Inequality and Poverty

John Rentoul

ifsditb2 300x222 Inequality and PovertyReaders of my article in The Independent yesterday, which pointed out that the Coalition Government has neither increased inequality nor seems likely to do so significantly, continue to demand further particulars.

The main objection, apart from my leaving “the cuts” out of the picture, about which I wrote this morning, is that, to take the IFS figures, an 8 per cent cut in net income for the richest tenth of households is easier for them to bear than a 4-5 per cent cut is for the poorest tenth. A point made by, among others, Lawrence Phillips in a letter to the editor.

This is obviously true. It is one of the things about being rich: it gives you the comfort of a layer of insulating money. But it does not contradict the assertion that the effect of the changes is to make the overall distribution of incomes more equal.

What matters in a society in which the basic needs of food, shelter, healthcare and education are met cannot be absolute poverty, which is defined as the absence of those necessities, but relative poverty, namely how the poor compare to the average (hence the use of the median to define the “poverty line”, usually drawn at 60 per cent of median income), or to the rich.

So, while a 4-5 per cent cut in income may feel more painful for a poor person than an 8 per cent cut does for a rich one, we could say that poverty has been reduced a little, however paradoxical it may seem. Or, as Pete Mills points out, you could say that, if the rich and poor lose more than the middle, the gap between the poor the median, the usual definition of relative poverty, increases. (As he also points out, if you cut taxes on the rich and raised them on middle-income families, poverty on this measure would decrease.)

Other correspondents also seemed to think that I have not measured equality correctly, and it is true that I have had a long-running discussion with Jonathan Portes of the National Institute about whether the Gini coefficient is the best measure. He says that it fails to describe some of the oddities such as enrichment of the super-rich. Thus he disagrees (Page R3) with my description of the recent history of inequality, as increasing in the 1980s and roughly stable since. His version is a bit longer:

It seems to me that we can therefore come to a reasonably firm conclusion about the broad ‘story’ of inequality in the UK over the past forty years; consistent with the static analyses, inequality measured, if not over the life cycle, over reasonably long periods, rose sharply in the period up to about 1995, driven by growth in earnings inequality over the entire earnings distribution, demographics and other structural change, as well as a less progressive tax and benefit system. After 1995, and especially after 2000, the picture became more mixed. Structural changes, especially at the very top of the earnings distribution, continued to drive greater inequality; those in the financial sector and high earners in London did particularly well. However, a much more progressive tax and benefit system, and the National Minimum Wage, helped reduce inequality at the lower end and in the middle of the distribution.

It is true that the incomes of the richest 0.1 per cent of the UK-based population seem to have increased greatly over several decades, but they are untypical and globally mobile. And it is also true that the shape of the distribution has changed and is projected to change in curious ways, with both the poorest and the richest getting worse off while the supposed squeezed middle gets off more lightly. However, that for me strengthens the argument for the Gini coefficient as the only statistical measure that captures the full extent of inequality in any population. Any other measure, such as 60 per cent of median income or the ratio between the 10th and 90th decile points, would fail to do this.

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  • greggf

    Perhaps, at the root of those cavilling and demanding more particulars is the perception of your blog that the Coalition are doing this on purpose and to aid the poorest, when in fact “we all know” they are only searching out the best way to improve the amount of tax collected!
    And, that this might reduce inequality (or not increase it) accidentally is unbelievable……!

  • Toocleverbyhalf

    There’s a rather good letter from Dr Lawrence D Phillips in the Indy today which points out the flaw in using ratios when discussing the inequality gap.

    There is little doubt that the rich have even more money to spend on life’s inessentials nowadays than they had ten years ago whilst those at the bottom still struggle to pay for the essentials. But, as all the writing and analysis on the topic is done and read by people nearer the top than the bottom of the pile, it’s no great surprise that they search for figures to help us to salve our collective consciences in the face of this awful truth…

    PS Have you considered the possibility that the new chief humanist might have been sat in his office by someone else?!

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