Income Inequality Virtually Unchanged since Steep Rise up until 2005

Press Release of June 19, 2015

DIW Berlin’s researchers warn: employment does not necessarily prevent poverty11.5 million people in Germany are at risk of povertyone in five in eastern Germany is living below the poverty risk threshold

 Real disposable household incomes in Germany rose by an average of five percent from 2000 to 2012. At the same time, according to a study by the German Institute for Economic Research (DIW Berlin), the gap between rich and poor has grown in the past decade. Income gains are distributed very unequally between the various income groups: while the incomes of the top ten percent increased by more than 15 percent between 2000 and 2012, they remained virtually unchanged in the middle-income groups. The bottom 40 percent have up to four percent less in real terms than at the turn of the millennium. By 2005, the inequality of households’ disposable income rose considerably according to DIW Berlin’s study and since then it has remained at this level.

Definitions

Those considered at risk of poverty or income poor are defined as having less than 60 percent of median income (949 euro per month net for a single-person household in 2012), with the median dividing the distribution into top and bottom halves. Read more about this in DIW Berlin’s glossary (in German only).

Disposable income is largely made up of market income (earned income plus capital income), pensions, and government transfers, less taxes and social security contributions.

German Institute for Economic Research
(DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy advice as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

In addition to the distribution of income, DIW Berlin’s economists Jan Goebel, Markus Grabka, and Carsten Schröder also examined how the risk of poverty has developed in Germany. Although the principle, “the higher the participation rate, the lower the risk of poverty” still applies, “our findings show that now even more workers are at risk of poverty,” says Markus Grabka. This is especially true for career entrants aged between 25 and 35, almost one in five of whom earns less than 949 euros per month. For individuals living alone, the at-risk-of-poverty rate in this age group soared from approximately 27 percent (in 2000) to around 39 percent (in 2012). “One reason for this is the often low incomes earned at the beginning of their working lives, in particular for atypical employment relationships,” explains Carsten Schröder.

Risk of Poverty Risen Significantly since Turn of Millennium

According to DIW Berlin’s calculations based on data from the Socio-Economic Panel (SOEP) study, 20 percent of the population in eastern Germany are at risk of poverty—despite unemployment declining significantly in the same period. However, 18- to- 25-year-olds are most at risk of poverty in Germany. In 2012, their at-risk-of-poverty rate was around 21 percent, well above the average of around 14 percent (more than 11 million people) of the total population. “However, more than half of this group had completed a training or higher education course. Most of them are currently living below the income-related poverty risk threshold,” according to the authors of the study. “Nevertheless, it becomes worthwhile later on. The higher the educational level, the less likely it is that they will be at risk of poverty later on in life.”

No Increase in Market Income Inequality since 2010

Average real household income and average real market incomes have increased over time and were both seven to eight percent higher in 2012 than in 2000. However, looking at median income gives a different picture. Although median household income, which divides income distribution into the upper and lower halves, has risen, its increase with around two percent was considerably lower than average household income. Median market income actually declined up to 2005 and has since recovered only gradually. According to researchers at DIW Berlin, this is further evidence that not all income groups have benefited from positive income developments.