Poverty and social exclusion statistics explained

The European Statistics on Income and Living Conditions explained and how they are compiled

Mark Musú is Permanent Secretary within the Ministry for the Family, Children’s Rights and Social Solidarity

Poverty and social exclusion statistics probably capture the headlines as often as economic statistics.

This is not surprising, given that the EU emphasises smart, sustainable and inclusive growth as much as economic growth objectives. The EU’s 2020 strategy puts social concerns on an equal footing with strengthening the economy, as a way of preparing Europe’s structure for the challenges of the next decade. It is no less so in Malta.

In this article, I shall try to explain the European Statistics on Income and Living Conditions (EU-SILC) and how they are compiled, hopefully making it easier for readers to take their own view on them.

In Malta these statistics are usually published by the NSO in the third quarter of each year, and relate to income earned in the calendar year around 18 months previously. So the statistics published a few weeks ago are, in fact, based on 2016 income data.

Poverty and social exclusion can manifest themselves in various forms. Obviously, household income has a big impact on living standards. However, other aspects may prevent full participation in society.

The latter may include monetary poverty, material deprivation, and very low work intensity, which form the three components of the EU-SILC indicators.

Moreover, these factors often tend to overlap, so that people may be affected by two or even all three of these potential poverty or social exclusion factors, even though the same person is only counted once.

First of all, one must note that monetary poverty statistics frequently diverge from the other two indicators. This is because, whilst monetary poverty is measured in relative terms, material deprivation and low work intensity are measured in absolute terms.   

Thus, the at-risk-of-poverty rate (ARP) component does not measure wealth or poverty, but a household or an individual’s equivalised income in comparison to others in that country, which does not necessarily imply a low standard of living.

‘’... the at-risk-of-poverty rate (ARP) component does not measure wealth or poverty, but a household or an individual’s equivalised income in comparison to others in that country...’’

The ARP is, in effect, the share of people with an Equivalised Disposable Income (EDI) below the ARP threshold, which is arbitrarily set at 60% of the national median equivalised disposable income after social transfers (pensions and cash benefits).

EDI is the total income of a household, after tax and other deductions, that is available for spending or saving, divided by the number of household members converted into equivalised adults (1.0 to the first adult; 0.5 to the second and each subsequent person aged 14 and over; and 0.3 to each child aged under 14). Thus for example, a family of two adults, one child aged 15 and one child aged 12 would constitute 2.3 equivalised adults in a household of 4. If their income were €20,000 in 2016, then the household equivalised income would be €8,695.

Readers should also note that disposable income used for this purpose is the median or middle point of all incomes of the 430,643 people living in households in Malta in 2016. It is not the arithmetic average, which would be the sum of all incomes of those people divided by the number of people in households.

The median household disposable income based on 2016 data was €23,151, but the average was €27,722. By comparison, the Median National Equivalised Income (MNEI), or the median income of €23,151 adjusted for the number of equivalised adults, was €14,496.   

Under the EU SILC methodology, the ARP rate (60% of the MNEI) was €8,698, based on 2016 income. There were 72,143 persons (16.9%) living below this relative equivalised threshold.

This does not mean that all these lived in households earning less than €8,698 in 2016 as some have wrongly interpreted this particular statistic.

The family mentioned above as an example would represent four out of these 72,000 persons because their equivalised income (actual disposable income divided by 2.3) is €8,695, hence less than the established €8,698, despite the fact that their actual disposable income is of €20,000. A family of 4 (with two children over 14 years) would be considered at risk of poverty as well if its income in 2016 did not exceed €21,745 (almost triple the minimum wage).

Since the ARP rate is a relative measure, the rate may remain stable or even rise when the average or median EDI increases. Paradoxically, the ARP rate tends to decrease when the total disposable income decreases, that is ‘income relative poverty’ decreases when on equivalised terms the whole population is ‘poorer’ and increases when the population is ‘richer’.

‘’Parodixically....‘income relative poverty’ decreases when on equivalised terms the whole population is ‘poorer’ and increases when the population is ‘richer’. ‘’

The latter is what happened in 2017 (based on 2016 data) where both the average and median EDI rose significantly by 5.6% and 7.4% respectively. As a statistical result, the ARP rate rose marginally by 0.3 percentage points (pp).

This is because the monetary poverty threshold is set at a specific 60% of the MNEI, which means that if the median income increases (as it did), the relative poverty threshold increases as well (as it did, by 6.8% or €555). And this in spite of that fact that statistically income inequality has slightly decreased.

Since Malta has recently experienced a rapid increase in total income earned by resident families, the statistical practice behind the ARP rate tends to overstate monetary poverty.

This is due to a moving goalpost caused by a strong increase in the threshold itself within a short period of time.

One common method of overcoming this issue is by calculating the ARP rate using a fixed income threshold. Jude Darmanin of the Central Bank of Malta has shown that – fixing the threshold at 2008 levels gives a completely different picture of monetary poverty in Malta over the years, with the ARP rate declining steadily to 9.3% by 2016 (2015 data).

I calculate the 2017 rate (2016 data) would be around 8.7% (half that according to SILC 2017).

Conversely, material deprivation indicators reflecting a person’s ability to afford basic goods are likely to improve during economic revivals, when people are generally financially better off.

In fact, the material deprivation index (showing households that cannot afford at least three out of nine basic items) went down from 10.3% to 8% in 2017, whilst the severe material deprivation index (cannot afford at least four out of nine items) fell from 4.4% to 3.3%.

This is amongst the lowest in Europe.

Material deprivation is now down by almost 12pp from the 2012 level, whilst severe material deprivation is down by 6pp over the same period. These are the lowest levels achieved ever since these indicators were recorded.

Combining the ARP rate with the social exclusion rate yields what is known as the AROPE (the at risk of poverty or social exclusion) rate, which in 2017 measured 19.2%.

This is a significant decrease from the rate of 24% in 2013 and again the lowest rate ever recorded.

‘’...the at risk of poverty or social exclusion rate....in 2017 measured 19.2%....this is the lowest rate ever recorded.’’

One could delve into statistics relating to particular households, age groups, gender, and employment status. In general, one could say that unemployed women (especially single parents), elderly and young people, particularly if they have disabilities, as well as non-property owners and migrants are vulnerable to poverty and social exclusion; generally lack of work increases the risk of poverty or social exclusion; people with low educational attainment are significantly at risk; and risk of poverty or social exclusion due to low education is inter-generational.

While these remain challenges to be constantly addressed, we should be very satisfied that with a number of innovative measures and several other policy changes in these last years, poverty and social exclusion in Malta declined markedly.

More in Blogs