a corresponding decline in income from capital. The increase in the wage share observed when examining the wealthiest decile as a whole applies for the top 9% (P99-99.9) and especially the top 1% (P99.9-100). In the top 0.1%, the picture is broadly the same: the share of wages rises (from 8% to 18%) and the share of income from capital declines (from 87% to 67%).

The uneven distribution of income across the three broad income classes is illustrated as follows. In 2008 the lower class received one quarter of total income in the country for 60% of the population, the middle class (30% of the population) received 38%, while the upper class (10% of the population) received 37.5% of total income. Within the upper class, 99% of households received 25.7% of total income and the remaining 1% received 11.8% of total income, split out by 6.8% and 5% respectively between the top 0.9% and the top 0.1% of the population.

Overall, in 2012, 10% of the population receives about one third of total income, one third of wages, one fifth of pensions, half of income from commercial activities and independent activities and five tenths of income from capital. The data show that in 2012 there is a very slight improvement in inequality. The degree of inequality, according to Piketty, would rank Greece among “high inequality” countries and has remained high also during the crisis. Moreover, it should be pointed out that in the wealthiest decile the most severe shocks affect the top 0.1%, as these households were the main recipients of capital income. By contrast, the first fractile of the top 10% (P90-95) has maintained a constant share (up by 0.2 percentage points) in total income.

Measuring changes in average income within each class between 2008 and 2012, the lowest class had two percentage points higher losses than the middle (18.1% versus 16.1%) and as we move to higher deciles, the losses are greater, reaching 58.1% in the top 0.1%.

Measuring the impact of government tax and income support policy, inequality after taxes was less than pre-tax inequality by 6.0% in 2008 and by 7.1% in 2012, showing that government intervention after the crisis produced a small reduction in inequality.

The conclusions from the detailed examination of trends of inequality and from the comparison of the tops and bottoms clash with a number of standard perceptions. The most important of these conclusions are the following:

First, regardless of its different measurements in the various analyses and calculations, inequality remains a serious factor in Greek society, although a number of individual policy measures, particularly in the area of pensions, represented an attempt to protect the most vulnerable social groups.

Second, gains and losses are recorded in all three broad social groups (lower, middle and upper classes). The economically stronger groups suffered much more significant losses, both in absolute and in relative terms, while the losses of the bottoms were of a lesser size, but more painful because they affected either low income or involved large falls down mainly from the middle class to the lower one. The finding that gains and losses co-exist in each and every class is very important, as it is at odds with the dichotomous perception that either gains or losses affected one or the other group.

Third, the apparently limited change in overall inequality during the crisis masks several countervailing forces. In particular, severe income reductions could be seen both in lower and in higher incomes but also within these classes. Therefore, a relatively small change in total inequality indices conceals significant divergent developments in different population groups.

Fourth, redistribution or compensation policies or policies to address the social impact of the crisis have to fight new realities and new forms of poverty and inequality. The old realities have been overthrown. Therefore, policies geared towards older patterns of poverty or inequality risk intensifying inequalities or leaving difficult realities unaddressed.

The above conclusions and the strong differentiations in impacts within and across classes they bring into light are the most important contributions of this study. They highlight the changes in the very low and the very high income brackets, which are not captured by the usual analyses of survey results, and are crucial for any attempt to understand the multiple and complex shifts that occurred in the country’s economic and social fabric during the crisis.

In addition to these statistics the report also concludes with these very interesting remarks: “Our findings suggest also that during the crisis deep divides have been created in Greece between different categories of employment, professions, pensioners and socio-economic strata, and that additional forms of inequality continued to exist or emerged, such as:

– Inequality in the applicable tax regime.

– Inequality in the applicable social security regime, given the existence of contribution exemptions and a disproportionate contributions/earnings relationship for several categories of employees or because of interventions which affected seriously the viability of the pension system itself.

