AnalysisWSI Distribution of Income Report

WSI views poverty as a threat to democracy

Income inequality and poverty have continued to rise in Germany, according to the WSI Distribution Report 2023: A danger to democracy, warn the researchers, and highlight three possible countermeasures.

WSI views poverty as a threat to democracy

For those affected, poverty not only means material limitations but also heightened concerns about their health and future. They also have less trust in state and democratic institutions. Therefore, the steadily increasing income inequality and poverty in Germany, as reported in the 2023 Distribution Report by the Institute of Economic and Social Research (Wirtschafts- und Sozialwissenschaftliches Institut – WSI) affiliated with the trade union-related Hans Böckler Foundation, pose a threat to democracy.

The researchers deduce from data from the Microcensus, which covers the year 2022, as well as the Socio-Economic Panel (SOEP) for the year 2021 that material limitations and a sense of low recognition for many affected individuals go hand in hand with a substantial alienation from the political system. "More and more effective political engagement against poverty and inequality is a fundamental approach to keeping society cohesive and functional, especially in times of great change and the challenge posed by populists," warns Bettina Kohlrausch, the scientific director of the WSI.

The poverty rate is also increasing

Income distribution has become highly unequal when examining the development since the late 1990s, according to the WSI. In 2022, there were hardly any changes compared to the peak reached in 2021. Additionally, the poverty rate has been on an upward trend since the 2010s. In 2022, it was noticeably higher at 16.7% compared to the 15.9% reported before the onset of the pandemic in 2019. Moreover, 10.1% of people in Germany lived in severe poverty last year. For comparison: according to the WSI, the two rates were still 14.5% and 7.7% respectively in 2010. Those disproportionately affected by poverty include the unemployed, part-time workers, people from East Germany, women, single parents, individuals with a migration background, singles, and those whose educational attainment is at most equivalent to a secondary school diploma. For a single-person household, the WSI sets the poverty threshold for 2022 at an available monthly household income of just under 1,200 euros. Severe poverty is defined as less than 1,000 euros.

Stable share of high-income earners

The share of "high-income earners," who, as singles, had more than double the median income at their disposal in 2022 (approximately 4,000 euros), has, in contrast, recently fluctuated around a share of 8% of all households, with a somewhat decreasing trend. Between 2010 and 2018, which was the period following the global economic and financial crisis when Germany experienced stable economic growth, the share of high-income earners remained consistently around 8.1%.

Aid measures partly successful

The study authors, Jan Brülle and Dorothee Spannagel, find it interesting that the percentage of people living in poverty increased during the COVID-19 crisis, but slightly decreased from 16.9% in 2021 to 16.7% in 2022. This reduction could be "related to relief measures that the government implemented in 2022, including supplements to benefits for basic income recipients." Even though the anti-crisis policies of the federal government, after the start of the Ukraine conflict and the surge in energy prices, provided at least a similar level of relief to higher income brackets in absolute terms, it may have made a small contribution to poverty alleviation, according to the WSI Distribution Report 2023 titled "Income Inequality as a Threat to Democracy," released on Thursday.

Different perceptions

The distribution report shows that there are significant differences in the perception of appreciation or contempt depending on income. For example, over 24% of the persistently poor, i.e., people who have lived below the poverty line for five or more years, believe that others look down on them. Among the temporarily poor, fewer than 14% feel this way, while for those with medium incomes, it's 8%, and just over 3% for high-income individuals. On the other hand, nearly 48% of high-income individuals stated that others often look up to them, while only 28% of the persistently poor felt this way. Brülle and Spannagel warn that such differences in the experience of recognition and disregard can foster alienation of lower income classes from society and the political system. In fact, there is a clear correlation between income level and low trust in state and democratic institutions. Among the wealthy, there are few who do not trust the legal system, but among the persistently poor, it's more than a third. While less than a fifth of the wealthy have little trust in the Bundestag, it's almost half of the persistently poor, according to the WSI.

Three countermeasures

While the broad societal impacts of the recent crises are still difficult to assess, “much suggests that they have deepened social divisions in Germany,“ write Brülle and Spannagel. To address the growing inequalities, they highlight three measures. First, they suggest raising basic social security to a poverty-proof level. To reduce working poverty, the researchers recommend a mix of higher wages and increased labor force participation, especially among individuals with low formal qualifications.

This includes a higher minimum wage, strengthening collective bargaining agreements, more individualized training measures, and further expansion of childcare facilities. Additionally, the wealthy and super-rich should contribute more to the common good. Brülle and Spannagel see potential in a higher top income tax rate and a progressive wealth tax. They also call for closing loopholes in the inheritance tax. However, the study authors emphasize the need for high tax exemptions for both wealth and inheritance taxes.