Inequality and stagnating family income in Italy

December 8, 2017
Editorial Open Society
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The last quarter of a century was probably the most difficult since World War II for Italian families. The currency crisis of 1992 posed the first clear slowdown in the country’s economic development. In the following 15 years, growth has been modest, fueling the debate on the “decline” of the Italian economy in the early 2000s. This weak recovery was abruptly interrupted by the global financial crisis of 2008-09, followed by the sovereign debt crisis of 2011-13. The “double recession” has dealt a decisive blow to the already stagnant dynamics of household disposable income, which has returned in per capita terms to the dominant levels of the end of the 1980s (see chart no. 1). Among major advanced countries, only in Italy has the real income of households per capita decreased in the last 20 years. The analysis of the evolution of inequality cannot be separated, in Italy, from the attention paid to this prolonged stagnation in family income levels.

To understand how the income distribution has changed in Italy, the so-called “Pen’s Parade” can be used.

This is a means of visually representing distribution, suggested by Dutch economist Jan Pen in 1971. He imagined that the population of a country would parade according to height, with the height of each individual proportional to their income. Therefore the shortest people, the poor, would be first in line, followed gradually by the middle classes and, finally, in the back, by the richest, much taller than all the others; those who are more affluent would be last in the parade, so tall that they could not be seen in their entirety. Chart no. 2 shows a Pen’s Parade for the Italian distribution of income (to 2014 prices) in four periods: 1989-91 and 1993-95, respectively, delimit the currency crisis of 1992, while 2004-06 and 2012-14 confine the recent double recession[1]. In order to assess the dynamics of situations of economic hardship, the chart also shows a horizontal line indicating a poverty line that remains constant over time[2]. The estimates are based on survey data on household balance sheets as provided by the Bank of Italy[3].

Comparing this Pen’s Parade before and after the 1992 currency crisis, it can be seen that the share of poor individuals rose from 13 to 19 percent, mainly due to the fall in the incomes of people in the lower-middle classes. During the same period, people with higher incomes not only have suffered no losses, but have also seen the improval of their economic condition. The share of poor people has also increased during the double recession and to a very similar extent, from 14 to 19 percent. In this second occurrence, however, the reduction in income affected the entire population, as shown by the downward shift of the whole curve associated with the Pen’s Parade between 2004-06 and 2012-2014.

Using the Gini income index, a conventional measure of inequality, one can see that it has rapidly grown during the recession of the early 1990s, but has not changed significantly since then, either during the modest expansion that occurred until 2007, or during the following long recession (see chart). The sharp increase in inequality in the early 1990s is largely due to the shift of many people from the lower-middle income class to the poorer class[4]. With the exception of this occurrence – the 1992 currency crisis – there is no indication that the middle class, defined in terms of income, has diminished.

The trend of inequality in the two main recessions of the last quarter of a century is therefore different. During the currency crisis of 1992 it increased within the socio-demographic groups, while at the same time the gaps between these groups widened, for example between residents in the Centre-North and in the South of Italy. During the double recession beginning in 2008-09, which was much longer and heavier in terms of the fall in GDP, the gap between socio-demographic groups grew, without any evident repercussions on the measured level of inequality. As many commentators have observed, the gaps between young people and the elderly have widened; but the distance between those who live in families born in Italy and those who live in families born abroad has also widened. The burden of the double recession has fallen heavily on immigrant people.

The substantial stability of aggregate inequality measures over the last decade therefore hides important changes in the relative positions of specific socio-demographic groups. In a context of a chronic weakness in the income dynamics, this re-definition of the relative income positions of entire sections of society (in particular, workers compared to pensioners, young people compared to the elderly) can help explain the widespread sense of impoverishment and weakening of future prospects, perceived by people and reflected in public debate, despite the fact that statistical indicators show neither an increase in inequality nor a disappearance of the middle class.

In Italy, there is a need to improve redistribution instruments in order to make income allocation less unequal, but the achievement of an “inclusive growth” cannot be pursued without a return to growth, both of the economy and family incomes.

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[1] The calculation of the curves for year pairs is intended to increase the statistical robustness of estimates.
[2] This threshold corresponds to half of the average equivalent income over the period 1989-91 (approximately €9,000 at 2014 prices).
[3] In order to take into account the different age needs and economies of scale in the consumption within a household (for instance, heating costs do not increase proportionally with the number of components), all estimates are made with reference to the “equivalent” income. This is a measure of economic well-being given by family income divided by the number of “equivalent adults” defined according to family size and structure. The number of equivalent adults is calculated by applying the modified OECD equivalence scale, as typically used by the European statistical institutes, which gives a value of 1 to the first adult component, 0.5 to any other component over 13 years of age and 0.3 to any component under 13 years of age.
[4] For the purposes of this analysis, the population was divided into four classes of equivalent income, using conventional thresholds: poor people (below 60 percent of median income); people on low middle income (between 60 and 120 percent of median income); people on high middle income (between 120 and 300 percent of median income); wealthy people (above 300 percent of median income).

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