Employment and Social Developments in Europe (ESDE) 2023

4. Social Situation, Poverty, and Income Developments

This section presents recent income trends and social developments in the EU, with a particular focus on the indicators included in the revised social scoreboard of the European Pillar of Social Rights action plan. It analyses the living conditions of EU households, including in the context of growing inflation and the recovery from the economic and social impacts of the COVID-19 pandemic. It also documents income trends for the overall population and looks at the multifaceted nature of poverty and social exclusion, with a focus on variations across different levels of educational attainment.

4.1. Income and consumption trends

Inflation spiked in 2022 and negatively affected households’ purchasing power, although it decreased from record levels in the last quarter of the year. After two decades of low inflation, the COVID-19 pandemic, coupled with supply-chain bottlenecks, caused prices to rise in 2021. This trend was exacerbated by the Russian war of aggression against Ukraine in early 2022 and the resulting impact on energy and food markets. While nominal wage growth was high and picked up in Q4 2022, it remained far below inflation, leading to a fall in real wages. Inflationary pressures thus accentuated concerns about the purchasing power of lower-income households and low-wage earners, ⁽⁵⁶⁾ who spend a higher share of their income on the elements that were among the primary drivers of inflation in 2022 (e.g. energy, food, transport). ⁽⁵⁷⁾ At the same time, risks of wage-price spirals should be monitored ⁽⁵⁸⁾.

Prices increased sharply for energy-related utilities, food, and transport in 2022, placing substantial financial pressure on lower-income households. Consumer price indices for energy-related and energy-intensive consumption items increased significantly (Chart 1.14). Electricity and gas prices increased steeply compared to the previous year, with gas prices surging by 55.2% on average in the EU. Prices peaked at 12.2% for food and 12.1% for transport. Consumer price indices for housing rentals also increased, albeit by a comparatively lower 1.9%, with large differences recorded across Member States. ⁽⁵⁹⁾ Inflation pressures are expected to have had a particularly negative impact on lower-income households, given that the prices of necessities predominant in the consumption basket rose substantially. Lower-income households are also typically less able to smooth their consumption by drawing on savings or additional borrowing.

Recent price surges negatively affected the recovery of households’ real income growth in 2022. Previously, with the recovery from the impacts of the pandemic driven mainly by labour market income, growth of real GDHI per capita (quarterly, year-on-year) reached a remarkable 4.0% in Q2 2021 and a more moderate 1.1% in Q3 2021 (Chart 1.15). GDHI is an aggregate measure approximating households’ overall living conditions by focusing on the income that households are able to spend. ⁽⁶⁰⁾ However, real GDHI per capita growth was negative in Q3 2022, at -0.5%, and again in Q4, at -0.4%, driven by a negative year-on-year change in the weight of the real compensation of employees and the self-employed. This contraction in year-on-year real GDHI growth in Q3 2022 was the first since the onset of the COVID-19 pandemic in Q2 2020 and, before that, since Q2 2013. Overall, for the first time since 2013, annual adjusted gross disposable income of households per capita in real terms was also negative (-0.66%) in 2022, compared to the previous year. ⁽⁶¹⁾

Taxes and transfers played a role in mitigating negative effects on households’ real income growth in 2022. ⁽⁶²⁾ Faced with soaring energy prices, governments rolled out sizeable measures to protect households and corporations from the adverse impact of high energy prices in 2022, with the estimated net budgetary cost of energy support measures reaching 1.2% of GDP in the EU in 2022. ⁽⁶³⁾ Following the negative weight of taxes on real GDHI growth in general, including for much of 2021, in Q3 and Q4 2022 the year-on-year change in the weight of taxes was positive (as it was between Q2 2020 and Q1 2021), likely reflecting income and wealth tax relief measures. Additionally, the year-on-year change in the weight of net other current transfers on real GDHI growth was positive and particularly large in Q4 2022. In the context of previous exceptionally high net social benefit growth compensating for the loss in labour market income during the COVID-19 pandemic in the EU, the year-on-year change in the weight of net social benefits was negative for all quarters in 2022.

The further decrease in the household saving rate in 2022 reflects the recovery in demand for consumption items and could also suggest that households’ budgets were squeezed. In 2022, the annual gross household saving rate in the EU fell to 12.9% from 16.5% in 2021 (having spiked in 2020), slightly above the rate recorded just before the COVID-19 pandemic and close to the long-term average (12.8%). ^{(64) (65)} With policy measures prompting an abrupt decline in contact-intensive consumption and income resilience leading to increased savings during the early stages of the pandemic, the saving rate decline in 2022 (that started in mid-2021) is the result of recovery in the demand for consumption items. In addition, it also likely reflects to some extent households’ increased drawing on their savings to cope with inflation pressures. ⁽⁶⁶⁾ In the context of the COVID-19 recovery, household consumption shares increased by 2.6% in 2021. Following the easing of travel restrictions in many countries, the increases for holidays (+6.6%) and transport (+6.3), as well as for leisure items such as restaurants and hotels (+2.4%) and recreation and culture (+2.2%), were particularly marked in 2021 (Chart 1.16). Necessities also witnessed expenditure increases, particularly housing and related utilities (+3.1%). Expenditure on fundamental items such as health (+0.3%), clothing (+1.1%) and food (+1.5%) increased to a lesser extent.

Inflation pressures in the economy have increased financial distress among households on lower incomes. Overall, reported financial distress of households increased from 12.5% in December 2021 to 15.8% in December 2022 (Chart 1.17). ⁽⁶⁷⁾ As one of its components, the share of adults reporting having to draw on savings to meet daily needs also rose, from 9.1% in December 2021 to 11.8% in December 2022. Broken down by incomes, in December 2022, 27% of lower-income households ⁽⁶⁸⁾ reported financial distress (up from 23.3% in 2021), compared to 7.4% of households in the top income quartile (up from 5.5% in 2021). The levels of financial distress among lower-income households were similar to those recorded in the aftermath of the financial crisis in December 2013. Financial distress also increased for households in the second income quartile (increasing from 14.1% to 17.2%) and third income quartile (increasing from 9.8% to 12.4%) from December 2021 to December 2022. The share of households reporting an inability to face unexpected financial expenses also increased in 2022, at 31.5%, compared to 30.2% in 2021. ⁽⁶⁹⁾ Similarly, the share of households reporting difficulties in making ends meet increased from 11.3% in 2021 to 12.2% in 2022, the same level recorded in 2020.

Surges in energy prices, coupled with pressures on households’ purchasing power, had implications for energy poverty in 2022. Energy poverty increased by 2.4 pp in 2022, reaching 9.3% (compared to 6.9% in 2021). There were large variations across Member States, with energy poverty particularly high in Bulgaria (22.5%), Greece (18.7%), Lithuania and Portugal (both 17.5%). ⁽⁷⁰⁾ The share remained substantially higher for the population at-risk-of poverty, at 20.2%, more than double the EU average in 2022 (up from 16.4% in 2021). Before energy prices increased more steeply in early 2022, energy poverty had decreased at EU level, from 10.8% in 2013 to 6.9% in 2021. ^{(71) (72)}