Poverty is fundamentally linked to the issue of how resources are distributed and redistributed in a country.
Countries with high levels of inequality are also likely to have high levels of poverty and those with lower levels of inequality are likely to have lower levels of poverty.
Inequality: what is it?
Unlike poverty, which concentrates on the situation of those at the bottom of society, inequality shows how resources are distributed across the whole society. This gives a picture of the difference between average income, and what poor and rich people earn, and highlights how well different Member States redistribute or share the income they produce.
Data on inequality is vital when considering poverty, as the overall distribution of resources in a country affects the extent and depth of poverty. This is important as the monetary poverty levels in the EU are calculated in relation to median income.
Looking at inequalities is particularly crucial at a time when in many countries the financial efforts necessary to get out of the budget crisis are not necessarily asked of the rich.
Generally, countries with high levels of inequality are also likely to have high levels of poverty and those with lower levels of inequality are likely to have lower levels of poverty. This shows that the problem of poverty is fundamentally linked to the issue of how resources are distributed and redistributed in a country.
How is it measured?
Income inequality in the EU is normally measured in two ways: the S80/S20 ratio and the Gini coefficient. Both these measures can be difficult to understand and have some basic limitations in terms of capturing an accurate picture on
The S80/S20 ratio is the ratio of the total income received by the 20% of the country’s population with the highest income to that received by the 20% of the country’s population with the lowest income. The higher the ratio the greater the inequality.
The Gini coefficient is a way of measuring the inequality of distribution of income in a country. It takes account of the full income distribution whereas the S80/S20 ratio only looks at the top and bottom. It is a technical formula which
identifies the relationship of cumulative shares of the population arranged according to the level of income, to the cumulative share of the total amount received by them. If there were perfect equality (i.e. if each person received the same income), this coefficient would be 0%. If the entire national income were in the hands of only one person then the coefficient would be 100%. The higher the coefficient – the greater the inequality in the distribution of income in a country.
You can read more about the technical aspects of the Gini coefficient in Wikipedia.
Some key issues
Poverty and wealth have to be studied together. In the EU inequality is studied by looking at the distribution of income. However, this is only part of the picture.
Another key element in inequality is the study of wealth: where it comes from, who has it, and how society redistributes it. An important area is the extent to which people own capital and assets of one sort or another – for example, property, shares and investments.
However, there is a lack of comparable data across Europe on ownership of capital and assets. Unfortunately depending on income distribution only gives a partial picture and may well lead to a significant underestimation of inequality in some Member States.
Inequality: key facts & trends
There is a considerable diversity within the EU in the degree of income inequality, measured by the ratio of the income share of the top 20% to that of the bottom 20%.
The ratio for the EU-28 as a whole is 5.2 (2016) but this varies from 3.5 up to 7.9. Austria, Belgium, Czech Republic, Denmark, Finland, France, Hungary, Ireland, Malta, the Netherlands, Sweden, Slovakia and Slovenia have the lowest inequality figures, ranging between 3.5 and 4.4, while the highest inequality ratio is to be found in Bulgaria, Croatia, Cyprus, Estonia, Germany, Greece, Italy, Latvia, Lithuania, Luxembourg, Portugal, Poland, Romania, Spain and UK, ranging from 4.6 up to 7.9. There has been a steady upward trend in inequality since 2000, when the EU ratio was 4.5. (Source: Eurostat – SILC Database, January 2018)
The Gini coefficient shows a similar ranking pattern to the S80/S20 ratio. The overall EU figure (2016) is 30.8, representing a slow but steady increase from the year 2000, when this value was 29. The lowest inequality is to be found in Czech Republic, Finland, Slovenia and Slovakia, with coefficient lower than 25.5, while the highest inequality is to be found in Bulgaria, Greece, Spain, Latvia, Lithuania and Romania, which figures exceed 34. (Source: Eurostat – SILC Database, January 2018)
Inequality of income: S80/S20 income quintile share ratio – see Eurostat graph