WSI Distribution Report | A little statistic of inequality

Poverty is increasing and the lower middle class is shrinking. Photo: dpa/Maurizio Gambarini; Jens Kalaene Participation, satisfaction, life expectancy – as we all know, a lot of things are related to income. However, it is distributed more and more unequally, as shown in a report by the Economic and Social Sciences Institute (WSI) of the trade union-affiliated Hans Böckler Foundation. Income inequality in Germany is at its second highest level since 1992. Data from the OECD, which the WSI worked with, are available from 1992 onwards.

This means: More and more people are slipping into poverty, and promotion from the lower middle is becoming rarer. »The constant demand to work more ignores the experiences. The promise of prosperity is no longer a reality for many,” explains WSI director Bettina Kohlrausch when presenting the report on Thursday. "This has the potential to destabilize society."

Wage inequality has fallen over the past decade. This is mainly due to the introduction of the minimum wage of 8.50 euros in 2015, as the authors of the report, Dorothee Spannagel and Claus Schäfer, explain. Until then, due to the Hartz IV reform, there was a large low-wage sector in the Federal Republic compared to other countries. However, the income consists of rental income, dividends, profits from business assets, earned income and government transfer payments. Mechanisms such as the minimum wage can therefore limit the lower edge of the wage distribution, but not that of the income distribution.

“Poverty and wealth cannot be determined objectively, nor can the threshold at which too much inequality is reached,” say the authors of the distribution report from the Institute for Economic and Social Sciences. In calculations, those households that have less than 60 percent of the median income are generally poor. For a person living alone, this currently corresponds to an annual net income of less than 15,673 euros. Those households with more than 200 percent of the median income are rich according to this definition; the amount is currently 52,244 euros net per year. In between lies the middle class. The Institute for Economic Research (IW), on the other hand, only draws the line to wealth at 250 percent of the median income. This means that the middle class in IW calculations is broader and stable over longer periods of time.

“Wages are an important mechanism for reducing inequality,” says Spannagel. "But only one of several, because many people are not active on the labor market." The following applies to the working population: the more balanced the wage distribution is, the less the social security systems and the tax system have to take corrective action. However, people who are retired or unemployed are left out of these developments.

From 2010 onwards, pensions and so-called unemployment benefits no longer kept up with the relatively strong development of wages and middle incomes; they no longer ensured a life above the poverty line. In addition, more and more people were employed part-time, also due to a lack of childcare options. Hence the higher income inequality despite more fair wages.

While the upper middle class has remained relatively stable since 1992, the lower middle class has shrunk significantly. At the bottom, more people are poor; their share rose by 76 percent, from 5.9 to 10.4 percent. The proportion of the rich remained relatively stable, but that of the very rich almost doubled. Top earners benefited more from economically strong years and were less affected by crises. This development would be much more pronounced if assets were also taken into account. "Poverty has deepened, the lower middle has come under pressure, and wealth is increasingly concentrated at the top," is Spannagel and Schäfer's conclusion in the report. “Income distribution is becoming increasingly polarized.”

Social inequality can only be justified as long as competition appears fair.

The WSI sees the development as problematic both economically and politically. Economically, because higher incomes increase demand. Politically, because doubts about fair distribution can weaken trust in democracy. Social inequality in the performance and growth society can only be justified as long as competition appears fair - keyword: everyone has the same opportunities for prosperity. If that doesn't work, the crucial legitimacy of the democratic system will be shaken.

Current developments in the social system are a cause for concern for the WSI. The new basic security is increasingly focused on faster placement in gainful employment. Today, unlike in the era of Hartz IV, there is a minimum wage that is intended to cushion the expansion of the low-wage sector to a certain extent. It is currently 13.90 euros and will rise to 14.60 euros in 2027. Nevertheless, WSI researchers fear that this could increase pressure on lower segments of the paid labor market and thus further promote inequality.

With regard to the upcoming pension reform, a lot is still unclear, says Spannagel to “nd”. The planned increase in the retirement age and the proposed abolition of the tax-free pension at 63 are likely to have negative effects. "Many people, especially those in lower-paid jobs with worse working conditions, are negatively affected by this." However, the discussed allowances for the statutory pension in the basic security could lead to the pension becoming "somewhat more poverty-proof again". If, on the other hand, the current debates about cuts push forward social cuts, this could worsen inequality, warns Kohlrausch.

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