What is happening to inequality?
Paul Johnson
September 13, 2012
© Institute for Fiscal Studies
What is actually happening to inequality
• The standard analysis
– What HBAI tells us
– The components of inequality
• The complications
– Under reporting of income
– Other measures of income and consumption
• The role of government
– Importance of tax and transfers
– How different measures give different answers
– Going beyond transfers
• Conclusions
© Institute for Fiscal Studies
Median household £419 a week in 2010-11
Household income (£ per week)
2,500
2,000
1,500
50th percentile:
£419
1,000
500
0
10
20
30
40
50
60
70
Percentile point
Source: Figure 3.1 of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
80
90
90th centile income about 4 times 10th centile
Household income (£ per week)
2,500
2,000
1,500
90th percentile:
£846
50th percentile:
£419
1,000
10th percentile:
£216
500
0
10
20
30
40
50
60
70
Percentile point
Source: Figure 3.1 of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
80
90
Income growth 1996-97 to 2009-10 equalising
over middle 90%
4%
Average annual income gain
Income growth: 1996–97 to 2009–10
3%
2%
1%
0%
10
20
30
40
50
60
Percentile point
70
80
-1%
-2%
Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
90
Income falls in 2010-11 bigger at top end
4%
Average annual income gain
Income growth: 1996–97 to 2009–10
3%
Income growth: 1996–97 to 2010–11
2%
1%
0%
10
20
30
40
50
60
Percentile point
70
80
-1%
-2%
Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
90
In stark contrast to story since 1979
4%
Average annual income gain
Income growth: 1996–97 to 2009–10
3%
Income growth: 1979 to 1996–97
Income growth: 1996–97 to 2010–11
2%
1%
0%
10
20
30
40
50
60
Percentile point
70
80
-1%
-2%
Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
90
Gini up sharply to 1990, modestly 1996-2009
Gini coefficient
0.40
1996-97 to 2009-10 Gini rose
from 0.33 to 0.36
1979 to 1990 Gini increased
from 0.25 to 0.34
0.35
0.30
Source: Figure 3.7 of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
2010–11
2008–09
2006–07
2004–05
2002–03
2000–01
1998–99
1996–97
1994–95
1992
1990
1988
1986
1984
1982
1979
0.25
With sharp fall in 2010-11
Gini coefficient
0.40
0.35
0.30
• Gini fell from 0.36 to 0.34 in 2010-11
• Largest one year fall since at least 1961
• Returns Gini to below its 1997-98 level
© Institute for Fiscal Studies
Source: Figure 3.7 of Living Standards, Poverty and Inequality: 2012
2010–11
2008–09
2006–07
2004–05
2002–03
2000–01
1998–99
1996–97
1994–95
1992
1990
1988
1986
1984
1982
1979
0.25
Inequality ratios: 1979 to 2010-11 (GB)
99/50 ratio fell to 5.1
(still higher than 2008-09)
6.0
5.5
Ratio
5.0
4.5
4.0
3.5
3.0
99/50 ratio
Source: Figure 3.9a of Living Standards, Poverty and Inequality: 2012
© Institute for Fiscal Studies
At the bottom of the distribution
• Pensioners have done very well
© Institute for Fiscal Studies
Relative pensioner poverty lowest
since 1984
45%
Number of pensioners
living in poverty now:
40%
35%
2.0 million (BHC)
30%
25%
20%
15%
1.7 million (AHC)
10%
5%
0%
1962
1970
1978
1986
Pensioners AHC
Source: HBAI Data (FES and FRS)
© Institute for Fiscal Studies
1994
2002
Pensioners BHC
2010
At the bottom of the distribution
• Pensioners have done very well
• Families with children on an improving trend
© Institute for Fiscal Studies
While relative BHC child poverty rates are
back at mid 1980s levels
30%
25%
20%
Lowest
since 1984
15%
Target
10%
5%
0%
1961
1968
1975
1982
1989
1996
Notes: Poverty line is 60% of median income. Years up to and including 1992 are calendar years; thereafter,
years refer to financial years. Incomes are measured before housing costs have been deducted.
Source: Authors’ calculations using Family Resources Survey and Family Expenditure Survey.
© Institute for Fiscal Studies
2003
2010
At the bottom of the distribution
• Pensioners have done very well
• Families with children on an improving trend
• But the working age childless have not done well
© Institute for Fiscal Studies
Relative poverty among working-age adults
without children on continuing upward trend
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1962
1970
1978
1986
60% of AHC Median
1994
60% of BHC Median
Source: HBAI Data (FES and FRS)
© Institute for Fiscal Studies
2002
2010
Absolute poverty among working-age adults
without children similar to 1970s levels...
