Selected Issues

Abstract

Selected Issues

Social Inequality in Lithuania After the Global Financial Crisis: Evidence from Household Survey Data1

  • The significant gaps between urban and rural areas, pensioners and working-age population, and across educational levels have been persistent throughout the crisis and the recovery. The gap can be narrowed by raising educational achievements.

  • The recovery has been uneven. The purchasing power of rural population has not recovered to its pre-crisis level, contributing to the widening urban-rural gap. Pensioners had some cushion during the crisis but have not benefited from the recovery. As educational achievement increases across the population, those with less education are increasingly at risk of poverty.

  • Changes in the family structure appear persistent while setbacks in employment have mostly rebounded. Importantly, health and education expenditure were preserved during the crisis.

A. Introduction

1. The financial crisis in 2008–09 was short but dramatic. Lithuania experienced a collapse of credit and demand, and a dramatic swing in the current account, a surge in unemployment and a drop in real earnings. The slowdown started earlier in Estonia and Latvia while in Lithuania, large pension and public-sector wage increases were granted as late as mid-2008. GDP hit a record drop of 13 percent in the first quarter of 2009. The recession lasted around two years with cumulative output loss of around 28 percent.

2. The impact of the crisis and the recovery often differ across households. Therefore, micro-level data such as Lithuania’s Household Budget Survey could provide greater insight. The survey in Lithuania was conducted in early 2008 before the crisis, in 2012 during the recovery, and in 2016 when the output gap was closing. The survey covers more than 6,000 households in 2008 and 2012 and around 3400 households in 2016 from different regions, age groups, and income brackets and allows for differentiating the impact for urban versus rural households, households with different sizes, educational achievements, type of employment etc.

3. A short-lived crisis can have a long-term impact. There are a few channels for this: (i) workers who lose jobs may not be able to find employment again; (ii) assets that are liquidated to smooth consumption may not be regained; and (iii) a reduction in investment in human capital such as health or education spending can reduce long-term productivity, resulting in a long-run poverty trap. However, in the case of Lithuania, these channels have been minimized.

B. Inequality in Lithuania

5. The urban-rural gap in Lithuania is persistent. In 2008, the unconditional median monthly expenditures of a rural household were only 90 percent of an urban household. The gap continued to widen both in euro terms and as a percentage of urban household expenditure throughout the time horizon (see figure 1).2 Controlling for additional factors, such as household sizes, monthly real expenditure in rural areas were lower by around 96 euros in constant prices, or by about 20 percent of the median urban household expenditure (see Table 1). The gap remained largely unchanged between 2008 and 2012 but widened again in 2016. Controlling for educational level of the household heads reduces the gap in euro terms by between 50 and 60 percent while controlling for employment type only reduces the gap by around 12 percent (see regression (5) in Table 1).

Figure 1.
Figure 1.

Lithuania: Monthly Expenditure per Household

(In 2010 constant prices)

Citation: IMF Staff Country Reports 2018, 186; 10.5089/9781484363546.002.A003

Source: IMT Staff Calculations, Lithuania’s Household Budget Survey
Table 1.

Lithuania: Urban Rural Gap Among Households

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Robust standard errors in parentheses+ p<0.10, ** p<0.05, *** p<0.01

6. Education is an equalizer between households in rural and urban areas, explaining more than 50 percent of the gap. In fact, having a degree in higher education reduces the gap more than completing any other level of education. Additionally, returns to education have increased (see Figure 2). Compared to a household whose head only has a primary education, the payoff of getting a degree in higher education is the highest where the purchasing power could increase by more than 2000 euros per year. If the payoff is normalized by the number of school years, an upper-secondary degree (by completing the 11th and 12th years of schooling) and a “matura” exam would offer the highest payoff. Even after controlling for household size, location, age group, and even type of employment, the gap in household budget across educational level, especially between higher education and post-secondary education, remains.

Figure 2.
Figure 2.

Lithuania: Additional Annual Household Expenditure for Degrees beyond Primary Education

Citation: IMF Staff Country Reports 2018, 186; 10.5089/9781484363546.002.A003

Figure 3.
Figure 3.

Lithuania: Monthly Expenditure per Household

(In 2010 constant prices)

Citation: IMF Staff Country Reports 2018, 186; 10.5089/9781484363546.002.A003

Figure 4.
Figure 4.

Lithuania: Home-ownership Rate

(In percent of surveyed sample)

Citation: IMF Staff Country Reports 2018, 186; 10.5089/9781484363546.002.A003

Sources: IMF Staff Calculations, Lithuania Household Budget Survey
Table 2.

Lithuania: Educational Gap

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Robust standard errors in parentheses+ p<0.1, ** p<0.05, *** p<0.01

7. Household expenditures decline as workers retire, emphasizing the social challenges of the pension system where more than 40 percent of pensioners are at risk of poverty (see Table 4). Compared to non-pensioners, households of pensioners spend on average around 140 euros less every month (see regression (1) in Table 3). All employment categories seem to have less spending power than self-employed households, who are often entrepreneurs. Compared to the self-employed, households of pensioners spend on average between 280 and 370 euros less per month in constant 2010 prices (see Table 3). It is difficult to account for the differences in the consumption baskets between the old and the young just from the survey data. However, it is possible that when the employees retire, savings from some categories such as transportation or attires may be offset by increases in medical expenses. While pensioners are very likely to own a home and thus, able to cut down on rental expenses, the overall home ownership in Lithuania is also relatively high (see Figure 4). Furthermore, most home-owners in Lithuania do not have mortgage payments, unlike in other advanced economies where the mortgage payment explains a large part of expenditure gap between the old and the young. In addition, despite the accumulated wealth in the form of real estate, pensioners still reduce their spending significantly, suggesting limited mechanisms for consumption smoothing over the life cycle. Again, educational outcome is key in lowering the gap for pensioner.

