Did the Corona Crisis widen the gap between rich and poor? An Analysis of Economic Inequality in Germany during the Corona Crisis

Table of Contents

List of Figures

List of Tables

List of Abbreviations

1 Introduction
1.1 Research questions and hypotheses
1.2 Methodology and data basis

2 The term inequality and its key figures
2.1 The concepts of income
2.1.1 Market and net income
2.1.2 Net equivalence income
2.2 The concept of wealth
2.3 The concept of poverty
2.4 Gini coefficient and other indicators

3 Framework and Development of economic inequality in Germany
3.1 Economic framework in Germany
3.1.1 Solid economic growth until the Corona crisis
3.1.2 Labour market situation and the importance of short-time work
3.1.3 Distribution of national income
3.2 Income inequality in Germany
3.2.1 Development of net equivalised disposable income
3.2.2 Decline in wage inequality with gender pay gap remaining
3.2.3 Development of the Gini coefficient and other indicators
3.2.4 Trends in income poverty
3.2.5 Decrease in material deprivation
3.2.6 Developments at the upper end of the income distribution
3.3 Asset distribution in Germany
3.3.1 Gini coefficient and percentile distributions
3.3.2 Relationship between income and assets
3.3.3 Asset distribution in international comparison

4 Changes in economic inequality due to the Corona crisis
4.1 Short-term effects on the labour market
4.1.1 The significant role of short-time allowances
4.1.2 Marginally employed persons face major challenges due to the crisis
4.2 Effects on market and disposable household income
4.3 The Gender Pay Gap in the Corona Crisis
4.4 Income inequality during the Corona pandemic in Europe
4.5 Short-term effects on asset distribution

5 Policy instruments to reduce economic inequality
5.1 Financial support for the self-employed persons
5.2 Assistance for marginally employed persons
5.3 Spreading the costs of the pandemic fairly

6 Limitations

7 Conclusion

Appendix directory

Reference list

Abstract

This Master's thesis aims to address the in the media, politics and academia recurring issue of economic inequality against the background of the Corona crisis in Germany. Through a deductive literature analysis, the research question to what extend the economic inequality in Germany changed during the Corona crisis is answered. The analysis revealed that although income inequality has decreased due to social security effects and losses of the higher-earning self-employed, this effect is likely to be short-lived and certain groups such as the self-employed and persons in marginal employment are facing major challenges with regard to their income. The analysis of first indicators regarding asset distribution showed that the already high asset inequality might have increased even further.

List of Figures

Figure 1: Poverty and wealth lines by income decile

Figure 2: Poverty Indicators Survey

Figure 3: Lorenz curve and Gini coefficient

Figure 4: Corona effect on unemployment since April 2020

Figure 5: Development of national income and its components

Figure 6: Distribution of wages and salaries in 2018 by quantiles

Figure 7: Development of disposable household income by decile

Figure 8: Development of the poverty risk rate according to different data sources

Figure 9: Proportion of people with material deprivation

Figure 10: Income millionaires and their income since 2002

Figure 11: Assets distribution in Germany in 2019

Figure 12: Net assets by deciles of household net income 2012 and 2017

Figure 13: Persons in short-time work during the Corona crisis

Figure 14: Realised Short-Time Work and Employment Equivalents in 2008/2020

Figure 15: Marginal employment (mini-jobs) from 2008 to 2020

Figure 16: Change in disposable household income due to Corona crisis

Figure 17: Effective taxation of corporations in Germany

List of Tables

Table 1: Income changes due to the Corona pandemic in 2020

Table 2: Monthly net household incomes according to Occupational status

Table 3: Development of Gini Coefficients during the Corona-Crisis

List of Abbreviations

CDU - Christlich Demokratische Union (Christian Democratic Union)

cf - confer (Latin: compare)

DAX - Deutscher Aktien Index (German Stock Index)

Destatis - Statistisches Bundesamt Deutschland (Federal Statistical Office Germany)

DGB - Deutscher Gewerkschaftsbund (Federation of German Trade Union)

