Eastern convergence? Not in incomes!

In spite of all the talk about human development and happiness indices, for most people the single most important determinant of their standard of living is their income. More than two decades after the fall of the Iron Curtain, Eastern Europeans still earn much less than their Western counterparts.

Foto: Creative Commons/ Omar Bárcena

There is little discussion in European media about the convergence or non-convergence of income levels across Europe. This is especially surprising given all the headline comparisons of GDP numbers. Pundits, banks analysts, academics and politicians talk about them with the eagerness of football fans looking at score data on newspaper sports pages. But the fact is that people cannot buy things with their country’s GDP statistics. They do that with money they have in their purses.

And what do they have? Interestingly, information is scarce. Eurostat, the European Union’s statistical office, collects all kinds of data relating to macroeconomic development. These are updated frequently and promoted to the media. Figures that would allow people to compare their living standards tend to be more hidden.

Wage data are scarce

Luckily, Eurostat does publish wage data, although only once every four years. This is part of the Structure of Earnings Survey (SES). This survey collects earnings data for companies with more than 10 employees in the private sector. This is published as median wages per country, in absolute figures, as well as adjusted for purchasing power standards. The most recent dataset (based on 2010 figures) was released in January 2013.  It gives a very sobering picture. EU 15 countries, the ‘old member states’, are on the high-wage left side of the graph, the EU new member states are all grouped in the low-wage tail (only Portugal has fallen into this group, just behind Slovenia).

Unfortunately, the data as published does not give us details on the distribution of income. Such data are collected in EU Statistics on Income and Living Conditions (EU SILC). But the micro dataset is not publicly available and Eurostat only publishes certain calculations based on these figures. However, in 2008, the Hungarian institute TARKI published its European Social Report, with income statistics. These 2005 data are recalculated for 2008 by reflecting inflation. They are also adjusted to purchasing power (so, the “euros” mentioned are not absolute values but express what a euro can buy in that individual country). While a report based on 2005 incomes might look like old news, by looking at the statistics for individual countries we know that income growth slowed down significantly after the global economic crisis erupted in 2008, so with a pinch of salt we can accept this as a good introductory overview into income levels and especially income distribution. Let us look at the graph below, taken from the report.

Distribution of gross income in the European Union, PPP, 2005 data recalculated for 2008. Source: Márton Medgyesi (2008) “Income distribution in European Countries. First Reflections on the Basis of EU SILC 2005“ in TÁRKI European Social Report, Budapest: TARKI, fig. 3.3

The bars show annual gross income, including labour, capital and self-employment income, plus social transfers and minus taxes. The bottom line of the bar represents the average income of the last decile (last tenth), and every subsequent line represents the average income in the corresponding decile. What are the conclusions? First of all, earnings are brutally low in Eastern Europe. The average income in the East is about a third of that in the West. Basically, everyone in the region (except for Slovenia) was earning less than €20,000 annually in 2008, while in other parts of Europe income distributions reached as high as €40,000. In Ireland, the United Kingdom and Luxembourg, with large portions of financial and offshore economic activity, incomes spread even higher at the time the data were collected. Now, as said, the data is relatively old, but these ratios are indirectly confirmed by the most recent data on wages quoted at the beginning of the article.

Still no meritocracy?

At any rate, what is more interesting is the distribution of incomes. The difference between the bottom and the top of the income scale is very narrow in the CEE group. The income scale does not show much reward for merit such as hard work or education in your own country. Better emigrate. In the East, if you are not in the top decile, you earn no more than €10,000 annually. In Western Europe, your salary could be as high as €25,000 with the same position. Only the Czech Republic sticks out slightly, but only very slightly from the CEE group. Romania and Bulgaria, not shown on the graph, would lie even lower. Slovenia’s economic structure has shaped out dramatically differently, a result of a divergent transition path. It could be called a Western European country belonging to what economists call the Rhineland model (an arrangement based on long-term economic relations and search for consensus between employers, employees and the government), which includes Austria, Germany and the Netherlands.

The second lesson emerges when to the enormous income differences on the graph we add the fact that many prices have converged in Europe, as confirmed by Eurostat. There is almost no difference in cost of living in terms of the prices of most consumer goods between East and West any more. (Anyway, the graph above is already adjusted to price standards.)

Given the converging price levels, it would now be potentially possible, with some adjustments for individual country contexts, to establish a Europe-wide subsistence level, below which it is impossible to survive without direct physical and emotional harm, as well as a depreciation of skills and social networks. This Europe-wide level lies somewhere between €5-6,000 per annum. In the Netherlands, for instance, where the price level is only 104% of EU average, the official subsistence minimum is officially above this level at €10,104.) In Eastern Europe, about a third of the society easily lives below this income level. In Western Europe, practically no one does.

East-European middle class?

There is effectively no physically threatening absolute poverty in the West, whereas in the East it is widespread. In Hungary, for instance, some 4 million people live under the official subsistence income level calculated by the Central Statistical Office. Relative measures of inequality, the most widespread of which is the Gini coefficient, calculated for Eastern Europe generally reassure us that relative inequality there is lower than in the West. While this is correct, relative poverty hides the dire situation of high absolute poverty.

Another interesting question is: Who lives at a European middle-class level in Eastern Europe? As is visible from the graph, the income levels of the so-called middle classes in Eastern Europe are roughly equivalent to the bottom 20%, and in some cases the bottom 10%, in the West! This means that the Eastern European “middle-class” living standard in fact corresponds to the Western European underclass.

The much-celebrated GDP per capita convergence of Eastern Europe essentially translates into higher profits of the investing multinationals. It is income, not GDP, convergence we should be more closely observing. Eastern Europeans continue to compete in the global economy with a low wage strategy. But no society can be healthy if their working members have to live with the psychological burden that at the end of the month they are barely able to provide for their family. Competing downwards, with low taxes to attract investors into low wage businesses incomes is not a recipe for healthy, innovative, sustainable economic growth.

Zoltán Pogátsa

Zoltán Pogátsa

is an international political economist. His home institution is the Faculty of Economics at the University of Western Hungary.