Inequality in the UK

The IFS have recently published a report on inequality in the UK (  They show inequality at its highest level since a consistent time-series began in 1961.  Unfortunately the data has not picked up all of the recent declines in income but they speculate that incomes at the top (more heavily dependent upon interest and dividends and with a higher proportion of earners in the financial sector) may have experienced a greater fall.  It is interesting to carry out similar speculation for Ireland.  Certainly the same forces are at work at the top of the income distribution but we have also experienced a greater rise in unemployment.  However the recent ESRI analysis by Tim Callan and his colleagues has shown that the lowest quintile has done relatively well in recent budgets, particularly last year.  On balance this suggests a fall in inequality. The relative position of pensioners is of particular interest, with their reliance on interest and dividends (which have fallen) and on the old-age pension, which has risen in real terms in recent years.  No doubt Brian Nolan’s paper at Wednesday’s Conference in TCD will throw further light upon this.

9 replies on “Inequality in the UK”

NBER had a nice summary a few weeks ago looking at the effect of aggregate fluctuations on high income households, again making the case that high income households are hit more in modern recessions due to more widely fluctuating incomes. Debt is the key factor in Ireland particularly as we might still be deflating as European interest rates rise.

Equally important I think for this type of analysis is the work of folks at IFS in looking at the differences in inflation across different groupings (see ageing population as a recent example at Deflation, or low inflation, seems a key plank in the budget stance over the planning cycle of the next two to three years with respect to taxation, public sector pay reforms etc. Simply assuming that inflation is low or negative for all groups is naive.

Similarly there is the work on picking apart the unemployment data – – which addresses the point that Jim O’Leary gets at in his Irish Times piece last Friday and again is critical to understand – the unemployment experience this time is only marginally hitting at the more educated and it is still the lower educated, skilled and semi skilled manual worker that are hitting the dole queues. This is critical for understanding the labour market response required, but also for ensuring that a sense of disillusionment with education does not take hold.

Overall what the IFS work shows is that the story is not an easy one and in reality the problem is that particular groups are getting hit in pretty severe ways. Without understanding the distribution of issues we could have some serious problems lying unaddressed, or approach problems with very blunt instruments.

Two other factors are the reliance on taxes on incomes in the recent fiscal measures and the movement away from universality in some social programmes – medical cards over 70, for example. If the fiscal adjustment involves further movement away from universality, withdrawal of some tax expenditures etc., it is difficult to see how it can be particularly regressive. There must also be a lot of mobility across income deciles right now.

Colm H – at the risk of me becoming a one-trick pony, there has been a rise in graduate unemployment. Also, the ones coming out now are the first cohort really facing into a collapsed market. We will have to wait until October to start seeing what is happening with this. I predict something nasty.

This is a marked contrast to Ireland. Relative poverty in Ireland has been falling continuously since 2001. It had previously risen continuously been 1994 and 2001, both during the period of the FG/Lab government (1994 to 1997) and the FF/PD government (1997 to 2001). Given the political bias of the Irish media, the fall in relative poverty in Ireland since 2001 has received minimal publicity compared with the rise between 1994 and 2001. Indeed, a number of media commentators, for example Fintan O’Toole and Vincent Brownne, still write in exceedingly bitter terms as if the relative poverty rate in Ireland was continuing to rise, when its actually been falling since 2001. Its extremely likely to continue to fall while the global recession lasts, as social welfare benefits are rising much faster than the incomes of the middle-class. I offer no opinion as to whether or not this is a good thing, but am merely pointing out that its occurring and should be recognised more by the media, particularily the two commentators mentioned above, and organisations like CORI. For the record, the relative poverty rates (based on 60% median) in Ireland and the UK since 2001 are:

2001 Ireland 21.9% , UK 18.4%
2003 Ireland 19,7% , UK 17.8%
2004 Ireland 19,4% , UK 17.0%
2005 Ireland 18.5% , UK 17.6%
2006 Ireland 17.0% , UK 18.0%
2007 Ireland 16.5% , UK 18.3%

source: Irish figures from CSO SILC surveys – UK figures from link given by David Madden above

My guess is that that gap in relative poverty rates between Ireland and the UK will widen.

Re the distributional effect of inflation, probably the most sophisticated way to look at this is to calculate Feldstein’s distribution coefficient for each good (or for aggregates of goods). This is essentially a weighted sum of each households consumption of each good with poorer households having higher weights. The weights can be adjusted so as to put very high weights on the very poorest if you wish or just to have gradually increasing weights as you move to poorer households. You can then rank goods by this coefficient and check what the inflation rate is for each good – high inflation rates for goods with high distributional coefficients indicate regressivity. My experience in looking at work in this area for other countries is that distributional effects are usually quite small unless the overall inflation (or deflation) rate is quite high (i.e. in excess of 10%).

Dave – your last point is really interesting. It just seemed to me from memory that the way to be doing well out of deflation in Ireland is to constantly need new clothes and white goods….which for most are at best infrequent purchases. Fuel, travel costs etc were all ticking up. But I take your word for the relative distributional imbalances being small.

Liam – I suspect something nasty too. To return to previous topics on the blog I think the effort that other countries (US, UK) have swiftly put into propping up the graduate labour market are very informative. The raising of the school leaving age in the UK in the early 70’s kept a cohort off the market at that time and then flooded the market with the combined weight of the ‘normal’ school leaving cohort as well as those kept in the system by the policy change….and all onto the oil crisis hit UK labour market. Old work by Nickell shows just how badly that cohort did over a lifetime. This will be much worse! So I agree that without something to cushion this now we will completely change the composition of the unemployment figures (particularly of the under 25s) come October. That will do nobody any good.

John, above, provides the poverty rates for Ireland going back to 2001. He points out that these have been falling and states that this “should be recognised by the media … and organisations like CORI”.

For the record, if he took a moment to check the CORI website or to consult any of CORI’s publications on the topic he would find that CORI provides all these numbers and more – going all the way back to 1994. For example these numbers can be found in the Policy Briefing on Poverty published by CORI Justice in March 2009 (cf. Table 2 on page 3). Likewise they can be found in the annual Socio-Economic Review published by CORI Justice in 2008 (cf. table 3.1.2 on page 26).

In fact CORI Justice went even further in its recent Policy Briefing by acknowledging that the maturing of the SSIA scheme in 2007 kept the poverty rate higher than it might otherwise have been. When the impact of the once-off SSIA is taken out of the calculation the poverty rate had fallen to 15.8% – a fact CORI Justice recognised and welcomed in the first column of the first page of the Briefing.

Just one further anorak’s point: the UK poverty rates quoted in the IFS study come from the Households Below Average Incomes (HBAI) data which originally arises from the Family Resources Survey (FRS). Whereas the Irish figures quoted derive from the EU-SILC survey, the UK counterpart of which is the General Household Survey (GHS). To those of you still awake, the point I am trying to make is that comparison of poverty levels between Ireland and the UK in this instanceis a bit tricky as definitions of income, equivalence scales employed etc all may vary. However, comparisons of the trends over time are still valid in my opinion.

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