Inequality and risk of poverty

Countries measure income inequality and poverty in different ways. One method starts out with the determination of basic household needs, including the essential nutritional intake, and from that determines the amount of income required for minimum living standards. Typically, different amounts are necessary for households of different sizes. Households making less than the necessary income levels are classified as poor.

The other method is to measure average income across a country and then take a somewhat discretionary but reasonable threshold percentage of that average income as the threshold below which there is poverty.

As our national statistics are upgraded up to EU standards, Malta now introduces this type of measurement in line with a Eurostat method that is common to all EU member and accession states. These are important statistics that recognise the importance of raising incomes at the bottom of the distribution scale.

In addition, there is no denying that the most desirable type of economic growth is one that not only raises average income levels substantially but also narrows income and wealth inequalities. Policies that sustain this type of growth are the only morally acceptable and politically viable ones. The Eurostat threshold is 60 per cent of the national average. Those with incomes lower than 60 per cent are classified as "at risk of poverty".

In the Maltese setting, this is more likely to be a measure of inequality than a measure of abject poverty or utter destitution. Moreover, as with most statistical information, what are just as important are the improvements that occur over time. The study is a good starting point for further research into the factors that would turn a household that is at risk into one that is actually poor.

The method

The purpose of the new statistics is to count the number of persons at risk of poverty. It stands to reason that each person shares his or her level of economic well-being with the rest of the household, and in practice the sources of income for each household are often concentrated in one or two breadwinners.

The technique is to combine all income of the household but then to also consider the size of the household in a way that takes into account the "consumption capabilities" of its members.

In each of the sampled households, the statistician adds up all incomes received by members of that household. Then the statistician divides that amount of money by the number of "consuming" units in that household. Members of a household have differing weights in line with a "consumption capability" formula.

Under Eurostat regulations, in order to distinguish between members' consumption capabilities, a value of 1 is attached to the so-called reference person, a value of 0.5 to all persons aged 14 or over and 0.3 to all persons under 14. In other words, in each household, the so-called reference person counts as one person and then a formula is applied to prorate the rest of the members of the household.

The resulting adjusted income per so-called consuming unit is labelled Net Equivalised Income or NEI. If that income level is below sixty per cent below the national median, all members of that household are considered as being at risk of poverty.

The findings

The national NEI median for 2000 was Lm3,394. The at-risk-of- poverty line was placed at sixty per cent of that amount, or Lm2,036 per consuming unit. Nationally, 57,380 persons, or just under 15 per cent of the population, fell below that threshold. The proportion of women who were at risk, 15.1 per cent, was slightly higher than that for men, 14.7 per cent.

One of the more striking findings relates to the link between risk of poverty and household type. The study presents a classification of households by number of adults, with and without dependent children. Fifty-five per cent of single-parent households with at least one dependent child were at risk, while the corresponding rate for households with two adults and dependent children was considerably less, 18.5 per cent. Geographically, the highest at-risk rate was in the southern harbour area.

The importance of social benefits emerges from some key statistics. A household whose primary income source was a pension had a 25 per cent chance of being at risk. The at-risk rate was 79 per cent for those living in households where social benefits other than pensions were the primary source of income. For those in households where no one was at work, the rate was 40 per cent.

Education level

One very significant result is that those at risk of poverty were found to decrease with an increasing education level. In fact, this rate stood at 24.4 per cent for those with no formal schooling, 17.5 per cent for persons who completed only primary education, 11.4 per cent for persons who completed secondary level, 3.8 per cent for individuals who had completed post-secondary education, and only 1.6 per cent for persons who had completed tertiary education.

This is a most powerful result, vindicating the importance given to education by the Nationalist administration, especially since 1987 when the tertiary level was revamped and literally opened up from the puerile mentality of the previous Labour administrations that seemed to hold tertiary education in a dubious light, something to be severely restricted lest we end up with unemployed graduates!

Spending patterns

The expenditure patterns for those in the risk category are equally relevant. Annual household spending by the 15 per cent of the population who were at risk was on average 57 per cent of the spending level for all households. Across the entire population, average expenditure came to Lm7,679. For the at-risk group, it amounted to Lm4,340.

One important spending category is "food, beverages and tobacco". Across the population, average household spending on these items amounted to Lm1,827 per year. For the at-risk group, the amount came to Lm1,632 or 11 per cent less. In other spending categories, the gap was wider. For example, spending on ìtransportation and communicationî was on average some 61 per cent lower for at-risk households.

The study also analysed the number of household appliances across all households and in the at-risk households. For example, the not-at-risk household had an average of 1.7 television sets. The at-risk household had an average of 1.3 sets. For most essential consumer durable items, differences were not significant, but there were noticeable divergences in such items as air conditioning systems, clothes dryers, microwave ovens, personal computers and so on.

Past and future

The National Industrial Policy Document, "Prosperity in Change", published earlier this year documents the trend towards a flatter income distribution that occurred as the overall level of income rose in the nineties. The document used specific statistical evidence from 1986, 1992 and 2000.

Contributors to the more equitable distribution were the lifting of the earlier wage freeze, changes in both direct and indirect tax regimes, substantial improvements in social benefits and the opening up of tertiary education. Most importantly, those were years of rapid economic growth. A rising tide lifts all boats, and the only guarantor of further social improvement is continuing economic progress.

The new statistical measurements will be a most important instrument for measuring our steps forward on the equity front.