Poverty and Inequality in the UK
Rob Joyce
© Institute for Fiscal Studies
Overview
1. Introduction
2. Poverty
i.
ii.
Definitions
What‟s been happening over the last 3 decades, and why?
3. Inequality
i.
ii.
Definitions
What‟s been happening over the last 3 decades, and why?
4. Summary and final thoughts
© Institute for Fiscal Studies
Disclaimer
 This talk is narrow.
 Clearly there are lots of ways to think about well-being, and
many have little/nothing to do with material living standards.
 But we focus on things we can count!
 Even after imposing that restriction, choices remain…
© Institute for Fiscal Studies
Income
 Transitory, not reliable
measure of material living
standards in short run
Consumption
 Conceptually better measure
of living standards
 Easier to measure
 Difficult/expensive to
measure
 Largest UK survey ~25,000
households
 Largest UK survey ~ 7,000
households
If interested in link between consumption inequality and income
inequality, see Blundell, Pistaferri and Preston (2008) and
Blundell and Preston (1998)
© Institute for Fiscal Studies
So we will focus on income...
 Data from annual Households Below Average Income
series (HBAI), based on Family Resources Survey
(FRS)
 Incomes are measured:
• Net (private incomes + benefits/tax credits – taxes)
• At household level
• Equivalised (accounting for different family structures)
• Both before and after subtracting housing costs (BHC and
AHC incomes)
© Institute for Fiscal Studies
Number of individuals (millions)
UK income distribution in 2008/09 (1st full
financial year since start of recession)
1.5
Median = £407
Only 1/3 of
individuals
have income
Mean = £507
1.2 million
individuals
with income
> £1,500 per
week
> mean
1.0
0.5
0.0
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
Income, £ per week, 2008/09 prices
Source: HBAI data
© Institute for Fiscal Studies
1300
1400 1500+
POVERTY
© Institute for Fiscal Studies
What exactly do we care about?
Could focus on those at the
bottom in isolation
Absolute living standards:
Food/nutrition
Clothing
Heating/electricity
Lowest
Highest
Income
© Institute for Fiscal Studies
What exactly do we care about?
Relative poverty
Or the gap between
bottom and „average‟
A „kind‟ of inequality
Lowest
Highest
Income
© Institute for Fiscal Studies
Absolute vs relative poverty
 Absolute poverty ≠ destitution!
 Key difference between absolute/relative poverty: what
happens to poverty line over time
 Absolute poverty line constant (in real terms)
Should society get more ambitious (i.e. have lower tolerance for
low living standards) as it gets better off? Are „needs‟ fixed?
 Could just raise absolute poverty line now and then...
...but hard to rationalise this discontinuity.
 If raising poverty line, do it smoothly – a relative poverty line.
© Institute for Fiscal Studies
Calculating relative poverty
Take (e.g.) 60% of that amount.
Everyone with income less than
this is in relative poverty.
Find the middle person‟s income
(the median)
Lowest
Income
© Institute for Fiscal Studies
Highest
Relative poverty over time – a moving target
...then “60% of median income” –
the relative poverty line – grows
too...
If median income grows...
...even with no change to incomes
of low-income people, relative
poverty goes up
Lowest
© Institute for Fiscal Studies
Income
Highest
The moving target, continued…
Earnings growth between 1998-99 and 2008-09 acted to
increase relative child poverty by 4 ppts (Brewer, Browne,
Joyce, Sibieta, 2010), by increasing the median.
Conversely, relative poverty can fall when poor get poorer, if
median household fares even worse.
 Indeed, it fell in previous 3 recessions (Muriel and Sibieta
(2009)). Not something to celebrate!
 Imagine policy implications of ONLY worrying about relative
poverty.
© Institute for Fiscal Studies
(Relative) poverty from 1979/80 to 2008/09
Longest sustained fall in
recent history during
Labour‟s first two
terms...
Large and rapid rise
between mid-1980s and
early 1990s
30%
...but rose in third
term (BEFORE
recession hit)
25%
AHC
20%
BHC
15%
10%
5%
0%
1979
Source: HBAI data
© Institute for Fiscal Studies
1983
1987
1991
1995
1999
2003
2007
Poverty from 1979/80 to 2008/09 : subgroups
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1979
1983
1987
Children
Source: HBAI data
Note: Only BHC incomes shown.
© Institute for Fiscal Studies
1991
Pensioners
1995
1999
2003
Working-age non-parents
2007
(Relative) poverty under Labour: subgroups
 Biggest
drivers of falling poverty during Labour‟s first two
terms: pensioners, families with children.
 Child tax credit, pension credit, winter fuel allowances introduced
 Poverty up amongst working age adults without children
between 1996/97 – 2008/09.