– Inequality in the evolution of wages/salaries and pensions; inequality is much lower among older cohorts of workers and becomes much higher when more recent cohorts are included.

– Inequalities in access to a number of professions, due to long-established barriers to entry or government-awarded rents or privileges, statutory fees and protected activities (mainly but not exclusively engineering activities). As a result of many such distortions, production costs increase, leading, in the case of tradables, to lower competitiveness and a squeeze on wages in order to offset these higher non-labour costs and the concomitant competitiveness losses.

…Taxation, as shown in our analysis, has been the predominant tool of fiscal adjustment. The dimensions described above would have not been so large if the burden of taxation had been shared by all. This has not been the case, either because tax evasion is still extremely high or because large swaths of Greek society, especially in regional areas, are self-exempted with impunity or enjoy statutory exemptions from old and new tax burdens.

In essence, a significant number of households and individuals refuse to comply to any change to the rules of the game that applied in the past and played a major role in the emergence of the crisis; governments, on the other hand, tacitly go along with this refusal. All these phenomena make any adjustment and especially growth-oriented policies extremely difficult.

Unless the higher inequality in the country is addressed and the burden of coping with the crisis is distributed in an equal, fair and effective manner across the high and the middle strata – or even the low ones where reasonable and especially if these are only statistically and not truly “low” – the problem will persist.

Unlike taxation, the evolution of government spending seems to have had an upward effect on inequality. Government expenditures on health, disability, child and family, unemployment, social exclusion, all declined between 2008 and 2014, from a total of EUR 28.7 billion to EUR 20.4 billion (-29%). With particular regard to unemployment, which by 2014 and 2015 had risen to a multiple of the 2008 figure, expenditure fell from EUR 2.8 billion to EUR 1.8 billion.

The findings on these complex aspects… highlight an urgent need for a broad range of political choices, of which the report focuses on the following three:

(a) Designing and implementing policies to stimulate growth. This choice is urgently necessary for a number of reasons: first, growth will enable a gradual exit from poverty; second, it will lead to an improvement of macroeconomic aggregates linked to the level of GDP (government deficit and debt ratios, new investment); and third, it will allow a return to conditions of higher and better paid employment and more social convergence.

(b) Effectively tackling tax evasion, contribution evasion, preferential tax exemptions or tolerance on the part of the government towards these phenomena, which remain a major factor behind inequality and the crisis in Greece. Several years into the crisis, the already high tax evasion seems to have become even higher, as whole categories of incomes, mainly in regional Greece and in tourist areas, continue to tax evade as if there is no crisis and as if solidarity in the sharing of tax burdens means, for some, significant income losses and, for others, an opportunity to increase their income and evade taxes and social security contributions.

(c) Focus on raising the productivity and efficiency of the State, eliminating political corruption and the costs associated with an invisible corruption tax that these conditions impose on the economy and society. The combination of excessive taxation, extensive tax evasion and high expenditure-to-GDP ratio is not sustainable and is a major factor behind many of the problems and challenges mentioned above. Unless the state is re-organised so that a part of the fiscal rebalancing can be shifted to the expenditure side and away from taxes, which during the crisis bore the brunt of fiscal consolidation, the country will remain trapped in a quagmire, just nudging a little up or down.

… For decades, growth policy was consistently synonymous with a policy attitude that downplayed the importance of the real economy and focused on monetary and financial games and clientele-oriented policies. However, in conditions of meltdown without emphasis on the production base, redistribution means that everyone, the weak and the less weak, become even weaker.

These problems were not central elements of policy during the crisis. But the relationship between inequality, growth and an efficient State is important, as growth is a crucial factor in the success of fiscal adjustment and stabilisation. Fiscal consolidation without growth is doomed to fail and vice versa.

Last but not least, the outcome of the crisis is directly linked with national or European policy inefficiencies… The issue is a fundamental question of what type of governance can allow a country to successfully navigate through the risks and challenges and shape its future in a rapidly changing world.”

Read the full report here: