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ILO: Middle class at risk

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ILO: Middle class at risk

Newly-homeless. Berlin, October 2015.

[Joel Schalit]

The erosion of the middle class is worrying, because it particularly hurts young people, thus leading to an intergenerational gap. But it is even more worrisome, as it does not seem to have been taken seriously enough so far, said ILO senior economist Daniel Vaughan-Whitehead.

Daniel Vaughan-Whitehead is senior economist at the International Labour Office (ILO). He is the co-author and editor of the report report “Trends in the world of work: What effects on inequalities and middle-income groups” done in cooperation with the European Commission. In the mid-1980s, he worked as adviser to European Commission President Jacques Delors, mainly on Social Europe, before joining the ILO in 1991.

He spoke to EurActiv’s Editor-in-Chief, Daniela Vincenti

Increased income inequalities has hut the middle class in Europe. How devastating is this trend for the EU economy as a whole?

As reported in recent reports by the IMF, OECD and ILO, income inequality is at its highest level for the past half century. While so far inequalities have been studied from the two extremes – the top and the bottom – it is important to start tackling inequalities from the perspective of all different income groups and in particular from the perspective of middle-income groups or what we generally categorize as the ‘middle-class’.

Inequalities between the top and the bottom seem to have been accompanied by a squeeze in the middle, and this trend is having direct effects on the economy: there is consistent evidence that the long-term rise in inequalities of disposable income observed in OECD countries has indeed put a brake on long-term growth. For the IMF, ‘the income shares of the poor and the middle class are the main engines of growth’ and ‘stagnant incomes of the poor and the middle class have a causal effect on crises, and thus directly hurt short and long-term growth’. This new ILO volume also provides evidence of declining consumption and also difficulties to get economic recovery.

How do EU member states perform with respect to these issues?

While the middle class in most European countries experienced a rapid increase in the 1980s and 1990s – notably due to increased labour participation – the past decade seems to have brought some erosion of the middle class, exacerbated by the effects of the recent financial and economic crisis. The expansion of the number of middle-income households below median income levels is reported in most EU countries.

19 countries experienced a decline in the size of their core middle class in 2008–2011, while it remained stable in two countries and increased slightly in only five countries. Even countries where the middle class had rapidly grown before the crisis have experienced a rapid fall.

The changing structure of jobs and occupations and additional factors brought about by the recent financial and economic crisis, such as further increases in unemployment, especially among young people, further real wage moderation or decline. The reforms of social dialogue institutions, and cuts in both employment and wages in the public sector, all seem to represent contributory factors to the erosion of the middle class in Europe.

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The weakening of a number of mechanisms of social dialogue since the crisis began, seems to have had a direct impact on the world of work with significant effects on inequalities and the middle class in countries like Greece, Spain and Ireland.

Long-term transformations in industrial relations and labour markets can also explain the growth of the low pay segment and the erosion of the middle class, as in Germany that has experienced a fall in the middle class and also in the United Kingdom and in Italy. In this context, minimum wage policies contribute to lifting the income position of those at the bottom of the wage scale and facilitate their households’ progression towards the middle group categories.

Which member states demonstrate lower inequality? And is there a recipe for stabilizing the middle class that can be transposed from one country to another?

Even if industrial relations systems are very different between, for instance, Belgium, France, the Netherlands and Sweden, their resilience in those four countries seems to have represented one major reason for relatively lower inequalities and a greater stability of the middle class. Industrial relations as a process for influencing the world of work and thus inequalities were found to play a particular role.

Mechanisms of wage fixing and wage bargaining were also found to play some role. While the removal of the wage indexation mechanism in Italy in the early 1990s was accompanied by an immediate increase in inequalities, the survival of the indexation system in Belgium seems to have contributed to limiting inequalities and to stabilizing the middle class.

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Extension mechanisms and coordinated collective bargaining in a number of countries also contributed to more coherence along the income scale and less inequalities between the two extremes.

The public sector should be seen from the double perspective of a major source of employment and income, and of matching users’ needs in terms of public services, both important aspects for various income groups, including the middle class.

Which policy programmes can help reduce inequality and strengthen the middle class?

A mix of policies seems to be required. We saw above the importance of social dialogue mechanisms and also labour market institutions. This should induce policy makers to think more about these mechanisms that may have been put on hold in the recent years. More generally, social partners in collective bargaining talks, at both national and EU level can help to ensure a fair and efficient redistribution of productivity at national, sectoral or enterprise levels.

Other institutions and policies beyond the world of work contribute greatly to the outcomes in terms of inequality and the middle class. An effective tax policy is essential to avoiding an increase in both income extremes and to reducing inequalities, while at the same time augmenting the number of people belonging to middle-income groups. The results of ILO research also highlight the importance of education for moving people into middle or upper income groups, even if higher education does not seem to represent a sufficient asset anymore for middle-income groups to avoid unemployment and income insecurity. Public services also affect income groups from both employee and user perspectives, and must be integrated into this equation.

Do you feel that EU leaders and policy-makers are aware of this trend and are they taking it seriously and addressing the problem or are they adopting a laissez faire attitude?

The erosion of the middle class is worrying – especially when it seems to hurt young people most of all, thus leading to an intergenerational gap – and does not seem to have been taken seriously enough so far. This suggests that several European countries are not moving from a pyramid-shaped society in which most people fill low-income ranks, to a diamond shape, in which a majority enjoy incomes clustered around the mean. This requires policy action specifically aimed at arresting this trend.

The ILO volume highlights policy programmes such as those mentioned above that could help to reduce inequalities and strengthen the middle class. Such initiatives could be launched in the world of work as well as in related areas, such as taxation, education and social protection. This calls for a new and comprehensive policy agenda extended to different and complementary fields aimed specifically at the middle class as a target group, leading to both sustained economic growth and improved living standards.