Not the focus of tax and benefit reforms under Labour (e.g. under-25s
ineligible for tax credits).
Current levels of „youth‟ unemployment suggests the position of this
group may have continued to worsen.
© Institute for Fiscal Studies
INEQUALITY
© Institute for Fiscal Studies
Inequality between whom?
Maybe we‟re interested in gap between bottom and top, or
bottom and middle, or middle and top?

 Simple ratios give you this information by comparing just
two points of the distribution...
© Institute for Fiscal Studies
Simple inequality measures: calculation
Find income of person 10%
from the bottom
Combine to form the
„90/10 ratio‟
Lowest
Highest
Income
© Institute for Fiscal Studies
Find income of person 10%
from the top
Inequality ratios since 1979
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1979
1984
1989
50/10
Source: HBAI data
Note: Only BHC incomes shown.
© Institute for Fiscal Studies
1994
90/50
1999
90/10
2004
More complex inequality measures
 Ratio measures great for detailed picture of small parts of
income distribution
 But they also „throw away‟ lots of information about rest of
distribution
 We also want single statistic to tell us how unequal the
distribution „as a whole‟ is. Many possibilities...
 Mean log deviation
 Gini coefficient (most commonly cited)
© Institute for Fiscal Studies
UK income shares (BHC) by decile group: 2008/09
Source: HBAI data
© Institute for Fiscal Studies
The Gini coefficient: a „summary‟ of income shares
Perfect
equality
A
G
Percentage of total income
100
A
90
80
70
B
Perfect equality
A=0
G=0
„Total‟ inequality
B=0
G=1
60
50
A
40
UK Lorenz curve in
2008/09 (BHC): Gini =
0.36
30
20
B
10
0
0
10
20
30
40
50
60
70
80
Percentage of population
Source of data: HBAI data
© Institute for Fiscal Studies
90
100
The Gini coefficient: 1979/80–2008/09 (Great
Britain)
Gini Coefficient
0.4
2007/08 was highest since
current records began
0.3
Thatcher
0.2
Source: HBAI data
© Institute for Fiscal Studies
Major
Blair/Brown
Inequality under Labour
 So the Gini has risen under Labour, even though...
1) Labour‟s tax and benefit changes have been inequalityreducing.
 Tax and benefit reforms since 1997 had roughly same effect
on inequality as raising all benefits in line with GDP (Adam
and Browne (2010)).
2) Relative poverty has fallen
 „Net‟ increase in inequality driven by small groups at top and
bottom of distribution...
© Institute for Fiscal Studies
Income changes by percentile group: 1996/97 –
2008/09 (Great Britain)
But tails of distribution tell different
story...
Middle 60% of distribution suggests
inequality declined...
Source: HBAI data
© Institute for Fiscal Studies
Income changes by percentile group: 1996/97 –
2008/09 (Great Britain)
Average annual income gain (%)
4%
Over 4 previous
Conservative terms, story
is more straightforward...
3%
1979/80-1996/97
2%
1%
0%
10
-1%
20
30
40
50
Percentile point
-2%
Source: HBAI data
© Institute for Fiscal Studies
60
70
80
90
Income dynamics and re-ranking
 An inequality-reducing pattern of income growth is not
equivalent to a „pro-poor‟ pattern (and vice versa).
 That would require a rank preservation assumption: the
poorest people remain the poorest and vice versa.
 Most good income data comes from repeated crosssections (i.e. doesn‟t track the same people over time), so
can‟t get at this.
 See Jenkins and Van Kerm (2008) for an exception.
Comparing early nineties with a decade later, they conclude
that income growth has not unambiguously become more
pro-poor, but specific groups (children, pensioners) have
improved their relative position.
© Institute for Fiscal Studies
Why has inequality been rising in last 30 years?
 Note the UK is not alone...
 Earnings are important (about 70% of income in UK)
 Possible
drivers of higher earnings inequality:
1) Increasing returns to education (Machin (2001), Acemoglu
(2002)). Wage gap between occupations has been rising in
UK and this is important for explaining rising inequality
(Brewer, Muriel and Wren-Lewis, 2010).
2) Globalisation (more competition means less rent for unions
to bargain over)
3) Weaker trade unions
4) Decline of collective bargaining – wage policies and wage
councils removed
© Institute for Fiscal Studies
Gini – Mid 80s
Gini - Mid 2000s
Source: OECD. Figures not directly comparable with those on other slides. Mid 80s Germany refers to West Germany.
