BRUSSELS, September 25, 2018 – Labor, taxation and social welfare policies in the European Union must be upgraded to protect vulnerable workers and tackle rising inequality brought about by rapidly changing labor markets and new technologies, says a new World Bank report, Toward a New Social Contract: Taking on Distributional Tensions in Europe and Central Asia.
The report calls for a fundamental rethink of social policies in order to slow the growing divide between citizens who benefit from new economic opportunities and those who are left behind in an ever more dynamic and flexible economy.
The report finds that large groups still have middle-class incomes, but not middle-class economic security. In some EU member states, the daily income level needed to avoid slipping into poverty has doubled. At the same time, more young people are in lower quality jobs compared to older generations. For instance, half of young workers (aged 15-24) in the Netherlands and France work with temporary contracts.
“Long-term wage employment is no longer the norm, especially for younger people, and we need to better understand how inequality is evolving and how to make growth more inclusive,” says Cyril Muller, World Bank Vice President for Europe and Central Asia.
In Croatia, while part-time and temporary jobs grew for the overall population from 11% of employment in 2002 to 15% in 2013, the growth was even stronger for the young: in 2002, 29% of the employed aged 20 to 24 years old were on part-time or temporary jobs. In 2013 that same percentage was 45% - a 16 percentage point increase.
To address the challenges, the World Bank recommends implementing three overall policy approaches: increasing protections for all types of labor contracts; rolling out universal welfare systems with better social services/safety nets; and expanding tax bases away from an income and expenditure-only model to include capital gains and higher earners.
Many citizens in the EU are still not experiencing upward mobility and feel stuck in an inequality trap. Ineffective policies in these areas has led to a decline in institutional trust and greater polarization within society.
In Croatia for example, individual birth circumstances are more important determinants of access to tertiary education among the generation that came of age in the early 2000s than among the generation that started education before the transition. In the case of Croatia, the index of inequality of opportunity in access to tertiary education for the cohort born in the 1980s is twice as much as that of those born in the 1940s.
“When we ask people about their well-being, we hear concerns about rising inequality and insecurity. This report investigates the causes of these concerns by analyzing the changes in income distribution in recent decades,” says Maurizio Bussolo, World Bank Lead Economist for the Europe and Central Asia region and co-author of the report. “We believe trying to stop globalization or technology is not the solution. Instead, a new social contract, with a fairer way of sharing risks and opportunities, is needed to preserve and expand the impressive economic gains the region has made in past decades.”
The report identifies four types of inequality between groups that are eroding social contracts: disparities between young and old generations; inequalities between workers engaged in different occupations; unequal access to opportunities based on geography; and inequalities based on gender, ethnicity, background and other factors, rather than individual efforts or abilities.
Building on earlier reports, including the recently published Growing United, this study emphasizes that policies should be adapted to protect and accelerate the remarkable social advances made by countries in the EU in recent decades.