IFS Poverty and Inequality Luke Sibieta. © Institute for Fiscal Studies, 2005 Whats coming up Why do we care about poverty and inequality? How do we measure.

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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0.5

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0 100 200 300 400 500 600 700 800 900 1,000 1,100

£ per week, 2004/05 prices

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mb

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of i

nd

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ua

ls (

mill

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s)

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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30%

1979 1984 1989 1994 1999 2004

60% AHC Median 60% BHC Median


All possible poverty thresholds BHC

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0% 20% 40% 60% 80% 100%

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

0%

50%

100%

Cumulative population

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tive h

ousehold

incom

e

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B

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0% 50% 100%


The Lorenz Curve and Gini Coefficient

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G


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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0.3

0.4

Gin

i C

oef

fici

ent

Thatcher Major Blair


International Comparisons

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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.


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

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

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lati

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to

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96

/97

Gini MLD Atkinson 90/10


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

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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 do we care about poverty and inequality? How do we measure.

Documents

fiscal studies

child poverty slide

income poverty dwp

consumption poverty

measuring poverty

ifs poverty

modal income slide

persistency slide