40%
35%
30%
25%
20%
15%
10%
5%
0%
1962
1970
1978
AHC
1986
1994
BHC
Source: HBAI Data (FES and FRS)
© Institute for Fiscal Studies
2002
2010
Families with children have done better than the
childless across the distribution since 1998-99
Average annual real income gain
2.5%
Children
Individuals in childless households
2.0%
1.5%
1.0%
Growth in
median
income
0.5%
0.0%
10
20
30
40
50
60
70
Percentile point of household income
st
nd
th
th
Notes: Changes in income at the 1 , 2 , 98 and 99 percentiles are not shown on this graph due to very
high levels of statistical uncertainty. Incomes have been measured before housing costs have been deducted.
Source: Authors’ calculations using Family Resources Survey, 1998-99 and 2010-11.
80
90
So the story seems to be
• Big increase in inequality since 1979
• Modest increase during 2000s driven by the tails
• Childless working age done particularly badly
• But inequality growth is overwhelmingly within identifiable
groups
© Institute for Fiscal Studies
Inequality (log variance x 1000)
Income inequality – factor decomposition
350
Employment
Status
Health
300
Ethnic group
250
Education
200
Age
150
Gender
100
Household
type
Region
50
Residual
0
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Source: HBAI Data (FES and FRS) and authors’ analysis
But is that the whole story?
• Two good reasons for thinking we are (increasingly)
underestimating living standards lower down the distribution
– First: important elements of benefit spending appear to be very
poorly captured in the data
© Institute for Fiscal Studies
Only half of tax credit and two thirds of Income
Support spending captured in the data
Coverage
Spend (£m/yr)
Retirement pension
95%
66,480
“Other”
52%
27,970
Working and child tax credits
50%
21,270
Rent rebates and allowances
83%
18,930
Income support & pension
credit
68%
16,580
Child benefit
96%
11,880
Incapacity benefit
74%
6,670
Maternity/Statutory
maternity pay
119%
1,900
Jobseekers allowance
80%
1,200
War pensions
33%
1,020
Student support
236%
970
Notes: based on Barnard (2011) analysis of LCFS 2009 and 2010
But is that the whole story?
• Two good reasons for thinking we are (increasingly)
underestimating living standards lower down the distribution
– First: important elements of benefit spending appear to be very
poorly captured in the data
– Second: incomes at the bottom of the distribution don’t match
consumption
© Institute for Fiscal Studies
Those with the lowest cash incomes do not have
the lowest cash outlays...
£490
£420
Median Expenditure
£350
£280
£210
£140
£70
Median expenditure
£0
£0
£100
£200
£300
Income
Notes: LCFS 2009; Great Britain only
£400
£500
...but those with the lowest cash outlays do have
the lowest cash income
£490
£420
Median Expenditure
£350
£280
£210
Median expenditure
£140
Median income
£70
£0
£0
£100
£200
£300
Income
Notes: LCFS 2009; Great Britain only
£400
£500
But is that the whole story?
• Two good reasons for thinking we are (increasingly)
underestimating living standards lower down the distribution
– First: important elements of benefit spending appear to be very
poorly captured in the data
– Second: incomes at the bottom of the distribution don’t match
consumption
• In addition
– Inequality in consumption has grown much less quickly than
inequality in income
© Institute for Fiscal Studies
Remember the rising Gini
0.38
0.36
0.34
HBAI Inc
0.32
0.30
0.28
0.26
0.24
0.22
0.20
1978
1982
1986
1990
1994
1998
2002
2006
2010
Doesn’t look so dramatic when you look at
consumption
0.38
0.36
HBAI Inc
0.34
0.32
Consumption
0.30
0.28
0.26
0.24
0.22
0.20
1978
1982
1986
1990
1994
1998
2002
2006
2010
While a broader measure of income matters little
0.38
HBAI Inc
0.36
0.34
Broad Inc
0.32
Consumption
0.30
0.28
0.26
0.24
0.22
0.20
1978
1982
1986
1990
1994
1998
2002
2006
2010
But is that the whole story?
