Inequality and Poverty

1. Inequality and Poverty Jonathan Shaw jonathan_s@ifs.org.uk

2. Motivation • Why care about inequality or poverty? • Intrinsic (ethical) reasons • Functional reasons – for example: • Impact of deprivation on later-life outcomes • Impact of inequality on growth

3. Measurement • How do we measure living standards? • We will focus on income • Income over what time period? • Snapshot at a point in time • What income? • Net income • Consider both BHC and AHC income

4. Measurement (continued) • Whose income? • Consider household income • Different needs? • Equivalisation of income • Where do the data come from? • Household surveys: FRS and FES

5. The Income Distribution 2002/03: Before Housing Costs

6. The Income Distribution 2002/03 • Features of distribution • Distribution is highly skewed • Around two-thirds of individuals have incomes below mean • Long tail: 2% of individuals have incomes above £1,100 • Where do you fit in? • www.ifs.org.uk/wheredoyoufitin

7. Where do you fit in? • If I live on my own and have net monthly income after council tax of £1,500 then I am in 83rd percentile • Suppose my net income after council tax is £900. Then I am in 49th percentile • Suppose income is £1,500 but I have a partner and two young children. Then I am in 34th percentile

8. Inequality: The Lorenz Curve

9. The Lorenz Curve: UK Data

10. The Lorenz Curve and Gini Coefficient

11. The Gini Coefficient • Bounded between zero (complete equality) and one (complete inequality) • Treats deviations from equality the same regardless of where the occur within income distribution • Net income Gini is typically between 0.25 and 0.35 for developed countries

12. International Comparisons

13. The Gini Coefficient 1961 – 2002/03

14. Explaining the change in inequality • Changing labour market participation • Decrease in male participation mainly in households where there are no other workers • Increased female participation among those with working partner • Led to increased polarisation between two-earner and zero-earner households

15. Explaining the change (continued) • Increasing skills premium • Skill-biased technical change • International trade and the Stolper-Samuelson theorem • Institutional factors • Decline in role of trade unions • Wages policies and Wages Councils abolished • Equal pay act • National Minimum Wage

16. Explaining the change (continued) • Demographic changes • Later marriage, fewer children, higher divorce • More single-person and lone parent households • Tax and benefit changes • Estimated impact of tax and benefit reforms depend on counterfactual • But income tax cuts of 1980s increased inequality, while direct tax rises and means-tested benefits in 1990s reduced inequality

17. Inequality under Labour • Since Labour came to power inequality (measured by Gini) has continued to rise • And since 1998/99, (BHC income) inequality is higher than at any point since 1961 • Increase in inequality has occurred despite redistribution of Government • Examine entire distribution to see how income growth varies

18. Income Growth: 1996/97 – 2002/03

19. Blair, 1996/97-2002/03 Income Growth: 1979 - 1990

20. Effect of tax and benefit reforms • What effect have recent tax and benefit changes had on inequality? • Consider what would have happened to incomes had the tax and benefit remained unchanged • Use simulation techniques to calculate income series under uprated April 1996 system

21. Simulated and Actual Gini

22. Simulated and Actual Gini • Since 2000/01 there has been a departure between the actual Gini and that simulated under April 1996 system • Tax and benefit changes therefore worked to reduce extent of inequality • Suggests the underlying distribution has become more unequal

23. Poverty • Often measured by proportion of individuals below a poverty line • Relative and absolute poverty measures • Ignores more direct ‘deprivation’ measures

24. Child Poverty: 1979-2002/03

25. Child Poverty Under Labour • Labour targets (relative to 1998/99): • A quarter lower by 2004/05 • Halved by 2010 and eradicated by 2020 • So by 2004/05: • AHC poverty must be 3.2m (from 4.2m in 1998/99) • BHC poverty must be 2.3m (from 3.1m in 1998/99) • Poverty in 2002/03: 3.6m AHC and 2.6m BHC • But figures do not yet include child tax credit

26. Why did poverty fall and at the same time inequality rise? • Poverty has not fallen for all groups since Labour came to power • But it has fallen for the population as a whole • Poverty and inequality are two different concepts that are measured differently • Bottom catching middle, top pulling away

27. Summary • Inequality and poverty are relevant for intrinsic and functional reasons • Difficult measurement decisions have to be made • Inequality is high relative to other countries • Inequality and poverty rose during 1980s • Child poverty has fallen over recent years

28. References • Brewer, Goodman, Myck, Shaw and Shephard (2004), ‘Poverty and Inequality in Britain: 2004’, www.ifs.org.uk/comms/comm96.pdf • Brewer and Gregg (2001), ‘Eradicating Child Poverty in Britain: Welfare Reform Since 1997’, http://www.ifs.org.uk/wps/wp0108.pdf • Clark and Leicester (2004), ‘Inequality and Two Decades of British Tax and Benefit Reform’, Fiscal Studies, Vol 25 No 2 • Goodman and Shepherd (2002), ‘Inequality and Living Standards in Great Britain: Some Facts’, http://www.ifs.org.uk/bns/bn19.pdf • Ray (1998), ‘Development Economics’, chs 6-8