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Poverty and Inequality

Learn about measuring living standards, income distribution, causes of inequality, and recent poverty trends in the UK. Explore arguments for equity and efficiency while focusing on material well-being and relative poverty.

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Poverty and Inequality

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  1. Poverty and Inequality Ali Muriel

  2. Poverty & Inequality Measuring living standards Poverty Inequality

  3. Poor education Poor health Poor nutrition Unemployment Inadequate clothing Low income Inadequate housing Vulnerability Low status Lack of voice/power

  4. Why do we care...? Equity arguments: Natural justice Equality of opportunity Intergenerational fairness Lowest Highest Living Standards

  5. Why do we care...? Efficiency arguments: Impact on growth Impact of deprivation on later life outcomes Political economy Lowest Highest Living Standards

  6. What do we care about...? Income Consumption Health Happiness...? Lowest Highest Living Standards

  7. Focus on material well-being Education Consumption Income

  8. Income v Consumption Saving Borrowing Borrowing Income/Consumption Consumption Income Age

  9. Focus on material well-being Consumption Better in principle Harder to measure Largest UK survey around 7,000 households

  10. Focus on material well-being Income Transitory, not permanent income Easier to measure Largest UK survey over 25,000 households

  11. Income DWP’s main poverty/inequality measure Uses Family Resources Survey Income from all sources Net of taxes and benefits At household level

  12. How unequal are we in 2006/07?

  13. The UK income distribution in 2006/07 Two thirds of individuals have income below mean Median, £377 Mean, £463 2.7 million individuals with income above £1000 per week

  14. What do we care about (again)...? Absolute living standards: Food Clothing Heating/Electricity Could focus on those at the bottom Lowest Highest Living Standards

  15. What do we care about (again)...? Or the gap between top and bottom (“inequality”) Lowest Highest Living Standards

  16. What do we care about (again)...? Or between bottom and ‘average’ (“relative poverty”) Lowest Highest Living Standards

  17. Poverty

  18. Poverty Measurement Recent trends Child poverty

  19. Calculating the poverty line Find the middle person’s income Take (e.g.) 60% of that amount Lowest Lowest Highest Highest Income

  20. Calculating the poverty line Everyone with income below this level is deemed to be in (relative) poverty Lowest Lowest Highest Highest Income

  21. Calculating the poverty line Takes no account of: Depth of poverty Length of poverty Persistence of poverty Lowest Lowest Highest Highest Income

  22. Relative poverty is a moving target If average income grows faster than incomes at the bottom Then relative poverty will tend to increase Lowest Lowest Highest Highest Income

  23. Poverty Measurement Recent trends

  24. Poverty fell in Labour’s first two terms Source: HBAI Data (FES and FRS)

  25. ... But has risen more recently Source: HBAI Data (FES and FRS)

  26. Poverty Measurement Recent trends Child poverty

  27. Child Poverty: historic aim Our historic aim will be for ours to be the first generation to end child poverty forever. It is a twenty year mission, but I believe it can be done

  28. Child poverty target Target: Cut by a quarter by 2004/05 Target: Cut by half by 2010/11

  29. 2010 Target looks challenging Projection: 0.5 million away from target in 2010 £2.8bn to have 50/50 chance of hitting target

  30. 2010 Target looks challenging £28bn to hit 2020 target through taxes/benefits alone

  31. Inequality

  32. Inequality Measurement Recent trends Causes

  33. Simple inequality measures Find the income of the person 10% from the top Divide this by the income of person 10% from the bottom Result is the 90/10 ratio of inequality Lowest Highest Income

  34. Simple inequality measures 90/50 ratio - ‘upper tail’ inequality 50/10 ratio - ‘lower tail’ inequality Lowest Highest Income

  35. Simple inequality measures Source: HBAI Data (FES and FRS)

  36. Simple inequality measures Measures discussed so far only use two points of the income distribution “Throwing away information” More ‘complete’ measure - use information from the whole distribution Lowest Highest Income

  37. Calculating the Gini Joining the points creates a ‘Lorenz curve’

  38. Calculating the Gini A = G + A B A Perfect equality B

  39. The Gini coefficient A = G + A B Bounded between zero and one Zero = complete equality One = ‘total’ inequality Typically between 0.25 and 0.35 for developed countries

  40. TheGiniCoefficient:1979–2006/07 (GB) Source: HBAI data

  41. International Comparisons Source: OECD. Figures not directly comparable with those on other slides. Mid 80s Germany refers to West Germany.

  42. 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

  43. 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)

  44. 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

  45. A puzzle • On most measures inequality is as high as it was when Labour came to power • ...if not slightly higher • Despite progressive tax & benefit changes • Tax credits, etc. • Despite the decline in relative poverty • ... What’s going on?

  46. Income changes by percentile group: 1996/97 – 2006/07 (GB) Bulk of distribution: bottom catching up with top Reducesinequality Lowers relative poverty Source: HBAI data

  47. Income changes by percentile group: 1996/97 – 2006/07 (GB) Lower tail of distribution: ‘falling behind’? Source: HBAI data

  48. Income changes by percentile group: 1996/97 – 2006/07 (GB) Upper tail: ‘racing away’ Lower tail of distribution: ‘falling behind’? Source: HBAI data

  49. Income changes by percentile group: 1996/97 – 2006/07 (GB) Counteracts inequality reduction in bulk of distribution Overall – two cancel out (Gini coefficient largely unchanged) Source: HBAI data

  50. Income changes by percentile group: 1996/97 – 2006/07 (GB) 1979-1996/7 Source: HBAI data

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