Agnes Norris Keiller [email protected]
Public economics: inequality and poverty
Average income at an all-time high…
© Institute for Fiscal Studies Public economics: inequality and poverty
20
40
60
80
100
120 19
61
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
Real
med
ian
inco
me
(200
7‒08
= 1
00)
Source: Authors calculations using the Family Expenditure Survey and Family Resources Survey, various years.
… but inequality a prominent concern
© Institute for Fiscal Studies Public economics: inequality and poverty
“we need to act to address the deeply felt sense of economic inequality that has emerged in recent years” Theresa May at Davos World Economic Forum, January 2017
“we need to rebuild the economy so that no one and no community is left behind” Jeremy Corbyn at Labour regional economic conference, February 2017
“Our economic model is broken… the gap between the richest and poorest parts of the country is significant and destabilising” Justin Welby writing in the Financial Times, September 2017
Inequality debate: what economists bring
i. Measurement
Understand merits of different measures
ii. Causes
Identify mechanisms that have driven changes in inequality and poverty
iii. Responses
Contribute to debates about appropriate policy objectives
Assess policy effectiveness
© Institute for Fiscal Studies Public economics: inequality and poverty
This presentation
i. Inequality
Measures
Trends and causes
ii. Poverty
Measures
Trends and causes
iii. Responses (time permitting)
Policy levers: tax credits and minimum wages
© Institute for Fiscal Studies Public economics: inequality and poverty
Inequality
© Institute for Fiscal Studies Public economics: inequality and poverty
Inequality of what?
Opportunity or outcomes?
Lecture will focus on outcomes
Inequality of outcomes can feed through to inequality of opportunity
• For example through early child development and health (Conti 2013)
© Institute for Fiscal Studies Public economics: inequality and poverty
Inequality of what?
Outcome of interest is welfare
… but measuring this is clearly challenging.
Most feasible approach uses annual income:
Net of taxes and transfers
Measured at the household level (assumes income sharing)
Adjusted for household composition (equivalisation)
Lifecycle economic model highlights important caveats:
Income ≠ consumption
• Implies consumption a better indicator of welfare but measurement remains challenging
Annual income ≠ lifetime income
• Implies annual income inequality may differ from permanent income inequality (more on this later)
© Institute for Fiscal Studies Public economics: inequality and poverty
What measure of inequality?
© Institute for Fiscal Studies Public economics: inequality and poverty
Measure J L
-
Percentile ratios e.g. 90:10
• Easily interpretable
• Insensitive to extremes (which may be driven by measurement error)
• Cannot be decomposed • Insensitive to extremes • Does not satisfy “ Pigou Dalton Transfer sensitivity”
Gini coefficient • Captures changes across the entirety of the income distribution
• Cannot be (additively) decomposed
• Sensitive to extremes
-
Top 1% Share • Easily interpretable • Cannot be decomposed • V sensitive to extremes • Does not satisfy “ Pigou Dalton Transfer sensitivity”
G - E measures e.g. GE0 a.k.a mean log deviation
• Captures changes across the entirety of the income distribution
• Can be additively decomposed
• Sensitive to extremes (GE0 sensitive to bottom of distribution, GE2 sensitive to top)
–
British income inequality: higher or lower?
© Institute for Fiscal Studies Public economics: inequality and poverty
Period 90:10 ratio Gini 2015 3.9 0.35
1995 4.1 0.33
1965 3.1 0.25
British income inequality: the last 50 years
© Institute for Fiscal Studies Public economics: inequality and poverty
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0.20
0.25
0.30
0.35
0.40
0.45
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2003
2005
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2015
90:1
0 ra
tio
Gin
i coe
ffic
ient
Note: Incomes have been measured net of taxes and benefits but before housing costs have been deducted. Years refer to calendar years up to and including 1992 and to financial years from 1993–94 onwards. Source: Figure 3.6 of Cribb et al. (2017)
Gini coefficient (left-hand axis)
90:10 ratio (right-hand axis)
British income inequality: the last 50 years
© Institute for Fiscal Studies Public economics: inequality and poverty
Note: Incomes have been measured net of taxes and benefits but before housing costs have been deducted. Years refer to calendar years up to and including 1992 and to financial years from 1993–94 onwards. Source: Figure 3.7 of Cribb et al. (2017)
0%
2%
4%
6%
8%
10% 19
61
1963
19
65
1967
19
69
1971
19
73
1975
19
77
1979
19
81
1983
19
85
1987
19
89
1991
19
93
1995
19
97
1999
20
01
2003
20
05
2007
20
09
2011
20
13
2015
The top 1% share
British income inequality: the last 50 years
© Institute for Fiscal Studies Public economics: inequality and poverty
What caused the 1980s surge?
