Indicators for social inclusion in the European Union: How responsive are they to macro-level changes?

Two weeks before the Euro was introduced into circulation as the common currency in twelve Member States (on 1 st January 2002) the European Union adopted a set of commonly agreed indicators for social inclusion. Among them are some income-based indicators, including poverty measures based on percentages of median household incomes. It is to be hoped that Member States can devise policies that will reduce poverty and social exclusion and that these reductions will be reflected in improvements in the chosen indicators. However, the positive effects of policy initiatives may be mitigated by other, independent changes in the economy or society. These “macro” changes may inhibit the movement of the indicator in the intended direction or may indeed result in a shift in an adverse direction. There is no reason to believe that the sensitivity of indicators is the same across countries (or across indicators). If incomebased indicators are to be used as generally accepted measures of the outcomes of policy, then it is important that the responsiveness of the indicators to other influences is fully understood. Clearly the relationships between macro- and micro- levels are complex and this paper uses a range of simple, simulated changes to illustrate possible consequences of wider changes. We use the EU-wide tax-benefit model, EUROMOD to establish baseline indicators using simulated incomes for 14 of the Member States and then explore the sensitivity of these indicators to (a) an increase in unemployment, (b) failure to index social and fiscal policies for inflation or real income growth and (c) an increase in earnings inequality.