Rising Child Poverty in Europe: Mitigating the Scarring from the COVID-19 Pandemic

Child poverty increased dramatically during the COVID-19 pandemic. In 2020 alone, the number of children suffering from poverty in the EU increased by 19 percent, or close to 1 million. Left unaddressed, this would not only affect individuals’ life prospects and well-being but also have long-term economic implications. This paper argues that, to limit this potential scarring effect of the pandemic, policies should be deployed to reduce rapidly the number of children affected by poverty and mitigate the long-term impact of poverty. Reducing the number of children affected by poverty can be achieved by (i) labor policies and reforms that increase parental work and the labor income of poor parents and (ii) fiscal spending on family and children that can have a powerful and immediate impact. These policies need to be complemented by public investment in education and childcare, health, and housing to mitigate the long-term impact of child poverty.

During the COVID-19 pandemic, child poverty increased dramatically in the European Union. Child poverty declined in the aftermath of the Global Financial and Sovereign Debt Crises (GFC), but in 2020 alone, the number of children suffering from severe material deprivation increased by 19 percent (0.9 million) in the EU. Indirect evidence suggests that this number may have further increased in 2021 and the sharp increase in inflation in 2022 likely worsened the situation further as higher prices for energy and foodstuff increased difficulties of poor households to afford essential goods.

Large variations were observed among EU countries. In 2020, about half of EU countries experienced an increase in child poverty while the over half experienced a decline. The sharp increase in child poverty at the EU level was driven by the fact that the increase in child poverty was particularly dramatic in countries with a large children population. For example, the number of children affected by severe material deprivation almost tripled in Germany in 2020. The share of children suffering from poverty increased by 3.0 to 4.0 percentage points in Germany, Romania, and Spain. Together these three countries account for almost a third of EU children. The heterogeneity across EU countries in the impact of the pandemic on child points to the role of several factors such as differences in the severity of the economic shock of the pandemic, differences in policy response to the shock, differences in existing safety nets, and structural characteristics.

The increase in child poverty could be an important scarring effect of the pandemic. Pediatric and economic literatures highlight that poverty has severe consequences for children themself (negatively affecting skills developments, health, and educational achievement and, in turn, well-being and income prospects in adulthood) and for the economy as a whole, through high remediation costs and lower human capital accumulation with impact on productivity, potential growth, employability, inequality, and social mobility. The potential scarring effect of rising child poverty during the pandemic is compounded by the educational loss associated with the closure of school and childcare centers, which was more severe for poorest children.

The literature on the impact of poverty has important implications for policies aiming at limiting this scarring effect of the pandemic. First, policies should both aim at reducing as rapidly as possible the level of child poverty and at mitigating its long-term impact. Second, because the long-term consequences of child poverty increase with the duration of poverty, and because it is less costly to reduce poverty early than to implement remediation policies later on to mitigate its impact, the priority should be to reverse as soon as possible the increase in child poverty experienced during COVID. Third, as the impact of child poverty persists in adulthood, policies aiming at reducing the level of child poverty should be accompanied by policies mitigating its long-term impact. Fourth, the effort should be broad based. Child poverty is multidimensional and given the multiple and interrelated channels through which child poverty affects economic and personal prospects, policies cannot be limited to increasing parental income.

This paper’s analysis suggests that both labor and fiscal policies have a role to play in reducing child poverty. An econometric analysis, exploiting heterogeneity across EU countries highlights that difference in child poverty dynamics across EU countries since the GFC is strongly associated with structural features (such as income inequality, average household size, share of children with single parenthood), the economic cycle notably via its impact on labor market, and the generosity and design of social protection spending on family and children.

Policy makers could deploy policies that increase parental work and the labor income of poor parents. Reforms that reduce the obstacles to work notably by increasing working hours flexibility, promoting work-life balance, reducing gender biases in employment, and increasing access to childcare for low-income parents would facilitate combining work and parental responsibilities. This would foster an increase in working hours and in labor market participation and would be particularly impactful for single parents. Adjusting the design of the tax-benefit system could also increase the financial incentives for parents to work (more) and women’s labor force participation. These reforms would reduce child poverty, and, at the same time, help increase job stability that the literature shows mitigate the impact of child poverty. Policies could also be implemented to increase the net wage of poor parents. For example, a reduction in payroll taxes paid by employees at the low-end of the pay scale would increase low-earner parents net wage without increasing the labor cost for employers and thus avoid a potential reduction in low-skilled demand. A reduction in payroll tax paid by employers at the low end of the pay scale would increase job opportunities without reducing net wages.

While some of these policies and reforms may take time to implement and have an effect, social protection spending on family and children can have a powerful and immediate impact on child poverty. At a time when fiscal tightening is needed in most countries to reduce fiscal deficits and public debt inherited from the pandemic and to fight inflation, increasing social protection spending may be challenging. In navigating potential trade-offs, it is important to note that repeating the post-GFC approach of reducing social protection spending on family and children as part of a broader fiscal consolidation would delay the reduction in child poverty and increase the scarring effect of the pandemic. Moreover, the increased means-testing implemented to support the post-GFC fiscal consolidation does not appear to have increased the impact of spending on child poverty and, post-COVID-19, is unlikely to do so unless issues with the design and implementation of means-testing are addressed. Therefore, in the short-term, spending on family and children should be preserved or, when possible, increased, while initiating reforms that would increase their impact on child poverty such as: (i) introducing a universal child benefit taxed at a sufficiently progressive and broad-based personal income tax, or (ii) making cash transfers more conditional on caregivers taking action for the child’s wellbeing (e.g., school attendance, health check), and (iii) increasing the amount of transfers to specific groups that tend to be more affected by child poverty such as single parents or parents of younger children.

Limiting the scarring effect of the pandemic also calls for policies to mitigate the long-term impact of child poverty. Increasing parents’ income and employability can mitigate the scarring effect of child poverty but public investment is also needed. As EU initiatives increasingly help reduce the cost of childcare, they need to be complemented by investment to increase availability of childcare, notably in poor neighborhoods. This would help increase the relatively low usage of formal childcare services by poor parents and, thus, the policy impact on child poverty and women’s labor force participation. Investment in education is needed to increase the inclusion of poor children in schools and alleviate the education loss from the pandemic. Policies to improve parents’ skills would reinforce the impact of labor policies aiming at increasing poor parents employability and labor income. Given that child poverty is associated with poorer health, increased access to healthcare and medicine would have a positive long-term impact, including by magnifying the impact of investment in education and the impact of labor policies. Providing adequate nutrition to poor children and pregnant women has a rapid impact on children health thus efficiently mitigate the long-term effect of poverty. As poverty determines where and how people live, housing policies have an important role to play in reducing the impact of child poverty.