A study, commissioned by Latvia’s Ministry of Welfare and carried out by the World Bank between May 2012 and April 2013, has looked at the social impact of the financial crisis on poor people. It profiles people with no or limited labour market attachment and low income, and examines poverty and inequality. It evaluates the effectiveness of programmes intended to deliver social assistance, bring unemployed people into the labour market and related social benefit programmes.
Research goal
In 2011, the Ministry of Welfare of the Latvian Republic commissioned a study into poverty and inequality, with support from EU Structural funds, and research was carried out by the World Bank between May 2012 and April 2013. The resulting report, Who is unemployed, inactive or needy? Assessing post-crisis policy options (in Latvian), analyses poverty and income inequality trends in Latvia, comparing them with the rest of the EU before, during and after the economic crisis.
The main goal of the study is to contribute background evidence to the government’s strategy of promoting inclusive growth.
Poverty, inequality and social impact of the crisis
Latvia is among the countries with the highest levels of inequality within the EU. Inequality increased in Latvia between 2004 and 2009. Three out of four of those who live in households with very low levels of employment are affected by high poverty rates. Analysis shows that the groups most at risk of poverty in 2009 were children aged up to 17 years (26.6%), single parents (41.3%), couples with three or more children (38.8%) and unemployed people (39.2%). Single people also have high risk of poverty.
The analysis shows that education plays a significant role in levels of poverty risk. People who have only primary education are almost five times more likely to be below the poverty threshold than those with tertiary education. In 2009, retired people and those aged 65 and over in 2009 were at the lowest risk of poverty because they benefited from relatively stable pension incomes rather than relying on earned income. Latvia has an unusually high incidence of the ‘working poor’, since 25% of those below the poverty threshold have jobs.
Taxes, contributions and benefits
In 2010, only 30% of unemployed workers received unemployment benefits, compared with the average of 70% for the countries within the Organisation for Economic Co-operation and Development. This is largely due to the Latvian benefit system’s strict eligibility criteria, although it also reflects the significant influence of informal employment, the result of which is that many workers do not pay the contributions that would entitle them to benefits. This informality leaves those employees without social protection in the case of unemployment
The household budget survey shows that only 12.5% of the poorest inhabitants in Latvia receive the Guaranteed Minimum Income (GMI) or cash housing benefits, which means the GMI programme acts as a last resort for assistance.
Between 2005 and 2008, the level of benefits did not keep pace with wage increases. Those in receipt of benefits also did not benefit from the tax reduction income gains that improved the income of wage earners.
Welfare benefits
A large proportion of Latvia’s social assistance spending does not directly target poor people. Poverty-targeted programmes represented only 10% of the total spending on social assistance in 2009. Approximately 57% of poor people receive at least one form of social assistance, which is relatively low coverage when compared to most other EU countries. At the same time, the share of those with a high income receiving social assistance is the fourth highest in the EU, with about 50% of those in the richest quintile receiving some form of social assistance benefit.
GMI performance
Low coverage and high targeting describes Latvia’s GMI programme. Individuals and families belonging to the poorest 20% of the Latvian population received 90% of the total budget allocated for GMI in 2011.
However, GMI eligibility or benefit levels are not linked to an objective minimum income or a consumption standard of a poverty threshold, which means that there are no rules for automatic adjustment. This means there is a risk of a decline in the GMI’s purchasing power and uncertainty about access to it.
Only 22% of the household disposable income of those in the poorest quintile comes from the GMI. However, when taken together with other benefits, it might discourage recipients from making the transition from social assistance to work. Means-tested benefit recipients face high marginal effective tax rates for taking up low-paid jobs since for every LVL 1 (€1.42) earned, one LVL 1 of benefits is withdrawn.
Commentary
The benefits system is not well-targeted because many people, whether working or not, remain at risk of poverty. Significant improvements are needed to ensure equal access to benefits across both poorer and richer municipalities. At the same time, it is necessary to encourage individuals dependent on social assistance to rejoin the labour market, motivated by inclusive active labour market programmes and policies.
Linda Romele, EPC Ltd.