Why the Opposition is wrong on poverty

A series of replies to parliamentary questions that have been presented recently provides some interesting facts that help us understand better the prevalence of poverty in Malta.

The first interesting reply indicates that according to a study by the Joint Research Centre of the European Commission, only 1.5% of the Maltese population does not have enough income to have a decent standard of living.

To arrive at this income requirement, the Commission Research Department compared the local cost of a basket of essential goods and services standardised across the EU. Some of these are offered for free in Malta. As a result, the required income in our country is €500 per month. This is very similar to a similar study that was carried out independently by Caritas some time ago using a similar methodology.

Only in Poland, Bulgaria, and Romania one requires a lower amount of income to be able to have a decent standard of living. On the other hand, in these countries even though the income requirement is low, still a considerable amount of the population cannot make ends meet, a situation that is quite different from Malta. Malta has the highest proportion of its population that can lead a decent life, while Romania has the lowest.

Malta has the highest proportion of its population that can lead a decent life. Romania has the lowest.

This is something that is not evident when one looks are the risk-of-poverty rates for both countries, as that measure looks at how the income of those in the bottom part of the income distribution compares with that of those in the middle. It does not take into consideration if the income of the middle class is itself not high enough to warrant a decent lifestyle. In simple terms, people who are classified as not at the risk of poverty in Romania are in material terms deprived compared to people defined as at risk of poverty in a wealthier country.

Another interesting reply to a parliamentary question reveals that if one were to use the Joint Research Centre’s measure, only 0.5% of Malta’s work force are unable to have a decent lifestyle with their level of income. Using the same benchmark, in 2012 the proportion of workers unable to make ends meet was 3%, or six times higher.

Recently the Opposition has been arguing that there has been an increase in the proportion of working poor in Malta. Yet this narrative fails to explain that the risk of poverty is quite a difficult indicator to interpret.

Let us give an example. Assume for simplicity’s sake that there are 3 women in a population. One of them does not work, while of the other two, one earns more than the average wage and the other earns less than 60% of the average wage. So, the in-work poverty rate is 1 out of 2. The non-working woman is excluded as she is not in work.

Now instead assume that she starts working and she earns less than 60% of the average wage.  Intuitively you would think that the situation is better off as all women are now working. Well, you would be right and wrong. Right in the sense that overall income is better than before in absolute. Wrong in that in terms of the risk of poverty, we now have 2 out of 3 women in in-work poverty. In essence, for this indicator you are better off when you were worse off.

Another parliamentary reply points out another problem with this relative poverty concept. It notes that the country with the highest in-work poverty rate is Luxembourg, with 11.9% or 4.5% more than Malta. Now does that mean that workers in Luxembourg are worse off than those in Malta? Well, that is very hard to believe given that the minimum wage in Luxembourg is more than €2,700, which is even higher than the average wage in Malta, let alone the minimum wage.

Understanding the prevalence of poverty is not as easy as scrolling a table downloaded from Eurostat. It requires a more in-depth analysis cross-checked by looking at various other indicators. It is clear that the Commission is increasingly understanding this. It is highly likely that the risk-of-poverty measures will show an improvement as COVID decreased the income of the middle class while leaving the income of those on benefits unchanged. A perverse result that if interpreted simplistically could lead to serious policy mistakes.

This is why the Commission’s recent research on minimum budgets required to lead a decent life is so promising. This type of poverty measurement is more intuitive as well as showing how important it is to keep prices of essential goods and services low.

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