Table 3.

Lithuania: Gap Between Pensioners and Non-pensioners

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Excluding observations for “Others” type of employment in the whole sample.

Except in regression (1), results are compared to self-employed individuals. Robust standard errors in parentheses.

+ p<0.1, ** p<0.05, *** p<0.01.
Table 4.

Lithuania: Characteristics of all Households Interviewed in Each Survey

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Note: Highlighted cells signify that the difference between this survey and the previous survey is significant at at least 10 percent level.

Defined as below 60 percent of median monthly expenditure

8. The post-crisis recovery was uneven (see Figure 5). By looking at the interaction terms between years and certain household groups, we can compute the marginal impact by groups. Rural population have not benefited equally from the recovery. For example, whatever the amount of spending was cut due to the crisis by urban households, rural households of the same characteristics had to further cut spending by about 40 euros per month (see Figure 5a). By 2016, the gap had widened and households with the same characteristics in rural areas spent even less, controlling for the overall recovery. By 2016, purchasing power of rural households also did not reach their previous level in 2008 whereas that of urban households exceed it by around 3 percent. Meanwhile, for pensioners, because the benefits are linked to previous contributions before the crisis, the spending gap narrowed in 2012 while employment income was severely affected by the financial crisis (see Figure 5b). Although non-pensioners absorbed a large income shock, they still fared better than pensioners. However, by 2016, pensioners on average were spending around 140 euros less per month. The young and those with higher education weathered the crisis better (see Figure 5c and 5d). As usual, having a college degree or above could provide a significant cushion during and after the financial crisis. For those below 30 years old, the small positive gap in spending in 2008 has mostly been erased and their expenditures are now at the population average.

Figure 5.
Figure 5.

Lithuania: Marginal Effect from the Interaction between Year and Household Characteristics

Citation: IMF Staff Country Reports 2018, 186; 10.5089/9781484363546.002.A003

C. The Lasting Impact of the Crisis

9. Lithuania’s population structure may have changed permanently after 2008. Household characteristics in the sample differed significantly between 2008 and 2012 but remained largely unchanged between 2012 and 2016 (see Table 4). Migration from rural to urban areas continued into 2016 although the magnitude was not comparable to the post-crisis years. Household size has become smaller with more one-person households or households without children. For households with children, having one child has become more popular as having more than one child seems to impose significantly more adjustments in per capita expenditure within the household (see Figure 6). While household expenditure dropped for everyone during the crisis, the impact was smaller for families with 3 or more children. The reasons could include their modest budget even before the crisis and the child benefits for low-income families with more children.

Figure 6.
Figure 6.

Lithuania: Household Expenditure and Number of Children

Citation: IMF Staff Country Reports 2018, 186; 10.5089/9781484363546.002.A003

10. Other household characteristics are less affected by the crisis. Achievement in education has been broad-based. There was a significant reduction in number of household whose heads only have primary or secondary education, which partially explained the reduction in the marginal benefits of lower secondary education (see Figure 2). Employment shift proved more temporary (see Figure 7). While more people moved from being employed into retirement during the crisis, the trend has somewhat reversed. However, many of those who retired during the crisis, especially before the statutory retirement age, have lost significant future pension benefits.

Figure 7.
Figure 7.

Lithuania: Employment has Recovered to Pre-Crisis Level, Similar to Neighboring Countries

Citation: IMF Staff Country Reports 2018, 186; 10.5089/9781484363546.002.A003

11. There is no evidence of other channels, such as health and educational spending, that would result in a more persistent impact. Often, because of a financial crisis, households often cut down on expenditure, including on health and education expenditure that could have a long-term impact. However, in the case of Lithuania, there is virtually no adjustments in terms of health and educational expenditure, suggesting some flexibility in household budget to be able to preserve these spending priorities. Instead, the main categories that were cut were consumer goods.

D. Conclusion

12. There are persistent gaps in household expenditure across population groups. The financial crisis has exacerbated these gaps for rural areas, pensioners, and households with lower education achievement. One key equalizing factor is via higher level of education. Among the different levels of education, investing in completing the post-secondary degree and passing the “matura” exam would yield the highest annual return. Importantly, spending on health and education did not suffer during and after the financial crisis.

1

Prepared by Vina Nguyen (EUR).

2

Without data on price level for different regions going back to 2008, the average gap can overstate the real living standards between urban and rural areas. At the same time, prices in some smaller cities have recently increased faster than in the main cities.

Republic of Lithuania: Selected Issues
Author: International Monetary Fund. European Dept.
  • View in gallery

    Lithuania: Monthly Expenditure per Household

    (In 2010 constant prices)

  • View in gallery

    Lithuania: Additional Annual Household Expenditure for Degrees beyond Primary Education

  • View in gallery

    Lithuania: Monthly Expenditure per Household

    (In 2010 constant prices)

  • View in gallery

    Lithuania: Home-ownership Rate

    (In percent of surveyed sample)

  • View in gallery

    Lithuania: Marginal Effect from the Interaction between Year and Household Characteristics

  • View in gallery

    Lithuania: Household Expenditure and Number of Children

  • View in gallery

    Lithuania: Employment has Recovered to Pre-Crisis Level, Similar to Neighboring Countries