Key driver was increase in returns to skill (education) as rising demand for skilled workers in the 1980s outstripped supply (Goldin & Katz 2007)
Large reductions in top income tax rates also contributed (Adam & Browne 2010)
Why has the 90:10 fallen over the last 20 years?
Tax and benefit reforms (increased incomes of pensioners and non-workers)
Labour market trends of falling worklessness and poor earnings growth
Why has the top 1% continued to rise?
High remuneration in Financial sector (Bell & Van Reenen 2014)
Income from investments and rising stock markets (Brewer et al. 2008)
Lifetime income inequality: methods
© Institute for Fiscal Studies Public economics: inequality and poverty
Various ways of overcoming measurement problem
i. Simulation approach:
e.g. Levell et al. (2017)
ii. Consumption data:
e.g. Blundell & Preston (1998)
iii. Measure lifetime income:
e.g. Guvenen et al. (2017)
Lifetime income inequality: findings
© Institute for Fiscal Studies Public economics: inequality and poverty
Levell et al. (2017):
Lifetime income inequality substantially lower than single-year inequality
Indicates a lot of inequality is temporary and reflects:
i. The stage of an individual life (e.g. differences in family structure)
ii. Transitory shocks (e.g. spells of unemployment)
Blundell & Preston (1998):
Not all of 1980s inequality surge was due to a rise in permanent inequality
But permanent income inequality did rise as a result of:
i. An aging population
ii. Younger cohorts experiencing greater levels of permanent income inequality than older cohorts at a given age
Inequality trends and determinants: summary
© Institute for Fiscal Studies Public economics: inequality and poverty
Defining feature of last 5 decades is 1980s inequality surge
Largely due to impact of changing returns to skills on earnings inequality
More recent trends differ between measures
Difference driven by increase in top 1% share
Lifetime income inequality
Research suggests different to snapshot inequality in terms of both levels (lower) and trends (increased in the 1980s but by less than snapshot)
Poverty
© Institute for Fiscal Studies Public economics: inequality and poverty
How to measure poverty?
Ideal measure reflects prevalence of very low welfare
Low welfare can have many causes e.g. social isolation, familial instability, health
But measurement of these is an issue
Standard approach
Focuses on material living standards
Define a threshold below which income is insufficient to achieve “adequate” standard of living (a “poverty line”)
Absolute poverty:
Poverty line defined as a fixed level of real income
Current UK definition = 60% of 2010/11 median income
Relative poverty:
Poverty line defined as a fraction of average income
Current UK definition = 60% of median income
© Institute for Fiscal Studies Public economics: inequality and poverty
How to measure poverty?
Absolute v. Relative:
Absolute poverty lines become irrelevant over time as society’s perception of what is an “adequate” standard of living changes
Relative poverty less appropriate for tracking year-to-year changes in poverty (particularly when average income is falling)
Tend to use absolute poverty to examine short-run trends and relative poverty to examine long-run trends
© Institute for Fiscal Studies Public economics: inequality and poverty
How to measure poverty?
What about housing costs?
Housing is a necessity that is relatively hard to adjust
Focus on income after housing costs are deducted (AHC income) rather than before housing costs are deducted (BHC income)
AHC income closer to disposable income a household can use to maintain living standards
What about duration of poverty?