• Two good reasons for thinking we are (increasingly)
underestimating living standards lower down the distribution
– First: important elements of benefit spending appear to be very
poorly captured in the data
– Second: incomes at the bottom of the distribution don’t match
consumption
• In addition
– Inequality in consumption has grown much less quickly than
inequality in income
– Relative performance of different groups is highly sensitive to
measure of income/consumption used
© Institute for Fiscal Studies
Relative poverty rate, HBAI income (<60% of
median household income)
0.45
Children
Working-age
0.40
Pensioners
0.35
0.30
0.25
0.20
0.15
0.10
0.05
1978
1982
1986
1990
1994
1998
2002
2006
2010
Relative poverty rate, broad income (<60% of
median household income)
0.45
Children
Working-age
0.40
Pensioners
0.35
0.30
0.25
0.20
0.15
0.10
0.05
1978
1982
1986
1990
1994
1998
2002
2006
2010
Relative poverty rate, consumption (<60% of
median household income)
0.45
Children
Working-age
0.40
Pensioners
0.35
0.30
0.25
0.20
0.15
0.10
0.05
1978
1982
1986
1990
1994
1998
2002
2006
2010
Relative poverty rate by age and time, HBAI
income
0.30
1978-1982
0.25
0.20
2003-
0.15
0.10
0.05
0.00
25
30
35
40
45
50
Age
55
60
65
70
75
So overall
• There may have been more a reduction in inequality in living
standards in the 2000s than HBAI data suggests
• Once you account for a broader definition of income pensioners
have not only done relatively better than other groups but are
now significantly less likely to be poor than working age people
with or without children
© Institute for Fiscal Studies
What about the role of government
• Of course the tax and transfer system is important
• 2000s saw an additional £30 billion a year spent on benefits and
tax credits
– Mostly focussed on pensioners and families with children
© Institute for Fiscal Studies
Effects of tax benefit changes 1997-2010
Loss as a percentage of net income
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
Poorest
2
3
4
5
6
7
8
9
Richest
All
Income decile group
Families with children
© Institute for Fiscal Studies
Pensioners
Working-age without children
All
A very close correspondence between movements in
benefit levels and child poverty levels
Couple, 3
children, no work
Lone parent, 1
child, no work
Lone parent, 1
child, part-time
work
Change in BHC
relative child
poverty rate in UK
1999-00
+
+
+
-
2000-01
+
+
+
-
2001-02
+
+
+
-
2002-03
+
-
+
-
2003-04
+
+
+
-
2004-05
+
+
+
-
2005-06
-
-
-
+
2006-07
-
-
-
+
2007-08
-
-
-
+
2008-09
+
+
+
-
2009-10
+
+
+
-
2010-11
+
+
+
-
Entitlements grew faster than relative poverty line (median income)
Entitlements grew more slowly than relative poverty line (median income)
Notes: Ignores Housing Benefit, Council Tax Benefit and the value of free school meals. The working lone parent earns an
amount that is below the personal income tax allowance and the primary threshold for National Insurance contributions.
Source: Authors’ calculations using TAXBEN, the IFS tax and benefit micro-simulation model.
© Institute for Fiscal Studies
What about the role of government
• Of course the tax and transfer system is important
• 2000s saw an additional £30 billion a year spent on benefits and
tax credits
– Mostly focussed on pensioners and families with children
• This had a big effect on inequality
© Institute for Fiscal Studies
Actual income changes 1997-2009 favoured
deciles 2 to 4 (and 10)
overall % change
45.0%
40.0%
35.0%
30.0%
25.0%
overall % change
20.0%
15.0%
10.0%
5.0%
0.0%
1
© Institute for Fiscal Studies
2
3
4
5
6
7
8
9
10
Very heavily driven by tax and benefit changes
50.0%
40.0%
30.0%
overall % change
20.0%
of which, taxben
10.0%
0.0%
1
-10.0%
© Institute for Fiscal Studies
2
3
4
5
6
7
8
9
10
Without those changes pattern is much less
progressive
50.0%
40.0%
30.0%
overall % change
20.0%
of which, taxben
implied change w/out taxben
10.0%
0.0%
1
-10.0%
© Institute for Fiscal Studies
2
3
4
5
6
7
8
9
10
I MITIGATED THE INCREASE IN
THE GAP BETWEEN RICH AND
POOR, LEAVING THE GAP
SMALLER THAN IT OTHERWISE
WOULD HAVE BEEN (UNDER
RPI UPRATING OF THE 1996-97
TAX AND BENEFIT SYSTEM)
What about the role of government
• Of course the tax and transfer system is important
• 2000s saw an additional £30 billion a year spent on benefits and
tax credits
– Mostly focussed on pensioners and families with children
