ifs poverty and inequality luke sibieta. © institute for fiscal studies, 2005 whats coming up why...

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


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


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


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


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


The income distribution 2004/05

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£ per week, 2004/05 prices

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Mean, £427

Median, £349Poverty Threshold £210


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


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


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


Income poverty falls under Labour

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1979 1984 1989 1994 1999 2004

60% AHC Median 60% BHC Median


All possible poverty thresholds BHC

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Poverty threshold: percentage of median

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1996/97 2004/05


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


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


Child poverty in 2010 and 2020

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ActualCurrent policy baselineRequired pathLong term fiscal forecast baseline, no demographic changes


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


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)


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


The Lorenz Curve and Gini Coefficient

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Cumulative population

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The Lorenz Curve and Gini Coefficient

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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


The Gini Coefficient: 1979 – 2004/05

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Thatcher Major Blair


International Comparisons

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Gini – Mid 80s Gini – 2000

Source: OECD. Figures not directly comparable with those on other slides. Mid 80s Germany refers to West Germany.


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


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)


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


Different measures of income inequality 1996/97 – 2004/05

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1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

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Gini MLD Atkinson 90/10


Income changes by percentile group: 1996/97 – 2004/05

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Percentile point


Income changes by percentile group: 1996/97 – 2004/05

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10 20 30 40 50 60 70 80 90

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Percentile point

1979-1996/7


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


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


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?

ifs poverty and inequality luke sibieta. © institute for fiscal studies, 2005 whats coming up why...

Documents

fiscal studies

child poverty slide

income poverty dwp

consumption poverty

measuring poverty

ifs poverty

modal income slide

persistency slide