Economic Prosperity Has Grown over Time, Yet Its Distribution Is Becoming Increasingly Unequal

“Welfare for all” is the guiding principle of Germany’s social market economy. At least since the German reunification, it has, however, become apparent that there is a yawning gulf between aspiration and reality. Despite steady economic growth, the poorest 40 per cent of the population hardly benefit from prosperity gains, while the income of high earners increased on average by 1.3 per cent per year between 1991 and 2014. These are the findings of a recent study carried out by the Centre for European Economic Research (ZEW) in Mannheim on behalf of the Bertelsmann Stiftung.

The results of the study show that economic growth in Germany has been steadily increasing and material wealth has never been greater. Nevertheless, growing income inequality and a higher at-risk-of-poverty rate are increasingly posing a threat to an inclusive distribution of economic prosperity. As a result, broad sections of the population do not benefit at all from growing prosperity, neither in terms of income increases nor in terms of returns.

In order to assess the inclusiveness of the German social market economy, the authors of the ZEW study considered how economic growth, inequality in terms of income and wealth distribution, equality of opportunities and poverty risks have developed since the founding of the Federal Republic of Germany. According to the results of study, the practical implementation of the principles of social market economy since its introduction in 1949 has been accompanied by a stable and positive economic development. Recessions have been chiefly the result of external economic shocks. What is more, Germany has not experienced any lengthy phase of negative growth since the 1950s; years of recession were always followed by positive adjustment periods in the subsequent years. All in all, the research findings indicate that German economic policy institutions are structurally stable.

Income gains of high earners increase inequality

One reason for growing inequality are the considerable income increases of high-income groups. By contrast, lower-income groups hardly benefit from economic growth. Since the late 1990s, income increases of the bottom 40 per cent of the population have been significantly lagging behind those of average income households. Besides income, another important factor that contributed to income disparity is the strong heterogeneity regarding the economic development of the individual regions in Germany.

The study also analysed the equality of opportunities and the dynamics of poverty in Germany. With regard to equal opportunities, the research results paint a rather positive picture. In 2014, merely 13 per cent of existing income inequalities could be attributed to unequal opportunities. Back in 1992, this share was still 19 per cent. A detailed breakdown of the various underlying factors provides a more differentiated picture: “While we were able to observe a decrease in income disparities between men and women, disparities between income earners from East and West Germany continue to exist more than 25 years after the German reunification,” says Martin Ungerer, a researcher in the ZEW Research Group “International Distribution and Redistribution” and co-author of the study. Another factor which increasingly contributes to income inequality is the socio-economic family background.

At-risk-of-poverty rate increasing in Germany

Despite the employment boom in the past ten years, the at-risk-of-poverty rate was steadily increasing in the considered period (1962–2015), rising from 9.8 per cent to a record high of 15.4 per cent. Looking at the historic development, ZEW researchers were able to show that, over the course of the years, different social groups were affected by poverty in specific periods: During the years of the “economic miracle”, single pensioners were particularly affected by poverty, whereas today, working-age single-person households are at the highest risk of poverty. According to the authors of the study, the poverty persistence, which has been increasing since the late 1980s, should be viewed in a particularly critical light. On average, individuals were living below the poverty line for approximately 2.5 years in 1991. Since 2008, this number has increased to more than three years.

With the aim of measuring the development and distribution of economic prosperity since the 1950s, ZEW researchers developed an indicator for inclusive growth, which comprises the heterogeneous developments of inequality, poverty, and economic growth in Germany. “As the development of the indicator shows, Germany’s economy has experienced strong and inclusive economic growth up until the eve of the German reunification. Since the reunification, this curve has been flattening,” explains Ungerer. “It remains one of the central challenges for a sustainable social market economy to ensure that as many workers as possible benefit from future increases in prosperity.”

For further information please contact:

Martin Ungerer, Phone +49(0)621 1235-303, E-mail martin.ungerer@zew.de