• This had a big effect on inequality
• Other spending is also equalising
– At least in the sense that cost of service provided is a higher
proportion of income of poor than of rich
© Institute for Fiscal Studies
Benefits in kind matter a lot
© Institute for Fiscal Studies
What about the role of government
• Of course the tax and transfer system is important
• 2000s saw an additional £30 billion a year spent on benefits and
tax credits
– Mostly focussed on pensioners and families with children
• This had a big effect on inequality
• Other spending is also equalising
– At least in the sense that cost of service provided is a higher
proportion of income of poor than of rich
• And spending on the welfare state has become much more
important over time
© Institute for Fiscal Studies
Public spending in 2010-11
Social protection
10%
1%
3%
Personal social services
29%
2%
Health
Education
6%
Transport
Defence
5%
Public order and safety
Gross debt interest
6%
4%
3%
Housing
TIEEE
AFF
13%
© Institute for Fiscal Studies
18%
Other
Public spending in 1978-79
Social security
9%
1%
Personal social services
23%
Health
9%
Education
Transport
6%
2%
Defence
Law, order & protection
10%
10%
Gross debt interest
Housing
TIEEE
4%
12%
10%
© Institute for Fiscal Studies
4%
AFFF
Other
What about the role of government
• Of course the tax and transfer system is important
• 2000s saw an additional £30 billion a year spent on benefits and
tax credits
– Mostly focussed on pensioners and families with children
• This had a big effect on inequality
• Other spending is also equalising
– At least in the sense that cost of service provided is a higher
proportion of income of poor than of rich
• And spending on the welfare state has become much more
important over time
• A lot of that spending now more skewed to those on low incomes
© Institute for Fiscal Studies
Funding focused more deprived schools
Implicit FSM Premium (2010-11 Prices)
Primary
Secondary
4,000
3,000
2,000
1,000
0
2005
2006
2007
2008
2009
2010
Notes: Implicit FSM Premium calculated as the extra funding associated with one extra pupil
eligible for FSM, holding other pupil and school characteristics constant.
Sources: For a full list of sources please see Table 2.2. (link)
© Institute for Fiscal Studies
Though we don’t know how much value that adds
£7,000
100%
90%
£6,000
80%
£5,000
70%
£4,000
60%
50%
£3,000
40%
£2,000
30%
20%
£1,000
10%
£0
0%
Most
deprived
2
3
4
6
7
Deciles of school deprivation (% FSM)
Spending per pupil (left axis)
© Institute for Fiscal Studies
5
8
9
Least
deprived
Students with 5+ A*-C GCSE grades (right axis)
What about the role of government
• Of course the tax and transfer system is important
• 2000s saw an additional £30 billion a year spent on benefits and
tax credits
– Mostly focussed on pensioners and families with children
• This had a big effect on inequality
• Other spending is also equalising
– At least in the sense that cost of service provided is a higher
proportion of income of poor than of rich
• And spending on the welfare state has become much more
important over time
• A lot of that spending now more skewed to those on low incomes
• And just as with measuring living standards need be clear what
measure of inequality government is impacting on
© Institute for Fiscal Studies
VAT reform: effects by income
% rise in non-housing expenditure
8%
% rise in income
£8
cash gain/loss (£/week, RH axis)
7%
£6
6%
£4
5%
£2
4%
£0
3%
-£2
2%
-£4
1%
-£6
0%
-£8
Poorest 2
© Institute for Fiscal Studies
3
4
5
6
7
Income Decile Group
8
9
Richest
VAT reform: effects by expenditure
% rise in non-housing expenditure
8%
% rise in income
£8
cash gain/loss (£/week, RH axis)
7%
£6
6%
£4
5%
£2
4%
£0
3%
-£2
2%
-£4
1%
-£6
0%
-£8
Poorest 2
© Institute for Fiscal Studies
3
4
5
6
7
8
Expenditure Decile Group
9
Richest
To conclude
• The HBAI story tells us what has happened to household incomes
over time
– But only on a particular measure
– Using a broader measure of income changes the picture between
groups
– And inequality in measured consumption has grown much less
• Redistribution through the welfare system over recent years has
been very important
– Though very costly and being partially reversed
• And don’t forget the wider role of the state in redistributing
– Nor the costs (as well as the benefits) inherent in that redistribution
© Institute for Fiscal Studies