IFS Poverty and Inequality Luke Sibieta Whats coming

IFS Poverty and Inequality Luke Sibieta

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 © 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 © Institute for Fiscal Studies, 2005

All possible poverty thresholds BHC © Institute for Fiscal Studies, 2005

Child Poverty: historic aim “Our historic aim will be for ours to be the first generation to end child poverty forever, and it will take a generation. It is a twenty year 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 © 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 © 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 © Institute for Fiscal Studies, 2005

International Comparisons Source: OECD. Figures not directly comparable with those on other slides. Mid 80 s Germany refers to West Germany. © Institute for Fiscal Studies, 2005

Why did inequality rise in the 1980 s? • 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 1980 s? • 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 1990 s? • No clear cut answer yet © Institute for Fiscal Studies, 2005

Different measures of income inequality 1996/97 – 2004/05 © Institute for Fiscal Studies, 2005

Income changes by percentile group: 1996/97 – 2004/05 © Institute for Fiscal Studies, 2005

Income changes by percentile group: 1996/97 – 2004/05 1979 -1996/7 © Institute for Fiscal

Explaining trends under Labour • Pattern of income growth between p 10 and p 90 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 1980 s • Little change in inequality since early 1990 s 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? © Institute for Fiscal Studies, 2005