Unravelling the relationship between employment, social transfers and income poverty: Policy and measurement

Abstract

Despite the rise in employment, consistently high EU-average poverty rates continue to generate debates about the factors that explain the level and changes in the relative poverty rate, both within and across countries. Assuming a strong negative correlation between poverty and employment, the article investigates the role of four mechanisms responsible for this blurred relationship. Using decomposition analysis and macro-level regression analysis, we investigate the extent to which (i) the distribution of employment across households with different levels of work intensity, (ii) the expansion of non-standard work, (iii) the change in the effectiveness of social welfare systems, and (iv) the change in median income and the corresponding shift in the poverty threshold have contributed to changes in relative income poverty in the last decades. We found that employment growth benefits poverty reduction, but this positive effect was partially offset by the precarious characteristics of some newly created jobs. If the distribution of jobs had favoured the jobless more in the pre-crisis period, the relative income poverty rate would have been lower. Although the share of persons in jobless households decreased during the recovery years, their risk of poverty increased due to the retrenchment of social transfers during and after the Great Recession. Furthermore, the use of a floating threshold, which is linked to changes in median income, underestimates the strength of the relationships between poverty, employment and social transfers: when the poverty threshold is kept fixed, not only do the dynamics of poverty look different, but the estimated coefficients are considerably larger.