Why the Irish middle may not be so squeezed at all

New research gives a clearer picture of the economic realities and inequalities facing Irish households, writes Brian Nolan

RISING inequality and the notion that “the middle” has been “squeezed” are the subject of heated debate across the rich countries. This was the point of departure for a recent article in The New York Times about the ongoing plight of the middle class in Spain.

Ireland has had its own version of these debates, feeding in to broader political framing of key policy issues.

How the middle has fared here through boom, crisis, recession and recovery has been the focus of recent research I did with former colleagues at the ESRI and UCD, Bertrand Maitre and Christopher Whelan, that featured in the report on which The New York Times drew. The findings show that the picture for the middle, and with respect to income growth and distribution in Ireland more generally, is much more nuanced than is reflected in those debates.

How the middle is seen to have fared depends both on who is taken to be ‘‘middle’’, and on how changes in their position are captured. One way is to focus on households around the middle of the income distribution and the share of total income they receive.

Examining the share of total after-tax income going to the one-fifth in the middle of the distribution, household surveys show no ‘‘squeeze’’ over the two decades from 1995. Their share of the overall ‘‘pie’’ remained rather stable in the years of boom, bust and recovery. The same is true for the broader 40pc in the middle of the distribution.

Another way to think about ‘‘the middle’’ being ‘‘squeezed’’ is that the distribution could have become increasingly polarised, with more households on both relatively high and low incomes. This could be driven, for example, by jobs around the middle disappearing due to the impact of new technologies. However, the percentage of Irish households with incomes no more than 20pc below or above the middle actually rose during the boom and further in the economic crisis.

Again, the same is true if one expands the income range to include a broader ‘‘middle’’. So while some rich countries have seen the middle shrink in that way, Ireland is not one of them. One could also think about ‘‘middle’’ in terms of occupation or social class rather than income. “Middle class” is an ambiguous term, but over the course of the boom and the recession Ireland saw the size of the manual ‘‘working’’ class decline as the proportion of managerial, professional and technical jobs expanded.

Whether people see their disposable incomes rise or fall in terms of purchasing power also really matters. The boom and recession were radically different periods from that perspective. Households around the middle saw very substantial increases in average income from 1995 up to 2008, slightly greater than the income groups above and below them. In the recession, real incomes around the middle fell sharply, but by less than at the bottom. Over the entire period from 1995 to the present, the middle has fared relatively well in terms of real income growth.

This primarily reflects what happened in the labour market, with broadly-based increases in income from work driving up incomes across most of the distribution in the boom as both employment and pay rates soared, followed by the pervasive impact of the crisis and accompanying austerity, and then the recovery in employment and incomes from around 2012.

The boom and bust periods are also contrasting in terms of the households actually located around the middle. Over the course of the boom, younger households became more common there, reflecting rapid growth in their incomes from employment, whereas older people became less common as pensions failed to quite keep pace with earnings.

In the crisis, though, those of working age bore the brunt of falling employment and earnings, while pensioners were more protected. Households around the middle change over time, with movement up and down the distribution. Some of those who were around, or indeed above, the middle were pushed down when the economic crisis hit; the severity of the recession was such that its effects were felt right across the distribution. Emigration in the teeth of the recession was also disproportionately of the better-educated, reversing the pattern in previous recessions.

Household incomes are im- portant but not the whole story. Looking at what households cannot afford, and how they see their own financial situation, highlights where some of those around the middle were particularly hard-hit in the crisis. Measures of material deprivation show a very marked increase from 2008 to 2012, towards the bottom but also around the broad middle of the distribution. The percentage saying they could not afford an annual holiday, for example, rose sharply. Indicators of financial stress, such as finding it very difficult to ‘‘make ends meet’’ or falling into arrears, rose particularly sharply around the middle.

This was especially marked for non-elderly home-owners, many of whom had substantial mortgages and other debts and difficulty servicing them as incomes fell, highlighting the central role that housing played in the bust. It, of course, continues to do so in the recovery as housing supply lags behind demand and accessing housing at an affordable cost has become such a challenge, including for those around the middle.

How the middle has fared should also be seen in the context of overall income inequality. Ireland is unusual among rich countries in that standard indicators of income inequality across the entire distribution, as measured in household surveys, show it has not risen over recent decades or during the recession. With such inequality measures often rising elsewhere, Ireland has moved from being an above-average rich country in inequality terms in the 1980s to being around the EU or OECD average now. This also applies to the share of the total income ‘‘pie’’ going to the lower/middle parts of the distribution.

Where Ireland is distinctive is in the extent to which this average disposable income inequality is a product of relatively extensive redistribution by progressive direct taxes and cash social welfare transfers.

One can see the relatively high degree of inequality in market income as something that also needs to be addressed directly, while taking considerable comfort from the effectiveness of redistribution policies.

Measures of the share of income going to the very top of the distribution based on income tax data also now get a great deal of attention. Estimates I have made for Ireland (available on the World Inequality project website led by Thomas Piketty) show the top 1pc share in total income rose from about 7pc to 11pc in the boom, fell back in the bust, and recovered recently. These figures are for incomes before tax and relate to individual taxpayers rather than households.

None the less, they probably mean that household surveys in Ireland as elsewhere are not fully capturing the increasing concentration of income at the very top of the distribution. This is a very significant phenomenon, but so is the remarkable stability in inequality among the other 99pc which sets Ireland apart from many other rich countries. Brian Nolan is Professor of Social Policy in the Department of Social Policy and Intervention and Senior Research Fellow at Nuffield College, University of Oxford

‘Household incomes are important but not the whole story’