This weeks blog is by NERI economist, Ciarán Nugent. He discusses the 'at-risk-of-poverty' indicator and the Living Wage.
Poverty is a wide and abstract concept that does not lend itself easily to measurement. Finding ways to quantify phenomena which are not easy to simply ‘slap a number on’ is part of the everyday work of social scientists the world over. The process of deciding what to measure, the method etc. involves debate, deliberation and ultimately judgement calls due to the abstract nature of social concepts, imperfect data and data availability. So, we use imperfect indicators to try to describe these phenomena and how they compare across time and across countries as best we can. Estimates should be interpreted with care. Always.
The ‘at-risk-of-poverty’ (AROP) indicator is one of the main ways in which we measure and discuss poverty, probably the most often cited (at least in the Irish case). AROP is often presented in public discourse as synonymous with the wider concept of ‘poverty’. Unfortunately, this is an inaccurate but widespread simplification.
The AROP threshold (sometimes referred to as ‘the poverty line’) is defined at 60% of the median household equivalised (weighted by household structure) disposable (after tax and transfers) income. Similarly, some people might be familiar with the measure for global extreme poverty, an estimate of the global population living on less than 2 dollars a day.
AROP captures income distribution and has no relation to the cost of living. For example, if there was a complete income freeze across households and the entire economy (wages, transfers, taxes etc.) and inflation hit 10%, there would be no change to households identified as AROP or the share of households identified as AROP in Ireland, though there would be a clear change in material conditions for everyone. Most people will implicitly understand what this would mean, especially for those struggling.
The AROP threshold for a single adult in Ireland is just under €16,000 (€15,993) (Eurostat 2020). This translates to about €300 a week and if your income is higher you are officially at no risk from poverty. For two adults with two children under 14 the AROP is €33,586. If that household takes home €33,587, they are not ‘at-risk’.
Focusing on the single adult for a moment, I think everyone understands that the figure €16,000 is arbitrary. It’s significantly less than full-time minimum wage salary (around €20k in 2020) and more than 20% short of a Living Wage. A single adult can apply for Housing Assistance Payment with income up to €35,000 in Fingal and a two adult, two children household up to €38,500. One would expect that households unable to afford rent would be ‘at-risk-of-poverty’. Not according to this widely used definition. The latest daft rental report has the cost of renting a double room in a shared house at around €700 in most (of the cheaper parts) of Dublin, closer to €600 in Cork and Galway and around €500 in Limerick. That’s 53%, 45% or 38% of the net income of an individual not considered AROP. In Dublin, you would be left with €146 a week for bills. Netflix doesn’t even come into it. With a €400 mortgage, this would leave €215 a week.
This mismatch can be seen comparing AROP with (arguably) the other most important indicator of poverty, the (enforced or material) deprivation rate. In Ireland, a household is suffering material deprivation if they cannot afford two of 11 goods and services on a list, representing ‘normal’ expenditure for a ‘normal’ life (a winter coat, a night out, furniture etc.). Of course, there are issues around subjectivity, around consumer choices etc. in this indicator as well. But it’s important to consider alongside the other indicators and will capture changes in inflation and the cost of living better than AROP.
The share of Irish households in deprivation actually increased in 2019, a year of strong real wage, employment and macroeconomic growth as did the share of Irish workers. Almost 1 in 5 Irish people were in households the year before the pandemic that could not afford the basics. The increase that year was driven almost exclusively by rising ‘extreme deprivation’, which counts households unable to afford 3 or more of the eleven items and by particular groups; renters and young adults, particularly young women. By contrast, the share of the population in the AROP group fell that year. Note: There’s recently been a break in the method of how the CSO gather and calculate these trends through SILC and so we have a new series, where only 2020 and 2021 can be compared. The data showed an improvement in 2021 (to around 14%).
The consistent poverty rate captures when households are both under the AROP income threshold and suffering from material deprivation. It was 4% of the Irish population in 2021. Considering the AROP rate was estimated at 11.6% and deprivation at 13.8%, this means that over 7 in 10 people who can’t afford the basic goods and services for a normal life are not officially ‘at-risk-of-poverty’. It also means that over 20% of the Irish population are in households that are either AROP or in material deprivation.
These issues are important in relation to recent announcements by government to introduce what they are calling a ‘Living Wage’. They’ve defined a Living Wage as €12.17, or 60% of median hourly earnings in 2022 and plan to bring it in over the next few years (to €13.60 by 2026….though I don’t know how they’re calculating the median wage in 2026 already) but aren’t really committing (‘depending on economic circumstances’).
The Living Wage is expressly calculated by adding up the basic costs of a minimum essential standard of living and dividing the figure by full-time working hours (39 to be exact). And it really is the ‘minimum essential’. The food budget for 2022 for a full grown adult was €47 a week, less than 7 quid a day. A chicken fillet roll would take up over half your daily budget (no cheese!).
The Living Wage Technical Group have been calculating the figure for several years and last year the estimate was €12.90 an hour for a single adult (the 2022 figure has yet to be published and will likely rise significantly this year due to inflation) or €503 a week (68% higher than the AROP threshold for a single adult). The median income of a single adult household is €19,9429 (€383 a week), the average €25,267 (€485 a week).
Defining a living wage at this arbitrary point in the wage distribution rather than based on the cost of a minimum essential standard of living…..well it’s not really a ‘Living Wage’. A 10% increase in the cost of living would not affect the estimate and as we face into uncertain times with runaway inflation this could have real consequences for the wage floor we decide in future. Even the deliberations around the national minimum wage incorporate inflation (that’s one of the main arguments we were given for little to no increases over the past decade, as headline inflation was static for the most part). It’s not unlikely that we will be faced with scenarios in future with this arrangement where workers will take real term cuts to their wages, have their spending power diminish and have more difficulty making ends meet but still be considered to be on a ‘living wage’ from one year to the next.
This increase is obviously to be welcomed, though people will continue to struggle on it, even with full-time hours and the state will likely have to continue to subsidise the living costs facing many of these workers, through supports like HAP (only a third of HAP recipients were working in 2015, it was over half by 2018 and the median earned income of recipients was rising much faster than headline inflation in those years as well) and the family income supplement.
Really, what’s proposed is just a higher Minimum Wage (for now, in real terms at least). We should just call it that.