Comment 16 for bug 1324373

> It needs to be moved to a directory that the greeter has permission to read.

For anyone else struggling with this, if you choose to encrypt your home folder (an option available in the default installer), you can't select a wallpaper stored in your home folder (such as in the Pictures folder) and expect the login screen to be able to display it. Best to store custom wallpapers in /usr/share/backgrounds with 644 permissions. You'll need root permissions to save files in this directory, but if you don't know how to do that, a simply elegant distro like elemenaryOS just isn't for you.