DIW - Deutsches Institut für Wirtschaftsforschung (German Institute for Economic Research)

e. g. - exempli gratia (Latin: for example)

EST - Estonia

etc. - et cetera (Latin: and other, and more)

EU - European Union

FDP - Freie Demokratische Partei (Free Democratic Party)

Fig. - Figure

FR - France

GDP - Gross Domestic Product

GER - Germany

IT - Italy

IW - Institut der deutschen Wirtschaft (Institute of the German Economy)

mom - month on month

No. - Number

n. p. - no page

p. - page

pp. - pages

SE - Sweden

SGB - Sozialgesetzbuch (Social Security Law)

SOEP - Sozioökonomisches Panel (Socio-economic panel)

sa - seasonally adjusted

USA - United States of America

VAT - Value Added Tax

1 Introduction

Due to the Corona pandemic that broke out in March 2020, almost all countries in the world were forced to contain the spread of infections as quickly as possible to not overburden healthcare systems. Severe restrictions were imposed almost worldwide, in some cases lasting already several months (Kolev 2020). In Germany two phases of severe residual restrictions, one beginning in March 2020 and another beginning in October 2020, also have persistently brought public life to a virtual standstill, thus having a considerable impact on the corresponding economic strength (Destatis 2021a).

In addition to growth losses, high national debts, and other socioeconomic consequences the redistribution of economic assets and change in economic inequality has been controversially discussed in academia as well as in the media and thus crystallised as a current problem statement for science and politics.

Regarding the state of research, it can be noted that representative surveys and studies of income distribution have published valid results and analyses in relation to the Corona crisis. The longer-term effects of wealth distribution are less well researched at this point of time. This paper incorporates published data and studies up to May 2021.

1.1 Research questions and hypotheses

Against the background of the problem statement described above, this paper addresses the research question to what extent the Corona-related restrictions have led to changes in economic inequality in Germany and which possible approaches and policy instruments could be considered to counteract possible undesirable inequality.

By answering the formulated research question, the following research hypotheses are to be tested:

The poorer part of society in Germany has become even poorer or economically weaker as a result of the Corona crisis. (H1) The richer part of society in Germany has become even richer and wealthier as a result of the Corona crisis. (H2).

1.2 Methodology and data basis

The method used is the deductive literature analysis of various current studies and papers, such as the long-term survey of the Socio-Economic Panel (SOEP) of the German Institute for Economic Research (DIW), the latest studies of the pro-employee foundation Hans-Böckler-Stiftung, the data of the employer-affiliated Institute of the German Economy (Institut der deutschen Wirtschaft) and others . Through an expert interview with one of the presidents of the SOEP, the latest findings from the researches are qualitatively complementing this paper.

First, basic terms are defined and important parameters for measuring economic inequality, such as the Gini coefficient, are explained. In order to classify the analysis, the past development of economic inequality in Germany is examined. In the main part, the data sets and studies of the institutions mentioned above are analysed. Subsequently, possible political actions to combat possible unwanted inequalities are discussed. Finally, limitations are identified that weaken or undermine research findings. The thesis concludes with the summary, in which the most important core results are recorded and the research question is finally answered.

In order to place the concepts of social inequality in the overall context, the next sections will first explain the concepts of inequality, poverty and wealth in more detail.

2 The term inequality and its key figures

If certain resource endowments, such as income levels, a certain level of education or other living conditions (e. g. housing conditions) are reserved for certain groups within a society, which regularly have more advantageous opportunities for life realisation and personal development than other parts of society, this is referred as social inequality (Hans 2007, p. 242). The chances for individual development and personal realisation are considered as more advantageous if certain people are given the opportunity to further develop their own personality according to the respective existing social standards (security, health, prosperity), while other people are not (Hradil 2005, p. 30-31).

Although the term in the narrower sense is not synonymous with social justice, still, a society organised based on social market economy requires a certain degree of sense of justice within the population in order to maintain the legitimacy of the economic system¹ (Liebig and May 2009). In modern societies, the concept of social inequality continues to divide into four different dimensions: Formal educational attainment, occupational status, income and wealth (Hradil 2005, p. 31-32).

