IFS
Poverty and Inequality
Luke Sibieta
What’s coming up
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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
© Institute for Fiscal Studies, 2005
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
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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
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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?
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Living standards – income or consumption?
Permanent income against transitory income
Consumption better in principle
But… income data is more readily available
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How do we measure income?
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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 account for differential needs
– e.g. A single individual needs 2/3 of the income of
childless couple to achieve same standard of living
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The income distribution 2004/05
Number of individuals (millions)
2.0
Poverty
Threshold £210
Median, £349
Mean, £427
1.5
1.0
0.5
0.0
0
100
200
300
400
500
600
700
£ per week, 2004/05 prices
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800
900
1,000
1,100
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
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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
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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
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Income poverty falls under Labour
30%
25%
20%
15%
10%
5%
0%
1979
1984
1989
60% AHC Median
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1994
1999
60% BHC Median
2004
All possible poverty thresholds BHC
Percentage of
population
50%
40%
30%
20%
10%
0%
0%
20%
40%
60%
80%
Poverty threshold: percentage of median
1996/97
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2004/05
100%
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
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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
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Financial year
Actual
Current policy baseline
Required path
Long term fiscal forecast baseline, no demographic changes
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20–21
19–20
18–19
17–18
16–17
15–16
14–15
13–14
12–13
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
35
30
25
20
15
10
5
0
99–00
OECD poverty rate, %
Child poverty in 2010 and 2020
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
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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)
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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
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The Lorenz Curve and Gini
Coefficient
100%
50%
O
A
0%
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50%
Cumulative population
0%
100%
Cumulative household income
B
The Lorenz Curve and Gini
Coefficient
G
100%



50%

O
A
0%
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50%
Cumulative population
0%
100%
Cumulative household income
B
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
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The Gini Coefficient:1979–2004/05
Gini Coefficient
0.4
0.3
Thatcher
Major
Blair
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-0
5
20
04
-0
3
20
02
-0
1
20
00
-9
9
19
98
-9
7
96
19
19
93
-9
4
91
19
89
19
87
19
85
19
83
19
81
19
19
79
0.2
Gini – Mid 80s
Gini – 2000
Source: OECD. Figures not directly comparable with those on other slides. Mid 80s
Germany refers to West Germany.
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O
EC
D
ex
ic
o
M
US
A
Ire
la
nd
tra
lia
Au
s
Ita
ly
UK
ad
a
Ca
n
Ja
pa
n
an
ce
Fr
G
er
m
an
y
50
45
40
35
30
25
20
15
10
Sw
ed
en
Gini Coefficient
International Comparisons
Why did inequality rise in the 1980s?
• Increased wage inequality
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–
–
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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
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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)
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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
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Different measures of income
inequality 1996/97 – 2004/05
Relative to 1996/97
1.2
1.15
1.1
1.05
1
0.95
1996/97
1997/98
1998/99
Gini
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1999/00
MLD
2000/01
2001/02
Atkinson
2002/03
90/10
2003/04
2004/05
Income changes by percentile
group: 1996/97 – 2004/05
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
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50
60
70
80
90
Income changes by percentile
group: 1996/97 – 2004/05
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
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50
60
70
80
90
Income changes by percentile
group: 1996/97 – 2004/05
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
© Institute for Fiscal Studies, 2005
50
60
70
80
90
Income changes by percentile
group: 1996/97 – 2004/05
Average annual income gain (%)
5
1979-1996/7
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
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50
60
70
80
90
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
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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
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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?
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