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, Towards a New Social Contract: Taking on Distributional Tensions in Europe and Central Asia.
The report calls for a fundamental rethinking 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 the security these incomes once provided. In some EU member states, the daily income level needed to avoid slipping into poverty has doubled. In Romania, for example, this level has increased from USD 14 before the financial crisis, to USD 19 in 2013, meaning that households now need more income to overcome the vulnerability of falling into poverty. At the same time, more young people are in lower quality jobs compared to older generations.
“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 Romania, similarly to other countries in Southern and Western Europe, a process of job polarization has led to an increase in the share of wage employment in non-routine, cognitive, task-intensive occupations – typically employing high skilled individuals, and non-routine, manual, task-intensive occupations – typically employing low skilled individuals. However, routine, task-intensive occupations, the most prone to automatization, have seen their share in wage employment fall from 48% in 1997 to 38% in 2013. This decline may generate a sense of uneasiness among the middle class, as these are typically middle-skilled occupations.
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.
At the same time, inequality across regions has been growing in Romania. When comparing the welfare gap between urban and rural areas, Romania has the third largest gap in the region, behind just Georgia and Tajikistan. Spatial gaps also exist in income, consumption and other, relevant outcomes, such as Program for International Student Assessment (PISA) test scores. In fact, in 2015, the difference in average PISA test scores between urban and rural areas in Romania was equal to more than one year of schooling.
Furthermore, 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 Romania, the index of inequality of opportunity in access to tertiary education for those born in the 1980s is more than 40% higher than 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.