Relevant if welfare consequences of low income are greater when low income is sustained over several years
“Persistent poverty” defined as being in poverty for several years over a certain period (more on this later)
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Poverty in Britain: the last 50 years
© Institute for Fiscal Studies Public economics: inequality and poverty
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5%
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30% 19
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2011
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2015
Rela
tive
pov
erty
rate
(AH
C) s
ince
196
1 (G
B)
Note: Years refer to calendar years up to and including 1992 and to financial years from 1993–94 onwards. Source: Figure 4.5 of Cribb et al. (2017)
Poverty in Britain: the last 50 years
© Institute for Fiscal Studies Public economics: inequality and poverty
0%
5%
10%
15%
20%
25%
30% 19
61
1963
1965
1967
1969
1971
1973
1975
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1981
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1985
1987
1989
1991
1993
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2003
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2009
2011
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2015
Rela
tive
pov
erty
rate
(AH
C) s
ince
196
1 (G
B) Non-pensioners in workless households Non-pensioners in working households Pensioners
Note: Years refer to calendar years up to and including 1992 and to financial years from 1993–94 onwards. Source: Figure 4.8 of Cribb et al. (2017)
Persistent v. snapshot: poverty rates
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Defined as being in (absolute BHC poverty) for at least 3 of the last 4 years
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
All Children Working-age parents
Working-age non-parents
Pensioners
Abso
lute
pov
erty
rate
s, 2
012–
2015
(BH
C)
Snapshot poverty Persistent poverty
Source: Figure 4.9 of Cribb et al. (2017)
Poverty trends and determinants: summary
© Institute for Fiscal Studies Public economics: inequality and poverty
Poverty substantially higher than 5 decades ago as large increase in 1980s yet to be fully unwound
Increase in the 80s linked to surge in inequality
Those in poverty today are:
• far less likely to be pensioners than in previous decades
• and far more likely to be children or adults in working households
Trends driven by welfare reforms and declining worklessness combined with poor earnings growth
Persistent poverty considerably lower than snapshot poverty
Indicates very low income is short-lived for many
The policy debate
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Contributing to the debate: policy levers
© Institute for Fiscal Studies Public economics: inequality and poverty
Prominent policies aimed at changing the income distribution:
i. Fiscal redistribution e.g. Tax credits
Contributing to the debate: policy levers
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Tax credits:
Focus on reducing poverty rather than tackling inequality
“Our historic aim will be for ours to be the first generation to end child poverty”
Contributing to the debate: policy levers
© Institute for Fiscal Studies Public economics: inequality and poverty
Tax credits:
Focus on reducing poverty rather than tackling inequality
Resulted in large increases in welfare spending targeted at families with children
Contributing to the debate: policy levers
© Institute for Fiscal Studies Public economics: inequality and poverty
Tax credits:
0%
10%
20%
30%
40%
50%
60%
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
2015
-16
Abso
lute
pov
erty
rate
s (A
HC)
, UK
Child
All
Working-age non-parents
Source: Author’s calculations using the Family Resources Survey, various years.
Contributing to the debate: policy levers
© Institute for Fiscal Studies Public economics: inequality and poverty
Tax credits:
Focus on reducing poverty rather than tackling inequality
Resulted in large increases in welfare spending targeted at families with children
Drove steep reductions in absolute child poverty
Increased financial work incentives for lone parents
But reduced them for many potential second earners
Came at a large cost to the exchequer (accounted for 13% of GB welfare spending in 2015-16)
Contributing to the debate: policy levers
© Institute for Fiscal Studies Public economics: inequality and poverty
Prominent policies aimed at changing the income distribution:
i. Fiscal redistribution e.g. Tax credits
ii. Wage regulation e.g. National Minimum Wage
Contributing to the debate: policy levers
© Institute for Fiscal Studies Public economics: inequality and poverty
National Minimum Wage:
“National Living Wage” rebrand legislates substantial rises in wage floor; Labour has proposed an even higher rate
£4
£5
£6
£7
£8
£9
£10 19
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2000
20
01
2002
20
03
2004
20
05
2006
20
07
2008
20
09
2010
20
11
2012
20
13
2014
20
15
2016
20
17
2018
20
19
2020
Mai
n m
inim
um w
age,
£ p
er h
our,
20
17–1
8 pr
ices
Labour
Conservative
Note: Series show real minimum wages for employees aged 25 and over, 1999–2017 and under Conservative and Labour plans for 2020. Source: Cribb, Joyce & Norris Keiller (2017)
Contributing to the debate: policy levers
© Institute for Fiscal Studies Public economics: inequality and poverty
National Minimum Wage:
“National Living Wage” rebrand legislates substantial rises in wage floor; Labour has proposed an even higher rate
Substantial evidence that UK minimum wage has boosted worker pay (e.g. Dolton et al. 2011; Metcalf 2008)
Biggest gains accrue to middle-income households as:
• many minimum wage workers are second earners
• lowest-income households often contain no one in work
• low-income working households often lose means-tested benefits as pay rises
Little evidence to date of any adverse employment effects but past research has limited external validity given magnitude of current proposals
Policy levers: summary
© Institute for Fiscal Studies Public economics: inequality and poverty
Policy levers:
Tax credits contributed to large reductions in child poverty
• partly by increasing financial work incentives
• but disincentivised work for some and come at a large cost to the exchequer
Minimum wages do boost pay
• but biggest gains accrue to middle-income households rather than those on lowest incomes
• possible that large rises in future may have adverse consequences
References i.