Since this paper is primarily concerned with the last two dimensions (economic inequality) the concepts of income, wealth and poverty will be explained in more detail in the next sections.

2.1 The concepts of income

One basis for measuring and defining poverty and wealth is income. As a rule, a distinction is made between different concepts of income, which are explained in the next two sections.

2.1.1 Market and net income

The concept of income is first differentiated into market and net income. Market income corresponds to the sum of all individual income from dependent and self-employed work as well as from asset holdings². In this context, the individual gross income from dependent employment represents the largest component of market income (Kleimann et al 2020, p.44).

The net income extends the described market income by state transfers and pension payments from the statutory pension insurance, minus contributions made to social security system and income taxes (ibid).

In summary, the different types of income can consequently provide two different insights regarding income inequality: The market income reflects the primary distribution of income and thus signal how heterogeneously labour and capital markets remunerate individual resources. The net income is particularly relevant for assessing government redistributive activities and their effectiveness (Feld at al. 2020, p. 233).

2.1.2 Net equivalence income

The net equivalised income is a key indicator for determining inequality. It offers the possibility to compare the income situation of persons living in different households with different sizes and compositions (ibid, p. 45).

To determine the indicator, the household net income is divided by the sum of the equivalent size of the persons living in the household (Bedarfsgewichtete Personen).

For this purpose, science and politics use the generally accepted weighting scale proposed by the Organisation for Economic Co-operation and Development (OECD). According to the scale, the person with the highest income is assigned the weight one. For each additional person over 14 years living in the household the value is 0.5 and for each child (under 14 years of age) 0.3.

The equivalent income calculated in this way is allocated to each household member, assuming that all household members benefit equally from the joint income (ibid).

This method considers the potential for savings when living together, as well as the tendency of second earners to have lower incomes. Furthermore, it is assumed that each person living in the household benefits equally from the net equivalent income (ibid).

After this section has explained the different types of income that are used as a common basis for measuring economic inequality, the next two sections define the outer limits of inequality: the concepts of wealth and poverty.

2.2 The concept of wealth

The distribution of wealth has a direct influence on economic inequality and thus on the social cohesion of a society. In a social market economy, the question of distribution is therefore always in a field of tension: On the one hand, higher income can create incentives for innovations and more performance, which ultimately allow the individual added value to result in community welfare and economic growth (Bofinger 2020, p.4-9).

On the other hand, as already described above, the gap between rich and poor should not become too large, because participation in social wealth that is not perceived as fair could call into question the acceptance of the economic order or its design (ibid, pp. 632-636).

The point at which a person is considered rich is regularly discussed in the public debate. The Federal Ministry of Labour and Social Affairs of Germany (2017, p. 577) defines a person as income-rich if he or she receives more than twice the median³ of the net equivalent income of the total population. In 2019, the median net equivalent income in Germany was €1,871 and the defined wealth threshold was thus €3,742 (200%) (Adriaans et al., 2019, p. 36).

How difficult it is to define wealth is shown by the great disagreement about when a person is considered rich. The following illustration compares the survey results of different income groups, which should determine the subjective wealth threshold, with the actual wealth threshold set by the Federal Ministry of Social Affairs.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Poverty and wealth lines by income decile

Source: Adriaans et al., 2019, p. 36

It can be seen that the information on income values ranges from €3,800 to €15,000. All figures were above the 200% median of €3,742. Half of the respondents indicated an amount above €5,000. The subjective wealth threshold is on average more than €4,000 above the objectively determined value of the 200% median (Adriaans et al., 2019, p. 36-37).

In conclusion, the understanding of income wealth seems to be shaped by the extremely high incomes often debated in the media, such as top managers or top athletes. According to the survey results, wealth is more likely to be associated with the super-rich than with upscale affluence (ibid, p.37).