© Institute for Fiscal Studies
OE
CD
ex
ic
o
M
US
A
Ire
la
nd
Au
st
ra
lia
Ita
ly
UK
Ca
na
da
Ja
pa
n
Fr
an
ce
Ge
rm
an
y
0.50
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Sw
ed
en
Gini Coefficient
The Gini: international comparisons
Real earnings growth
UK (1980-2005)
Sweden (1980-2005)
USA (1980-2005)
France (2000-2005)
Source: OECD
Notes: Full-time male workers only
© Institute for Fiscal Studies
Why has inequality been rising in last 30 years? (2)
 Demographics
 More inequality in employment status across households (Gregg and
Wadsworth, 2008).
 More pensioners (but quantitatively not that important for explaining
higher inequality in UK – Brewer, Muriel and Wren-Lewis, 2010)
 Regressive tax and benefit reforms?
Most gainers from 1980s income tax cuts were on high incomes.
 Precise impact of changes depends on counter-factual (what would
„no reform‟ have meant?)...
 Conservative tax and benefit reforms had roughly same effect on
inequality as if all benefits had been raised annually in line with prices
(Adam and Browne(2010)).
© Institute for Fiscal Studies
Why has inequality been rising in last 30 years? (3)
There is much we do not understand!
The „unexplained‟ component of inequality has been rising in
the UK (Brewer, Muriel, Wren-Lewis, 2010).
 Has some factor which we can not observe been becoming
more unevenly distributed? Job/career preferences?
 Maybe preference heterogeneity translates into wage
inequalities more when societies become more educated –
education might increase the extent to which career preferences
actually determine careers.
© Institute for Fiscal Studies
How much can government affect inequality?
Tax and benefit system clearly makes a difference (and
quickly...).
 But can be very costly to just rely on fiscal redistribution.
 Countries with low inequality (e.g. Scandinavia) tend to
have low „pre tax and benefit‟ inequality.
 So how much can govt affect distribution of private
incomes? Depends what drives it (e.g. educational outcomes
vs technological change vs trade union influence).
 Policies that target private incomes tend to have less
immediate impacts than tax and benefit changes.
© Institute for Fiscal Studies
A summary of recent history (!)
 Pattern of income growth in 1980s was unambiguously
inequality-increasing.
 Inequality and relative poverty grew rapidly, then stabilised
in early 1990s.
 During Labour‟s first 2 terms relative poverty experienced
secular decline. Particular gainers: pensioners, families with
children.
 Relative poverty has since ticked up. Poverty rate for
working-age non-parents now higher than in 1996/97.
 Inequality remained stubbornly high throughout 1990s and
2000s, and is (essentially) at highest since current series
began in 1961/62.
© Institute for Fiscal Studies
References (1)
 Acemoglu, “Technical Change, Inequality and the Labor Market”, Journal of Economic
Literature 40 (1), 2002.
 Adam and Browne, “Redistribution, work incentives and thirty years of UK tax and benefit
reform”, IFS Working Paper 10/24, 2010.
 Blundell, Pistaferri and Preston, “Consumption Inequality and Partial Insurance”, American
Economic Review 98(5), pp. 1887-1921, 2008.
 Blundell and Preston, “Consumption inequality and income uncertainty“, Quarterly Journal of
Economics 113, pp. 603-640, 1998.
 Brewer, Browne, Joyce and Sibieta, “Child poverty in the UK since 1998-99: lessons from the
past decade ”, IFS Working Paper 10/23, 2010, http://www.ifs.org.uk/publications/5303
 Brewer, Muriel and Wren-Lewis, “Accounting for changes in inequality since 1968:
decomposition analyses for Great Britain”, report for the National Equality Panel, 2009,
http://www.equalities.gov.uk/national_equality_panel/publications/research_reports.aspx
 Gregg and Wadsworth, “Two Sides to Every Story: Measuring Polarization and Inequality in the
Distribution of Work”, Journal of the Royal Statistical Society Series A, 2008.
© Institute for Fiscal Studies
References (2)
 Jenkins and Van Kerm, “Has Income Growth in Britain become more pro-poor?”, Conference
Paper, 2008, http://www.iariw.org/papers/2008/vankerm.pdf
 Joyce, Muriel, Phillips and Sibieta, “Poverty and Inequality in the UK: 2010”, IFS Commentary
116, 2010, http://www.ifs.org.uk/publications/4877
 Machin, “The Changing Nature of Labour Demand in the New Economy and Skill-Biased
Technology Change”, Oxford Bulletin of Economics and Statistics 63 (S1), 2001.
 Muriel and Sibieta, “Living Standards During Previous Recessions”, IFS Briefing Note 85,
2009, http://www.ifs.org.uk/publications/4525.
© Institute for Fiscal Studies