© Institute for Fiscal Studies Public economics: inequality and poverty
Auten, G., Splinter, D., 2016. Using Tax Data to Measure Long-Term Trends in U.S. Income Inequality. Work in Progress.
Belfield, C., Blundell, R., Cribb, J., Hood, A., Joyce, R., 2017. Two Decades of Income Inequality in Britain: The Role of Wages, Household Earnings and Redistribution. Economica 84, 157–179.
Bell, B., Van Reenen, J., 2014. Bankers and Their Bonuses. The Economic Journal 124, F1–F21.
Blundell, R., Preston, I., 1998. Consumption Inequality and Income Uncertainty. The Quarterly Journal of Economics 113, 603–640.
Brewer, M., Wren-Lewis, L., Sibieta, L., 2008. Racing away? Income inequality and the evolution of high incomes. Institute for Fiscal Studies.
Browne, J., Adam, S., 2010. Redistribution, work incentives and thirty years of UK tax and benefit reform. Working Paper Series. Institute for Fiscal Studies.
Conti, G., 2013. The Developmental Origins of Health Inequality, in: Health and Inequality. Emerald Group Publishing Limited, pp. 285–309.
Cribb, J., Hood, A., Joyce, R., Norris Keiller, A., 2017. Living Standards, poverty and inequality in the UK: 2017. Report no. R129, London: Institute for Fiscal Studies
Cribb, J., Joyce, R., Norris Keiller, A., 2017. Minimum wages in the next parliament. Institute for Fiscal Studies.
Dolton, P., Bondibene, C.R., Wadsworth, J., 2011. Employment, Inequality and the UK National Minimum Wage over the Medium-Term. Oxford Bulletin of Economics and Statistics 74, 78–106.
Furman, J., and Stiglitz, J., 1998. Economic consequences of income inequality. Proceedings - Economic Policy Symposium - Jackson Hole, p. 221-263.
References ii.
© Institute for Fiscal Studies Public economics: inequality and poverty
Goldin, C., Katz, L., 2007. The Race between Education and Technology: The Evolution of U.S. Educational Wage Differentials, 1890 to 2005. National Bureau of Economic Research.
Guvenen, F., Kaplan, G., Song, J., Weidner, J., 2017. Lifetime Incomes in the United States over Six Decades. National Bureau of Economic Research .
Levell, P., Roantree, B., Shaw, J., 2017. Mobility and the lifetime distributional impact of tax and transfer reforms. Working Paper Series. Working Paper Series. Institute for Fiscal Studies.
Metcalf, D., 2008. Why has the British National Minimum Wage had Little or No Impact on Employment? Journal of Industrial Relations 50, 489–512.
Pickett, K., Wilkinson, R., 2009. The Spirit Level: Why Greater Equality Makes Societies Stronger. Bloomsbury Press: New York, Berlin, London
Data acknowledgements:
Department for Work and Pensions, National Centre for Social Research, Office for National Statistics. Social and Vital Statistics Division. (2017). Bespoke Version of the Family Resources Survey, 2005-2016.
Office for National Statistics. (2002). Family Expenditure Survey, 1961-2001. [data collection]. UK Data Service. Retreived from https://discover.ukdataservice.ac.uk/series/?sn=200016
University of Essex. Institute for Social and Economic Research, NatCen Social Research, Kantar Public. (2016). Understanding Society: Waves 1-6, 2009-2015. [data collection]. 8th Edition. UK Data Service. SN: 6614, http://doi.org/10.5255/UKDA-SN-6614-9