Un-Squeezing the Middle

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luasSeamus Coffey has been digging up some numbers which he self- deprecatingly refers to as one more ‘silly addition’ to what can be done with income distribution statistic. But silly they are not. They give insight into another aspect of Ireland’s income structure.

When we debate income distribution we usually do so through the prism of the relationship between the ‘top’ and ‘bottom’ income groups or the Gini co-efficient. What Seamus looks at are the fortunes of the middle income group and specifically compares Ireland with Sweden in the middle deciles (a decile represents 10 percent of the population). I reproduce Seamus’s table below but if it is difficult to read you can access it here.

Squeezed Middle 3

The numbers measure the percentage of ‘equivalised income’ each decile receives (equivalised factors in household size). In the table we see that in green Ireland, the lowest 10 percent income group receives 3.2 percent of all income; the top 10 percent receives 24.4 percent – or nearly a quarter of all income. Regardless of the magnitude, there is nothing surprising in this. Top income groups take more than low-income groups.

However, Seamus points us to the middle of the decile group – what has been described in the debate as the ‘squeezed middle’ and compares us to blue Sweden. There is a huge gap between the two countries in these middle deciles – 4th to 7th. Indeed, if Irish squeezed middle households took as much of a percentage of total income as Swedish middle decile households, each Irish household would be, on average, €5,000 better off according to Seamus. That’s a tidy sum.

Using the Eurostat data here is my own take. Rather than compare Ireland to Sweden (Sweden is pretty egalitarian but they’ve been at it for decades), I compare Ireland with the average of our peer group – other small open economies: Austria, Belgium, Denmark, Finland and Sweden. And since I’ve used the middle 60 percent in the past I’ll keep to that and calculate the income for households in the 3rd to 8th decile. That’s a bigger middle.

Squeezed Middle 1

Ireland’s low and middle income groups are below the share of those same groups in the other small open economies. However the Irish top 20 percent group take considerably more than their counterparts in the other five countries. What does this mean in Euros? If Ireland had the same share of disposable income:

  • Households in the lower income group would receive, on average, an extra €2,200.
  • Households in the middle income group would receive, on average, an extra €2,300.
  • Households in the high income groups would, however, lose on average €9,100.

In small open economies, low and average income groups make more at the expense of their high income groups.

Of course, one could argue that the real issue is not the share of total disposable income but rather how much income. You can be more equal but a lot poorer. So let’s look at the top cut-off point for each decile (the point at which you enter the next highest decile) measured in purchasing power parities to factor in currency and living costs.

Squeezed Middle 2

Other small open economies are more equal and more prosperous. Irish households are between 14.8 percent below the other countries (7th decile) to 20.6 percent below in the 3rd decile.

When income inequality is mentioned the first thing that many people do is reach for Robin Hood’s bow and arrow. Yes, it’s good to be well-armed but there are other issues besides tax and redistribution. Here are two that might help explain the gap.

First, in other European countries there is greater collective bargaining coverage than in Ireland – one reason being that workers there have a right to collective bargaining which employers are required by law to respect. This is not the case in Ireland. Trade union density and collective bargaining have been shown to increase workers’ wages.Frank Walsh of UCD estimates that workers in trade unions engaged in collective bargaining are 8 to 10 percent better off than their non-union counter-parts in a like-for-like comparison (occupation, economic sector, workplace size, etc.).

But there are other labour-related issues: the right of part-time workers to take up extra hours in the workplace when they become available; the right of part-time workers to certain hours (that is, ending precariousness); and statutory rights to Sunday premium and overtime pay. Strengthening labour rights through workplace organisation and statutory rights can translate into higher living standards for middle income groups.

Second, we’ve come to think of social protection as ‘welfare for the poor’. In other European countries, social protection is just that – protection throughout society and throughout the workforce. For instance, if you become sick and your employer doesn’t have a sick-leave plan, you have to wait for a week to get Illness Benefit from the Social Protection Department and then it’s only €188 per week. In other EU countries you can start to receive sick-leave after the first or second day and they are income-related, covering up to 70 to 80 percent of your wage.

Or take maternity leave: in Ireland it’s a flat-rate of €230 per week. In other EU countries, up to 100 percent of the wage is provided.

A strong social protection system – that protects people both in work and out of work – helps maintains income during periods of illness and injury, temporary unemployment, maternity (and paternity) leave and retirement. That could be another contributing factor in supporting middle income groups.

There are some who use the ‘squeezed middle’ trope as part of ideological discourse that seeks to blame low-income groups of being a burden on average earners and, therefore, argue for cuts in both social protection and taxation. This is far from the reality.

You want help the ‘squeezed middle’? Increase labour rights in the workplace and build a strong social protection system. That’s an agenda for all workers.

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