In contrast, there is much more agreement within a society on the definition of poverty and the definition of the poverty line. These aspects are explained in the following section.

2.3 The concept of poverty

As with the concept of wealth, poverty, by the definition of the German Federal Government, is always oriented in relation to the general welfare level of society. According to this definition, people are considered poor if they do not have the sufficient economic, social and cultural resources to create its life in a minimum acceptable way as it can be expected in Germany (Bundesministerium für Arbeit und Soziales 2017, p. 98). In the legal texts and government statements, this threshold is also called the socio-cultural subsistence minimum (soziokulturelles Existenzminimum) (ibid).

The relative approach to poverty is quite controversially discussed in academia and politics. Conservative and pro-employer politicians argue that no one in Germany is suffering from actual poverty if it is measured in terms of absolute poverty in nominal terms (e. g.: USA). According to the OECD definition, a person lives in absolute poverty if he or she has less than $1.90 per day at his or her disposal (Geyer 2009, p. 4).

Nevertheless, the measurement of relative poverty has become an internationally recognised concept in science and German politics (Bundesministerium für Arbeit und Soziales 2017, p. 98).

Poverty in affluent societies like Germany is a complex phenomenon with various influencing factors. The following graph confirms that poverty is also seen as a multidimensional construct by the population. The figure shows the results of a survey on what criteria determine a person living in Germany to be considered poor.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Poverty Indicators Survey

Source: Adriaans et al., 2019, p. 30

The fact that over 50% of the respondents consider lack of contact with friends or family as an indicator of poverty confirms that the multidimensional construct of poverty also includes social components (Adriaans et al. 2019, p. 30). Social disadvantage or unemployment, on the other hand, are not seen as criteria for poverty by the majority of the respondents.

However, since monetary resources are a basic prerequisite for social participation in a society, the net equivalent disposable income is the central dimension for assessing poverty (Bundesministerium für Arbeit und Soziales 2017, p. 98-99). In Germany, a person is considered poor if he or she has less than 60% of the net equivalent income median of the total population. This threshold is also referred as the at-risk-of-poverty threshold (Armutsrisikoquote) and is commonly used in science and politics (ibid).

Brenke (2018), on the other hand, prefers the use of the terms low-income persons (Einkommensschwache) and low-income-quote (Niedrigeinkommensquote), since the classification of persons at-risk-of-poverty cannot be made exclusively on the basis of disposable income and the consideration of private assets is left out. For example, a person may have a very high level of private assets but only a low income. Nevertheless, income and assets are closely linked (see also 3.3.2 Relationship between income and assets).

In order to measure poverty in a country more precisely, science and politics continue to use the measurement of material deprivation in addition to the assessment of financial resources.

Similar to the at-risk-of-poverty threshold, this indicator describes the point at which material deprivation or involuntary exclusion from the current general standard of living can be assumed (Kott 2018, p. 235-236).

It is measured according to the standards of the Continuous European Social Reporting System, which has defined nine deprivation criteria⁴, such as outstanding payments or the lack of essential household appliances. If three of the nine criteria are met by a household, material deprivation can be assumed. If four of the criteria are met, the household is considered to be significantly materially deprived (ibid).

Finally, it remains to be noted that there is still a greater social consensus on the threshold of poverty than on wealth. This is confirmed by the poverty line survey described in the previous chapter. The participants reported an average amount of 971€. This corresponds to a difference from the real poverty line (1,122€) of only -151€ (Adriaans et al. 2019, p. 36).

After the concepts of poverty and wealth have been defined more precisely, the following section discusses the indicator of the Gini coefficient and others, which can bring conclusions about the distribution of income and assets.

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¹ This aspect will also be explained in more detail in one of the next sections (2.2 The concept of wealth)

² Income from asset holdings includes dividends, interest income, income from renting and leasing as well as pensions from private old-age provision.

³ As the median is more robust against outliers at the edges of the income distribution, it is more often used as a statistical value to assess net equivalised income.

⁴ The established criteria can be found in the appendix (No. 1, p. 58)