# **1. Introduction**

In June 2010, the European Council approved the Europe 2020 strategy, an economic growth and wellbeing improvement plan for the European Union (EU) in the ensuing decade. The strategy includes five interrelated headline targets to be achieved by the year 2020, encompassing employment, innovation, education, poverty and social inclusion, and climate/energy. An overarching goal of the Europe 2020 strategy is to reduce the number of poor and socially excluded people by 20 million, with national-level targets set by each of the EU Member States. The European Council used three measures of poverty and social exclusion: the at-risk-of-poverty rate, a measure of relative poverty defined as the percent of the population with incomes less than 60 percent of the national median income after social transfers; the index of severe material deprivation, a measure of the percent of people who cannot afford a number of necessities that are considered essential in order to live decent lives in Europe; and low work intensity, which is the percentage of people living in households in which adults worked less than 20 percent of their potential.

This paper sheds light on the impact of improving employment and education conditions on poverty and social exclusion indicators. More specifically, we answer the question: Will achieving the Europe 2020 national targets on employment and education lead countries to achieve the Europe 2020 poverty and social exclusion target with no other policy interventions? To answer this question, we present a simple partial equilibrium model flexible enough to be implemented in a number of different settings using widely available household survey data. The simulation model analyzes poverty and social exclusion outcomes in response to changes in education completion rates and employment rates. We apply the model in ten of the European Union’s New Member States (NMS group)—Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia—and evaluate the model’s performance through a validation exercise.<sup>2</sup> We expect the proposed method and its application to be of particular value to policy makers, officials at the European Commission, and other stakeholders in the European Union.

The key underlying assumption of this model is that the current structural relationships between poverty and social exclusion outcomes and education and employment indicators remain constant over time. As a result, changes in education and employment rates, such as those that would be expected should countries achieve the Europe 2020 targets, will have a predictable impact on poverty and social exclusion if the beneficiaries are identified. We use a propensity score technique to identify beneficiaries.

This paper complements and builds upon existing analytical studies, four of which are particularly relevant for our analysis and merit highlighting. The first of these studies is a 2009 European Commission report titled “Growth, jobs and social progress in the EU: A contribution to the evaluation of

> 2 Bulgaria and Romania joined the European Union in 2007, and the other countries joined in 2004. Two other countries that joined in 2004, Cyprus and Malta, are not included in this study because of the World Bank’s more limited engagement in those countries.

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