Is population growth behind poverty increase?

After Malta’s Budget 2022 — a time of reckoning in determining the economic model of the future — James Debono catches up with economists Melchior Vella and Gilmour Camilleri, the authors of a seminal study tracking poverty rates between 2009 and 2018 which explores why material deprivation is decreasing, while the number of people at risk of poverty keeps increasing

Population growth, together with rising median incomes and widening inequalities, were major factors behind the increase in the number of people at risk of poverty between 2009 and 2018, economists Gilmour Camilleri and Melchior Vella say.

An increase in population, changes in household composition and widening inequalities are major determinants in explaining why a larger percentage of the population is being left behind while the upward increase in median income has pushed the poverty line upwards.

By 2018, the proportion of individuals in material deprivation had almost halved to 8.7% when compared to when the indicator started being collected in 2009. Yet, with a few exceptions, the number of individuals at risk of poverty increased at a yearly rate from 14.4 in 2019, to 16.8% by 2018, the last year covered by the study. In 2021, it was estimated that 85,000 people, or 16.9% of the population, were at risk of poverty.

While material deprivation is based on a head count, the at-risk-of-poverty rate is determined by the number of people earning less than 60% of the median equivalised household disposable income. This means that the increase in incomes generally also pushed the poverty line up. Perversely, in a recession when incomes are pushed down, the number of those at risk of poverty may actually decrease simply because the poverty line has been lowered.

The risk of being left behind

Camilleri and Vella explain that material deprivation and at-risk-of-poverty rates measure two different concepts of poverty: while the concept of material deprivation is based on the definition of unmet basic needs — i.e. the ability to afford at least five out of thirteen things that most people consider desirable or even necessary to lead a decent life, such as the ability to pay rent, utility bills or unexpected expenses — “in contrast, the concept of at-risk-of-poverty views poverty in relative terms, i.e. relative to the country’s standard of living”.

While the material deprivation rate decreased, an increase in the at-risk-of poverty rate was observed. “The reason lies in the two different concepts of poverty. While the proportion of the population who cannot afford the necessary items for a decent life has decreased, there are more members of society who have lagged behind the others in relative terms.”

In the same time frame, Malta has experienced a remarkable increase in its population due to the influx of foreign migrants often occupying both highly paid professional jobs and lower paid elementary jobs.

According to the two economists, it is expected that as the population increases, the likelihood that more people will be at risk of poverty will increase, even if all other factors remain constant.

However, population also influences job creation, income inequality and, thus, the poverty line used to distinguish between relatively poor and non-poor. “In the context of a small island state, the strong population growth in recent years has had a strong impact on poverty statistics.”

For starters, the nation has a larger population pool that brings together people from different socioeconomic groups. “Even if income inequality remained unchanged, the fact that the population has increased would make it more likely that there would be more poor people.”

Migration has also changed the demographic distribution of the population, whether this be in reference to age, gender or household size/composition. Additionally, since the majority of immigrants were labour migrants, population growth has also changed the poverty line, as the benchmark is measured as a percentage of median equivalised income.

In their article recently published in science journal Xjenza, Vella and Camilleri contend that in 2018, population increase reduced the impact of economic growth on poverty rates by half. How did this happen?

For the two academics, this phenomenon is intimately tied to the central question posed by their inquiry: that of explaining why the risk of poverty has increased in Malta in recent years with increasing income.

The three factors which affect the risk of poverty in an economy are income growth, income inequality and population growth. “In 2018, 3,600 more people were at risk of poverty. What drove this increase? In our study, we found that income growth alone would have lifted 5,800 people out of poverty in 2018. But, while income had increased, so too has income inequality. If income inequality alone had increased, it would have contributed to 1,500 more poor people.”

Since the poverty line depends on median equivalised income, one would also expect this threshold to rapidly rise in a growing economy. “In fact, we found that raising the poverty line in 2018 increased the number of people living in poverty by 5,300 people, almost erasing the impact of income growth on poverty.”

Finally, if only Malta’s population had grown in 2018, an average of 2,600 people would have risen out of poverty, roughly half the poverty reduction brought about by income growth. “In reality, all four of these drivers have changed and resulted in a net increase of approximately 3,600 people at risk of poverty.”

Moreover, the interaction between population and inequality has become more pronounced due to the dichotomous profile of economic migrants, “ranging from professional to elementary occupations.”

Population growth and the influx of migrants also changes the composition of Maltese households, which in itself is a major determinant of poverty.

Household composition and inequality

Rapid changes in the composition of Maltese households are also a major factor in analysing poverty rates and resilient inequalities: “We found that inequality risk was mostly attributed to differences in the individual’s qualifications, hours worked, occupations and household type.”

For example, the two researchers found that single-earner and multi-earner households are less prone to live in relative poverty. On the other hand, single-earner households with two or more adults are likely to be twice as prone to relative poverty.

Therefore, the transition from single-earner households to multi-earner households with more than one breadwinner, “have pushed the poverty line through the roof.”

Additionally, the increase in pensioners escalated poverty rates simply because they have a higher poverty risk relative to other groups.

Even if the poverty rate remains unchanged, the risk of poverty is not evenly distributed across different social classes, and therefore inequality or poverty can easily widen or take on another dimension if we are not careful. “This underscores the importance of having policies that are regularly reviewed to remain effective, as the benefits of growth can easily be offset by its disadvantages due to labour market imperfections.”

The importance of such policies is underlined by historical trends explored by the two academics. In another study published by the Centre of Labour Studies in February, the two economists note that in 2018, “the relatively poor were poorer when compared to the situation in the 2005-2009 period with the shortfall in income mainly deteriorating in the 2010-2013 period”.

Moreover, with the exception of 2010, when household incomes declined amidst a global recession, the poverty line (which continued to climb due to an increase in income generally) also placed upward pressure on relative poverty.

Additionally, the impact of changes in the poverty line also depends on the distribution of the poor — that is, the number of people living just below or above the poverty line. “We also find that during the 14 years, inequality amongst the poor increased, reflecting a larger fraction of the poor closer to the poverty line. By decomposing the change in the number of people at-risk-of-poverty, the increase in the poverty line was the main driving force of poverty, and the mean income growth had a neutralising effect upon poverty”. They conclude that the recent increases in inequality have “mildly affected poverty, with population change becoming a more prominent factor.”

The role of the state

Whilst noting that policy makers have focused on activation policies, such as the provision of childcare instead of traditional redistributive policy designs such as minimum wage increases, these proved less effective in reducing poverty rates, simply because those who are most likely to benefit are those who already participate or can participate in the labour market.

Moreover, evidence suggests that activity rates of low-skilled persons remain significantly below that of their highly skilled counterparts. “As long as the labour market remains socially stratified, poverty risk is likely to remain or intensify.”

Camilleri and Vella conclude that while growth remains vital, “we must complement our efforts to increase growth with policies that make more resources available to the relatively poor”. To some extent, “this can be achieved by focusing on inclusion, specifically by helping people below the poverty line to move up the income ladder faster.”