Germany has been experiencing a boom for years. But despite the good state of the economy and the favourable situation on the labour market, a new study has shown that income inequality in the federal republic has reached a record high. 

Disposable income has increased in Germany

As a buoyant economic situation allows the wages of middle- and upper-earners in Germany to steam ahead, a large proportion of the population is falling behind. That much is clear from a new distribution report by the Economic and Social Sciences Institute (WSI) of the Hans-Böckler foundation. Researchers analysed data from the long-running SOEP survey, which collects information about the income of thousands of households in Germany every year.

On the surface, the situation looks good: on average, the disposable income of households in Germany has increased significantly. “Disposable income” is defined as money that a household can actually spend, after taxes and social security have been deducted. Income is made up not only of salaries or company profits, but also social benefits such as child benefit, housing benefit or unemployment benefit. 

Income inequality rising in Germany

However, when the report’s researchers zoomed in further, they found that different population groups have benefited very differently from the increase in income. In particular, they used the Gini coefficient - a common measure of inequality - to demonstrate this. If the coefficient is at zero, all households in society have an equal income. If it is at 100 percent, all the income flows into a single household.

The data showed that between the years 1998 and 2005, the Gini coefficient in Germany rose sharply, from just under 25 percent to almost 29 percent. After 2005, in the aftermath of the financial crisis, it fell slightly and then stagnated. However, this latest batch of data shows that, since 2010, the coefficient has begun to rise significantly again. In 2016, it reached 29,5 percent - the highest level since reunification. 

Gap between rich and poor is getting bigger

According to WSI expert Dorothee Spannagel, this development does not have a great impact on the position of middle income households - but it does mean that the gap between the very poor and the very rich is getting bigger and bigger. 

“More and more income is concentrated in the very wealthy,” the report concludes. While high income groups profited from free-flowing capital and corporate profits, the 40 percent of households with the lowest incomes fell further behind. 

Poverty on the rise in Germany

Accordingly, poverty is becoming a real concern for a growing proportion of the population: the number of households that have less than 60 percent of the national average income, and are therefore considered “poor”, grew between 2010 and 2016 from 14,7 to 16,7 percent.

Moreover, the situation for households below the poverty line is getting more and more severe. The poverty gap (the amount that the average poor household would need to get above the 60 percent mark) has grown considerably in recent years. In 2005, the average shortfall was 2.873 euros per year. In 2016, it reached 3.452 euros - an increase of almost 30 percent. 

One of the strongest drivers of this is the increasing spread of wages in Germany, whereby salaries at the bottom do not increase as fast as those in the middle and top. The report found that the lowest 10 percent of earners actually had lower real incomes in 2016 than in 2005.