Inequality and Living Standards

1. Inequality and Living Standards Andrew Shephard andrew_s@ifs.org.uk

2. Motivation • Why do we care about inequality or poverty? • How do we measure living standards? • Will focus on income as main measure • Alternatives?

3. Income • Gross or net income? • Whose income? • Consider household income. • Housing Costs? • Consider both BHC and AHC income. • Different needs? • Equivalisation of income

4. Income equivalisation • McClements Scale (1977) • Compare all incomes to a childless couple • Complete resource pooling • Income needed to attain same living standard as childless couple on £20,000. • Single person, £12,200 (61%). • Lone parent with child aged 8, £16,800 (84%). • Three students sharing house, £29,800 (149%).

5. McClements Equivalence Scale • Add up the different contributions to calculate the scale: • childless couple • 0.61 + 0.39 = 1 • lone parent (child aged 8) • 0.61 + 0.23 = 0.84

6. The Income Distribution 2001/02: Before Housing Costs

7. The Income Distribution 2001/02 • Features of distribution • Distribution is highly skewed • Around two-thirds of individuals have incomes below mean • Long tail: 2% of individuals have incomes above three times the average • Where do you fit in? • www.ifs.org.uk/wheredoyoufitin

8. The Lorenz Curve

9. The Lorenz Curve: UK Data

10. The Lorenz Curve and Gini Coefficient

11. The Gini Coefficient • Bounded between zero (complete equality) and one (complete inequality). • Treats deviations from equality the same regardless of where the occur within income distribution. • Typically between 0.25 and 0.35 for developed countries.

12. The Gini Coefficient 1961 – 2001/02

13. Inequality under Labour • Since Labour came to power inequality on this measure has continued to increase. • And since 1998/99, (BHC income) inequality is higher than at any point since 1961. • Increase in inequality has occurred despite redistribution of Government. • Examine entire distribution to see how income growth varies.

14. Income Growth: 1996/97 – 2001/02

15. Income Growth: 1979 - 1990

16. Effect of tax and benefit reforms • What effect have recent tax and benefit changes had on inequality? • Consider what would have happened to incomes had the tax and benefit remained unchanged. • Use simulation techniques to calculate income series under uprated April 1996 system.

17. Simulated and Actual Gini

18. Simulated and Actual Gini • In 2000/01 and 2001/02 there is a departure between the actual Gini and that simulated under April 96 system. • Tax and benefit changes therefore worked to reduce extent of inequality. • Suggests the underlying distribution has become more unequal.

19. The Labour Market • Earnings inequality • Remain the most important source of income • Also has implication for future income (pensions) • Understanding the labour market is essential • Over the 1980s and 1990s the skills premium (ratio of skilled to unskilled wage) has increased. • Occurred at the same time relative supply of skilled labour has increased

20. The Skills Premium • Stolper-Samuelson Theorem • Increased trade with LDCs has increased the skills premium. • Problems • No evidence that premium has been reduced in LDCs. • Relative price of skilled vs unskilled intensive goods unchanged. • Is trade with LDCs important enough? • Alternative: Skills biased technological change • Technological advanced biased in favour of more highly skilled workers.

21. Changing Participation • Decrease in male participation mainly in households where there are no other workers. • Increased female participation among those with working partner. • Leads to increased polarisation between two-earner and no-earner households. • But no earner households decreased in recent years.

22. Changing Participation

23. Other Institutional Factors • Wages policies and Wages Councils abolished • Equal pay act • Decline in role of trade unions • National Minimum Wage

24. International Comparisons