By Cormac Lucey
The question of who bore the brunt of the bitter economic adjustment Ireland faced in the years immediately following 2008, as economic boom turned to bust, has always attracted heavy political attention. It’s also attracted academic attention as various experts have trawled through the data to measure the impact of the bust on different social strata.
The most detailed analysis of the question was presented a few years back in an ESRI paper titled “Distributional Impact of Tax, Welfare and Public Service Pay Policies: Budget 2015 and Budgets 2009-2015”. The paper examined the impact of budgetary changes over the years from the perspective of income deciles, which divide the population into tenths and so consider the poorest 10 per cent, the next poorest 10 per cent etc all the way up to the highest-earning 10 per cent of the population.
The examination of the impact of the budgets for 2009 (promulgated in 2008 as Ireland hurtled into crisis) to 2015 concluded that these budgets led to substantial income losses at all income levels and that, over much of the income range, there were broadly similar percentage losses for each income group.
But contrary to much political focus on the “squeezed middle”, the greatest percentage losses were for the highest income group (about 15½ per cent) and the lowest income group (close to 13 per cent). For middle-income groups, the income loss tended towards a narrow 10 – 11 per cent range.
That earlier analysis simply examined the budgetary impact of the financial crisis: it didn’t consider any income losses people might have suffered prior to the government taking a bigger slice of their income. A new study published in the Autumn edition of the Economic and Social Review considers this question, in addition to the distributional impact of budgetary policy.
The paper, written by Christopher T Whelan, Brian Nolan and Bertrand Maître, contains a plot-spoiler in its title “Economic Stress and the Great Recession in Ireland: The Erosion of Social Class Advantage”.
The paper starts with a good review of the background debate. It references claims made by a variety of analysts and commentators including our old friends Tasc and Social Justice Ireland that “austerity” policies imposed greater sacrifices on the more vulnerable, before pointing out that “detailed empirical analysis supporting any of the competing interpretations has been in relatively short supply.”
The authors also caution against assuming a set pattern in the results of any financial crisis stating instead that “crises differ greatly from each other in their causes and outcomes in terms of inequality.”
The new paper focussed on the changing distribution of social class; changes in the association between social class and income class; and changing patterns of interaction between the social and income classes.
It also went beyond just considering income to also consider the impact of asset price changes correctly arguing that the impact of the economic crisis, particularly on households made vulnerable by increased debt levels and affected by declining asset values (notably property) that accompanied it, “is not likely to be fully captured by focusing purely on incomes”.
In parallel the report’s authors tracked different income classes: the affluent (those earning more than 167 per cent of median income); the upper middle class (125-166 per cent); the lower middle class (75-124 per cent); the precarious income class (60-74 per cent) and the poor (less than 60 per cent).
Movements in the income classes between 2008 and 2012 were less noticeable than in the social classes. There was a rise in the proportion classified as poor from 13.1 to 14.7 per cent. And there was a reduction in the affluent class from 18.1 to 16.8 per cent of the population. But the proportions in the other income classes remained pretty constant.
The report writers used a measure of economic stress including items relating to structural arrears, burden of housing costs and illiquidity in terms of inability to meet with unexpected expenses. Their measure of stress saw continuous rises over the years 2008 to 2012 for the entire population.
Among social classes there was a clear pattern: the lower one’s social classes, the greater the likelihood you would experience economic stress. It was a similar story regarding income classes: the lower your income class, the greater the likelihood of economic stress.
But while the population as whole saw a 61 per cent increase in the proportion suffering economic stress, there were wide variations in the increase of economic stress across social and income classes. Among income classes, the affluent experienced a 133 per cent increase in the proportion suffering economic stress, more than double the rate of increase of any other social class.
Among social classes, the self-employed (135 per cent) and the professional & managerial classes (104 per cent) similarly experienced far greater increases in the proportion suffering economic stress than other income classes.
The overall picture then is that in 2008 both income class and social class contributed significantly to explaining economic stress and the lower your class, the greater the likelihood you would suffer economic stress. In the following years, economic stress levels increased significantly for all income and social classes.
And the proportions of those suffering economic stress jumped greatest in the higher classes, probably because we would expect them to have had the greatest exposure to falling property and share prices.
In relation to social class the research provides some support for the squeezed middle school: the self-employed experienced a significant deterioration in their circumstances relative to all other classes.
The effect of this change, combined with an improvement in the relative position of the routine class, was such that by 2012 social class contributed “almost nothing in the way of additional explanatory power” of the likelihood of experiencing economic stress once income class was taken into account.
Rather than observing social class polarisation, the writers of this important report found clear evidence of a “middle class squeeze” centred on the self-employed. They also found a significant erosion of the advantage enjoyed by the three higher social classes, in particular relative to the routine class.
This was driven by a reduction in the numbers in the professional/managerial and self-employed classes and a growth in the numbers of the self-employed found in the income poor class. The cumulative impact of these changes meant that by 2012 social class had no additional impact on economic stress net of the effects of income class.
Published in The Sunday Times (Ireland edition)
October 28th 2018