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Poverty and Inequality. Ali Muriel. What’s coming up. Why do we care about poverty and inequality? How do we measure them? What’s happened to poverty? What’s happened to inequality? Reconciling the trends Conclusions. Why do we care?.
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Poverty and Inequality Ali Muriel
What’s coming up • Why do we care about poverty and inequality? • How do we measure them? • What’s happened to poverty? • What’s happened to inequality? • Reconciling the trends • Conclusions
Why do we care? • “What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated.” – Tyler Cowen, 2007 • “An unequal society cannot help but be an unjust society. ” – Brad Delong, 2007
Why do we care? (2) • Equity & ‘Fairness’ • ‘Natural justice’ • Equality of opportunity • Intergenerational fairness • Efficiency • Impact on growth • Impact of deprivation on later life outcomes • Political economy
Poverty and inequality of what? • Look directly at material deprivation • Will form part of Government’s child poverty target • Is it a good proxy for overall living standards? • Living standards – income or consumption? • Permanent income against transitory income • Consumption better in principle • But… income data is more readily available
How do we measure income? • Same as the way Government does for HBAI • Use the annual Family Resources Survey • Income from all sources • Net disposable income • At household level • Equivalisation to to adjust for family size and composition
Features of income distribution • Highly skewed – log-normal distribution • 2/3 of individuals have incomes below mean • Long-tail: 2% of individuals have incomes above £1,000 • Poverty threshold is located near modal income
Measuring poverty (1) • Poverty is about needs & requirements • Many ways of defining these • 2 broad approaches: • Absolute Poverty • Exact definition difficult • Characterised by starvation, ill health… • Relative poverty • Living standards not commensurate with average living standards • Does relative poverty matter? • Political consensus emerging that it does
Measuring poverty (2) • How we measure relative poverty • Proportion of individuals living in households with incomes below x% of the median • Calculated both before and after housing costs • AHC more widely used • No account of depth of poverty • No account of length or persistency
Child Poverty: historic aim “Our historic aim will be for ours to be the first generation to end child poverty forever, and it will take a generation. It is a twenty year mission, but I believe it can be done” Tony Blair, March 1999
Child poverty targets • 2004/05 Target • Cut child poverty by ¼ compared with 1998/99 • Narrowly missed • 2010 Target • Cut child poverty by ½ compared with 1998/99 • Very challenging indeed • 2020 Target • Eradicate child poverty
The prospects for 2010 • “Running to stand still” • Cost £4.5 billion in new public expenditure to have 50/50 chance of achieving 2010 target • £28 billion for 2020 • Obviously, 2020 target will require much more than tax and benefit changes
Other measures of poverty • Brewer, Goodman and Leicester (2006) look at consumption poverty • Less dramatic falls than for income poverty • DWP publishes estimates of persistent poverty • Fell slightly between 1997 and 2003 (latest data)
Moving on to look at inequality? • How unequal is the income distribution? • Very subjective and political question • Let’s look at various measures of inequality • Graphical and summary statistics
The Gini Coefficient • Bounded between zero (complete equality) and one (complete inequality) • Treats deviations from equality the same regardless of where they occur within income distribution • Net income Gini is typically between 0.25 and 0.35 for developed countries
International Comparisons Source: OECD. Figures not directly comparable with those on other slides. Mid 80s Germany refers to West Germany.
Why did inequality rise in the 1980s? • Increased wage inequality • Skill-biased technological change • International trade • Decline of trade unions • Wage policies and wage councils removed • Demographic Change • Increase in single-adult households • “Work-rich” vs “Work-poor” households • Longer life expectancies
Why did inequality rise in the 1980s? • Regressive fiscal policy changes • Income tax cuts mainly benefited those on high incomes • But… estimated impact of tax and benefit reforms depend on the counter-factual • See Clark and Leicester (2004)
Why did it stop growing? • Increased supply of skilled workers dampened skills premium? • Increased demand for low-skilled workers? • Progressive fiscal policy since late 1990s? • No clear cut answer yet
Income changes by percentile group: 1996/97 – 2004/05 1979-1996/7
Explaining trends under Labour • Pattern of income growth between p10 and p90 will have reduced income inequality • Fast growth in the top decile and slow growth at the bottom increased income inequality • So… • Reduced relative poverty • Little change in overall income inequality
Summary • Relative poverty and inequality grew rapidly in the 1980s • Little change in inequality since early 1990s despite progressive tax and benefit reforms • Falls in relative poverty over past ten years
Reflecting on the trends • Tax and benefit changes have been important • Increasing inequality and stemming further rises • Structural changes are almost certainly the key • How much control does the Government have other these? • More than you think, but less than they want • e.g. education policy, encouraging single parents into work • Are pre-Thatcher levels of poverty and inequality unachievable? Or desirable?
