The social trilemma in practice: Fiscal costs of balancing poverty reduction and work incentives in EU-27

The 2022 Council Recommendation on adequate minimum income and the EU Minimum Wage Directive form two core elements of the current EU social policy framework. Both instruments aim to improve the situation of low-income households, but they operate through different mechanisms. Minimum income schemes raise the income of people outside employment, while statutory minimum wages affect earnings at the bottom of the wage distribution. Increasing income support for those out of work, however, reduces the financial gain from taking up employment. This creates the social trilemma faced by policymakers in modern welfare states: to simultaneously provide adequate minimum income support, maintain sufficient financial incentives for people to find a job, and keep the government budget in check (Cantillon et al., 2019).

This paper quantifies the fiscal cost of eliminating poverty while preserving work incentives across EU-27, and assesses whether this can be achieved within existing EU policy frameworks. We frame the problem as a constrained policy question: what level of public spending is required to achieve zero poverty while keeping participation tax rates (PTRs) not higher than their baseline level? We first establish baseline poverty rates, poverty gaps, and PTRs for transitions from inactivity into full-time minimum wage employment across member states. We then simulate raising minimum income support to poverty thresholds. These reforms eliminate measured poverty by construction but lead to substantial declines in work incentives. In many countries, PTRs for social assistance recipients increase substantially: when moving into work, the rise in disposable income is much smaller than the gross earning because benefits are withdrawn and taxes and/or contribution apply.

Next, we test whether implementing the Minimum Wage Directive can compensate for this loss in work incentives. We operationalise the Directive benchmark using the reference value of 60% of the national gross median wage. We find that Directive-level minimum wages are not enough to restore baseline PTRs in all of the member states. Directive-consistent wage increases prove insufficient, and labour subsidies with additional fiscal costs – or gross minimum wage increases with additional costs for employers – would be required to bring PTRs back to their initial levels. For each reform scenario, we report the associated fiscal impact and additional labour cost for employer.

We employ the EUROMOD microsimulation model with EU-SILC data covering all 27 EU member states for policy year 2023, complemented by hypothetical household data based on the Minimum Income Protection Indicators for transparent illustration of mechanisms. We examine multiple poverty thresholds including relative measures at 40%, 50%, and 60% of median income, as well as absolute budget-based thresholds from ABSPO (Menyhert et al., 2025).

The results show that poverty eradication with preserved work incentives is not feasible within the existing social policy framework. The paper provides quantitative benchmarks for the coordinated implementation of EU minimum income and minimum wage policies, and highlights the structural constraints faced by different welfare systems.

References: Cantillon, B., Goedemé, T. and Hills, J. (eds) (2019) Decent incomes for all: Improving policies in Europe, Oxford: Oxford University Press. Menyhert, B., Cseres-Gergely, Zs., Kvedaras, V., Mina, B., Pericoli, F. and Zec, S. 2025. Measuring and Monitoring Absolute Poverty in the European Union. Palgrave Macmillan.