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The 'squeezed middle' ?

Posted on October 06, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The squeezed middle is one of those terms that has entered popular discourse in Ireland as well as abroad. Political and media pundits refer, at ease, to the ‘squeezed middle’ who are said to have borne the brunt of the recent recession or fiscal austerity and have lost out compared to those on lower incomes or those on very high incomes.  The problem is twofold:

(i) nearly everyone in the commentariat believes that they belong to the ‘squeezed middle’ and (ii) the ‘middle’ corresponds to some undisputed and universally accepted notion (like for example people in the thirty to seventy thousand Euro income bracket). In other parts of the world there is much talk about the squeezed middle as constituting a social layer left behind by globalisation, neo-liberalism or socialism or whatever else one is having. In this context opportunity is provided to rogues and chancers of all hues to gather support on the basis that ‘they’ are squeezing ‘us’.  Things get particularly nasty when ‘they’ are immigrants or lone parents or unemployed or persons with a disability or young males or well-off pensioners from the public or private sectors or workers in some particular sector of the economy. What are the facts about the distribution of income in the Republic of Ireland?

Chart 1, below, shows a refined distribution of Gross Household Income in 2014 based on data from the Central Statistics Office EU Survey of Income and Living Conditions (EU-SILC). The data were prepared by NERI colleagues Dr Micheál Collins (now assistant professor at UCD) and Niamh Holton of the NERI. Further detail on income distribution can be found in a number of NERI research papers including The Distribution of Market Income, Earnings and Low Pay in the Republic of Ireland, Income Distribution in 2011 – NERI Research In-Brief.

Chart 1   Distribution of Gross Household Income in 2014 (Republic of Ireland)

CLICK ON IMAGE TO ENLARGE

 

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Who is in the middle? There is no hard and fast way of defining the middle. Perhaps the most meaningful measure is based on total income of households including earnings, rental income, social transfers (pensions, child benefit etc.) but before deduction of income tax. This is defined as Gross Income.  The distribution is very wide with just over 80,000 households on or below €10,000 a year while 10,000 households are above €200,000 a year (however, the limitations of data surveys in capturing households with very high income or very low income must be noted).  In between there is a wide variation around the ‘average’ or median which corresponds to the income of the 50th household were 100 lined up from bottom to top. The median average was just over €40,000 per annum in 2014. This includes all types of incomes including rent and dividends received to earnings from employment (which accounts for the bulk of household incomes except for the very lowest or highest of income earners).

 If we were to take the 33rd and 67th percentile points we could define the ‘middle’ as households lying between €27,000 and €59,000 a year in 2014 (the red-shaded areas of the graph). In other words, one third of households in the ‘middle’ lay in this income range around the median of €40,000. One third of households lay below this range while another one third were above this range. Some might prefer a different allocation distinguishing those at risk of poverty from others (the line would be somewhat below €27,000 for most households at risk).   Still others might prefer an allocation distinguishing the ‘top 1%’ and the bottom 99%.  Have your pick (although I suspect that the top 1% are most clever in managing their incomes for taxation and statistical purposes!).  Bear in mind that no two households are alike and that wealth distribution is just as important as income distribution and hardly anyone talks about the former.

 Depending on family, mortgage, rent and other characteristics many households in the low, middle and upper income range struggle with debt, with bills and with charges. Everything from third level fees to mortgage repayments and cost of childcare enters into the calculus. Of course there are some households way above the mid-range who struggle in a major way depending on circumstances just as there are some households in the lower range that are relatively secure (they own their home, have no mortgage, the kids are reared and they enjoy reasonably good health). Savings, inheritances and property downsizing can also help financial circumstances sometimes in a dramatic way.  But we should be under no illusion that managing on an annual income of €25,000 with a mortgage or crippling rent and children to clothe or feed is no picnic.  Persons in the upper income range (above €59,000) might in many cases have little concept of what it is really like to live on a much lower income.  Two further caveats are in order:

  •  The distribution of income within households gets relatively little attention and not a lot is known about it. This has major implications, among other things, for gender equality within family or household units.
  • The distribution of disposable income is somewhat different to that of gross income shown here.  Taxes on income have the effect of redistributing income as well as ensuring that money is collected for collective goods and services. As a result, households have lower incomes but income is more equally distributed than is the case with gross income (and gross income already includes social payments funded out of income tax).

 Who took the most pain in 2008-2013?

 Did households ‘in the middle’ suffer disproportionately during the years of recession and fiscal austerity? There is no clear evidence that households in the middle suffered more than other households. If anything, the impact of tax and social welfare changes in 2008-2013 seems to have impacted more severely on low income and very high income households than those ‘in the middle’. See for example the analysis of the Economic and Social Research Institute [Distributional Impact of Tax, Welfare and Public Service Pay Policies: Budget 2016 and Budgets 2009-2016].  The initial ‘austerity’ budgets from 2009 to 2010 took large sums of money out of the economy and impacted very significantly on household incomes but it does appear from the ESRI analysis that these budgets were somewhat ‘progressive’ to the extent that the cuts to incomes or increases in taxes were disproportionately felt by the highest income groups (but caution is needed in drawing conclusions because the ESRI analysis does not factor in all changes and does not address the impact of cuts in services which impact disproportionately on low income households). The later ‘austerity’ budgets from Autumn 2011 to 2013 were much less austere than the previous budgets where most of the ‘heavy lifting’ had been done but were mildly ‘regressive’ (but, again, with the reservations just expressed).

 According to the ESRI analysis (page 13), the groups that took the biggest hit, specifically, from budgetary measures during the whole period 2009-2016 were in descending order of severity

  •  Single unemployed without children
  • Unemployed couples
  • Non-earning lone parents

 Budget 2016 (the budget approved in the Autumn of 2015 for the year 2016) actually took more money away from the bottom 10% of households when the positive impact of raising the national minimum wage is excluded whereas all other groups made some gains.

Most commentators neglect the impact of indirect taxes on households (though the ESRI analysis did factor in the impact of indirect tax changes). Former NERI colleague, Dr Micheál Collins published research in 2014 showing that the total tax take is moderately U-shaped with respect to gross income (see Chart 1 on page 7 of The Distributive Effects of Recent VAT Changes in the Republic of Ireland).

 Over and beyond percentage shifts to income or taxes we do well to remember that a given percentage change (say 5% in either direction) is not the same across households. A household on the breadline taking a 5% reduction in income may be faced with devastating consequences compared to a household on very high income which takes a 20% drop in income. The extent of change is relative to the existing position of households and many are highly vulnerable because they are already heavily in debt and have little or no money left over at the end of each week or month as the case may be.

 Certainly, households ‘in the middle’ have suffered major impacts from recession. However, it is not clear that this has been any worse than for other groups – especially those on incomes below say €27,000 a year. The biggest contribution the State could make to struggling households ‘in the middle’ is to ‘give them something back’ by serious levels of investment in childcare, education, health, public transport and especially accommodation where it would appear that the crisis is going from bad to worse as winter approaches. In that regard grants that only stoke further demand for diminishing accommodation in some areas are of no help. We need an emergency programme of works to hit and supplement the supply problem where markets have failed.

 

 

 

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