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IFS
Poverty and Inequality
Luke Sibieta
© Institute for Fiscal Studies, 2005
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
© 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
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
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 account for differential needs
– e.g. A single individual needs 2/3 of the income of childless couple to achieve same standard of living
© Institute for Fiscal Studies, 2005
The income distribution 2004/05
0.0
0.5
1.0
1.5
2.0
0 100 200 300 400 500 600 700 800 900 1,000 1,100
£ per week, 2004/05 prices
Nu
mb
er
of i
nd
ivid
ua
ls (
mill
ion
s)
Mean, £427
Median, £349Poverty Threshold £210
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
Income poverty falls under Labour
0%
5%
10%
15%
20%
25%
30%
1979 1984 1989 1994 1999 2004
60% AHC Median 60% BHC Median
© Institute for Fiscal Studies, 2005
All possible poverty thresholds BHC
0%
10%
20%
30%
40%
50%
0% 20% 40% 60% 80% 100%
Poverty threshold: percentage of median
Per
cen
tag
e o
f p
op
ula
tio
n
1996/97 2004/05
© Institute for Fiscal Studies, 2005
Child Poverty: historic aim
“Our historic aim will be for oursto be the first generation to endchild poverty forever, and it willtake a generation. It is a twentyyear mission, but I believe it can
be done”
Tony Blair, March 1999
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
Child poverty in 2010 and 2020
05
101520253035
99
–0
0
00
–0
1
01
–0
2
02
–0
3
03
–0
4
04
–0
5
05
–0
6
06
–0
7
07
–0
8
08
–0
9
09
–1
0
10
–1
1
11
–1
2
12
–1
3
13
–1
4
14
–1
5
15
–1
6
16
–1
7
17
–1
8
18
–1
9
19
–2
0
20
–2
1
Financial year
OE
CD
po
ve
rty
ra
te,
%
ActualCurrent policy baselineRequired pathLong term fiscal forecast baseline, no demographic changes
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
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)
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
The Lorenz Curve and Gini Coefficient
0%
50%
100%
Cumulative population
Cum
ula
tive h
ousehold
incom
e
A
B
O
0% 50% 100%
© Institute for Fiscal Studies, 2005
The Lorenz Curve and Gini Coefficient
0%
50%
100%
Cumulative population
Cu
mu
lativ
e h
ou
se
ho
ld in
co
me
A
B
O
0% 50% 100%
G
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
The Gini Coefficient: 1979 – 2004/05
0.2
0.3
0.4
Gin
i C
oef
fici
ent
Thatcher Major Blair
© Institute for Fiscal Studies, 2005
International Comparisons
101520253035404550
Gin
i C
oef
ficie
nt
Gini – Mid 80s Gini – 2000
Source: OECD. Figures not directly comparable with those on other slides. Mid 80s Germany refers to West Germany.
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
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)
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
Different measures of income inequality 1996/97 – 2004/05
0.95
1
1.05
1.1
1.15
1.2
1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05
Re
lati
ve
to
19
96
/97
Gini MLD Atkinson 90/10
© Institute for Fiscal Studies, 2005
Income changes by percentile group: 1996/97 – 2004/05
-2
-1
0
1
2
3
4
5
10 20 30 40 50 60 70 80 90
Ave
rag
e an
nu
al in
com
e g
ain
(%
)
Percentile point
© Institute for Fiscal Studies, 2005
Income changes by percentile group: 1996/97 – 2004/05
-2
-1
0
1
2
3
4
5
10 20 30 40 50 60 70 80 90
Ave
rag
e an
nu
al in
com
e g
ain
(%
)
Percentile point
© Institute for Fiscal Studies, 2005
Income changes by percentile group: 1996/97 – 2004/05
-2
-1
0
1
2
3
4
5
10 20 30 40 50 60 70 80 90
Ave
rag
e an
nu
al in
com
e g
ain
(%
)
Percentile point
© Institute for Fiscal Studies, 2005
Income changes by percentile group: 1996/97 – 2004/05
-2
-1
0
1
2
3
4
5
10 20 30 40 50 60 70 80 90
Ave
rag
e an
nu
al in
com
e g
ain
(%
)
Percentile point
1979-1996/7
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
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
© Institute for Fiscal Studies, 2005
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?