Economic Insecurity, Inequality and Redistribution in Rich Countries

We know that economic well-being inequalities in Spain are high compared to other European Union (EU) countries, and that this lack of social cohesion negatively affects our quality of life. However, it is crucial to understand that people’s perceived well-being does not depend solely on household income and accumulated wealth, but also on how they perceive possible—and plausible—future risks and uncertainties. As both Osberg (1998) in his article Economic Insecurity and Hacker (2006) in his book The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream argue, when assessing our quality of life, individuals take into account not only their current economic situation but also their (most plausible) expectations about the future.

All this suggests that, to analyse human well-being, beyond studying income and wealth gaps among individuals, we should also consider a much broader concept that includes an approximation of what could be called economic insecurity. This concept can be defined as the concern about future economic problems and the inability to recover from them due to a lack of resources to cope. It is increasingly emerging as one of the main threats to the cohesion of our societies, especially after the Great Recession and the COVID-19 crisis. Yet, so far, it has received far less attention from social scientists than economic inequality and poverty.

Recent evidence shows that rising economic insecurity has negative effects on dimensions of human well-being related to both mental and physical health, and that it influences crucial individual decisions throughout life—such as leaving the parental home, fertility, labour market participation, and investment in one’s own or one’s children’s education. All these individual choices ultimately shape the long-term progress and development of our societies. Both the Great Recession and the COVID-19 crisis have amplified the importance of economic insecurity by worsening the already fragile financial expectations of large segments of the population in many rich countries. The global decline in labour income, together with rising household debt, has significantly increased people’s concerns about future economic difficulties, prompting scholars to seek new and comprehensive methods to assess this growing phenomenon. However, since economic insecurity is linked to expectations and is essentially a forward-looking concept, there is still no academic consensus on how to measure it. The fact that people are increasingly worried about their future financial situation highlights the need to identify adequate ways to quantify it and, more importantly, to study its relationship with other well-known social phenomena such as poverty, inequality, and material deprivation.

So far, empirical analyses of economic insecurity rely on diverse approaches and methodologies, and results are available for only a limited number of countries. What seems clear is that economic insecurity is a multidimensional concept that involves not only the measurement of future states but also how the risk of potential economic loss is perceived subjectively. Although the incidence of economic insecurity clearly decreases along the income distribution, empirical results suggest that insecurity is not merely an additional dimension of poverty; it also affects many individuals who are classified as non-poor. This means that even if poverty is positively correlated with economic insecurity, we need to go beyond current measures of poverty and material deprivation to fully assess well-being.

Some authors emphasise that insecurity is closely linked to the business cycle: during recessions, the number of people experiencing economic insecurity rises, while it slightly decreases during recoveries. When analysing the relationship between economic insecurity and income levels, it becomes clear that those with fewer resources suffer more from this phenomenon. More importantly, in countries where economic insecurity is more widespread, a significant proportion of affected individuals belong to the middle classes. Therefore, economic insecurity is not a problem exclusive to those at risk of poverty—it also extends to households with middle-income levels.

A key conceptual difference between insecurity and poverty is that the former measures the psychological anxiety caused by risk, while the latter focuses on material deprivation. Thus, a poor person with a stable future may not be economically insecure, whereas someone with sufficient income to avoid poverty but facing a high risk of losing resources may be highly insecure. At the same time, all the negative consequences of increasing economic insecurity can threaten poverty reduction in both the short and long run. On the one hand, insecurity is associated with poorer health and lower educational attainment for future generations, which in turn are linked to lower living standards. On the other hand, poor individuals who believe they are likely to face economic difficulties in the future may be less willing to take risks that could help them escape poverty, keeping them trapped in it. Moreover, risk is not evenly distributed: low-income individuals are typically more affected by economic shocks and have fewer mechanisms to protect themselves from insecurity.

Insecurity and public policies

Although few studies have addressed this issue, some evidence allows us to conclude that the level of economic insecurity in Spain is among the highest in Europe, whether analysing the objective risk of future economic problems or using subjective indicators. In a recent study on the European Union for the period 2009–2018, Cantó and Romaguera-de-la-Cruz (2023) found that Spain ranks near the top, well above the EU-27 average: in 2018, 21.6% of Spaniards experienced economic insecurity, compared with an average of 16% across Europe. Spain is similar to countries such as Italy, Estonia, or Croatia, all with insecurity levels above 20%, and is only surpassed by Greece, where more than one in three people were economically insecure.

In the European context, Nordic countries exhibit the highest levels of economic security, followed by the Anglo-Saxon countries. This result suggests that, as with inequality and poverty, economic insecurity is influenced by different welfare models. Consequently, if public institutions fail to update tax and benefit systems to mitigate the growing risks individuals face, widespread distrust in political systems and leaders could emerge, along with increased support for extreme political positions. In this regard, empirical evidence points to a positive relationship between economic insecurity and the growing support for far-right parties, contributing to political polarisation and social discontent in developed countries.

Although the modern welfare state is often perceived primarily as a mechanism for redistributing resources from the rich to the poor—“in a Robin Hood way”—one of its key functions is to act as an insurance mechanism, stabilising household income in times of recurrent crises. Public policies provide security by reducing or transferring risks and by reallocating the costs of adverse events from one economic agent to another. Therefore, tax and benefit systems can be understood as instruments of redistribution over individuals’ lifetimes: paying higher taxes in prosperous times legitimises citizens’ right to receive benefits in periods of economic hardship. In this sense, progressive taxation and adequate social benefits can greatly reduce citizens’ anxiety stemming from negative economic expectations, as they know that the welfare system will act as a safety net if the economic risks they fear eventually materialise.

References

• Bossert, W., A. Clark, D’Ambrosio, C. and Lepinteur, A. (2022), Economic insecurity and political preferences, Oxford Economic Papers, gpac037, 1–26.

• Calvo, C. (2018), Vulnerability to poverty: Theoretical approaches, in C. D’Ambrosio, (ed.), Handbook of Research on Economic and Social Well-being, pp. 372–383, Edward Elgar Publishing, Cheltenham, UK and Northampton, MA, USA.

• Cantó, O. and Romaguera-de-la-Cruz, M. (2023), Economic insecurity and poverty, Chapter in Silber, J. (ed.) Research Handbook on Measuring Poverty and Deprivation, Edward Elgar Publishing. Chapter 49.

• Hacker, J. S. (2006), The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream. Oxford University Press, New York.

• Osberg, L. (1998), Economic insecurity, Social Policy Research Centre, University of New South Wales, Sydney, Australia.

• Stiglitz, J. E., Sen, A. and Fitoussi, J. P. (2009), Report by the Commission on the Measurement of Economic Performance and Social Progress, Sciences Po, Paris.