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© Institute for Fiscal Studies What is happening to inequality? Paul Johnson September 13, 2012
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Page 1: What is happening to inequality? Paul Johnson September 13 ...

© Institute for Fiscal Studies

What is happening to inequality?

Paul Johnson

September 13, 2012

Page 2: What is happening to inequality? Paul Johnson September 13 ...

What is actually happening to inequality

• The standard analysis

– What HBAI tells us

– The components of inequality

• The complications

– Under reporting of income– Under reporting of income

– Other measures of income and consumption

• The role of government

– Importance of tax and transfers

– How different measures give different answers

– Going beyond transfers

• Conclusions

© Institute for Fiscal Studies

Page 3: What is happening to inequality? Paul Johnson September 13 ...

Median household £419 a week in 2010-11

1,000

1,500

2,000

2,500

Household income (£ per

week)

50th percentile:£419

© Institute for Fiscal Studies

0

500

1,000

10 20 30 40 50 60 70 80 90

Household income (£ per

week)

Percentile point

Source: Figure 3.1 of Living Standards, Poverty and Inequality: 2012

Page 4: What is happening to inequality? Paul Johnson September 13 ...

90th centile income about 4 times 10th centile

1,000

1,500

2,000

2,500

Household income (£ per

week) 90th percentile:

£84650th percentile:£419

© Institute for Fiscal Studies

0

500

1,000

10 20 30 40 50 60 70 80 90

Household income (£ per

week)

Percentile point

10th percentile:£216

Source: Figure 3.1 of Living Standards, Poverty and Inequality: 2012

Page 5: What is happening to inequality? Paul Johnson September 13 ...

Income growth 1996-97 to 2009-10 equalising over middle 90%

1%

2%

3%

4%

Average annual income gain

Income growth: 1996–97 to 2009–10

© Institute for Fiscal Studies

-2%

-1%

0%10 20 30 40 50 60 70 80 90

Average annual income gain

Percentile point

Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012

Page 6: What is happening to inequality? Paul Johnson September 13 ...

Income falls in 2010-11 bigger at top end

1%

2%

3%

4%

Average annual income gain Income growth: 1996–97 to 2010–11

Income growth: 1996–97 to 2009–10

© Institute for Fiscal Studies

-2%

-1%

0%10 20 30 40 50 60 70 80 90

Average annual income gain

Percentile point

Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012

Page 7: What is happening to inequality? Paul Johnson September 13 ...

In stark contrast to story since 1979

1%

2%

3%

4%

Average annual income gain

Income growth: 1979 to 1996–97

Income growth: 1996–97 to 2010–11

Income growth: 1996–97 to 2009–10

© Institute for Fiscal Studies

-2%

-1%

0%10 20 30 40 50 60 70 80 90

Average annual income gain

Percentile point

Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012

Page 8: What is happening to inequality? Paul Johnson September 13 ...

Gini up sharply to 1990, modestly 1996-2009

0.30

0.35

0.40

Gini coefficient

1979 to 1990 Gini increased from 0.25 to 0.34

1996-97 to 2009-10 Gini rose from 0.33 to 0.36

© Institute for Fiscal Studies

0.25

1979

1982

1984

1986

1988

1990

1992

1994–95

1996–97

1998–99

2000–01

2002–03

2004–05

2006–07

2008–09

2010–11

Gini coefficient

Source: Figure 3.7 of Living Standards, Poverty and Inequality: 2012

Page 9: What is happening to inequality? Paul Johnson September 13 ...

With sharp fall in 2010-11

0.30

0.35

0.40

Gini coefficient

© Institute for Fiscal Studies

0.25

1979

1982

1984

1986

1988

1990

1992

1994–95

1996–97

1998–99

2000–01

2002–03

2004–05

2006–07

2008–09

2010–11

Gini coefficient

• Gini fell from 0.36 to 0.34 in 2010-11

• Largest one year fall since at least 1961

• Returns Gini to below its 1997-98 level

Source: Figure 3.7 of Living Standards, Poverty and Inequality: 2012

Page 10: What is happening to inequality? Paul Johnson September 13 ...

Inequality ratios: 1979 to 2010-11 (GB)

4.0

4.5

5.0

5.5

6.0

Ratio

99/50 ratio fell to 5.1

(still higher than 2008-09)

© Institute for Fiscal Studies

3.0

3.5

99/50 ratio

Source: Figure 3.9a of Living Standards, Poverty and Inequality: 2012

Page 11: What is happening to inequality? Paul Johnson September 13 ...

At the bottom of the distribution

• Pensioners have done very well

© Institute for Fiscal Studies

Page 12: What is happening to inequality? Paul Johnson September 13 ...

Relative pensioner poverty lowest since 1984

25%30%35%40%45%

Number of pensioners living in poverty now:

2.0 million (BHC)

0%5%

10%15%20%

1962 1970 1978 1986 1994 2002 2010

Pensioners AHC Pensioners BHCSource: HBAI Data (FES and FRS)

1.7 million (AHC)

© Institute for Fiscal Studies

Page 13: What is happening to inequality? Paul Johnson September 13 ...

At the bottom of the distribution

• Pensioners have done very well

• Families with children on an improving trend

© Institute for Fiscal Studies

Page 14: What is happening to inequality? Paul Johnson September 13 ...

15%

20%

25%

30%

While relative BHC child poverty rates are back at mid

1980s levels

Lowest since 1984

0%

5%

10%

15%

1961 1968 1975 1982 1989 1996 2003 2010

© Institute for Fiscal Studies

Notes: Poverty line is 60% of median income. Years up to and including 1992 are calendar years; thereafter, years refer to financial years. Incomes are measured before housing costs have been deducted. Source: Authors’ calculations using Family Resources Survey and Family Expenditure Survey.

Target

Page 15: What is happening to inequality? Paul Johnson September 13 ...

At the bottom of the distribution

• Pensioners have done very well

• Families with children on an improving trend

• But the working age childless have not done well

© Institute for Fiscal Studies

Page 16: What is happening to inequality? Paul Johnson September 13 ...

Relative poverty among working-age adults without children on continuing upward trend

10%12%14%16%18%20%

0%2%4%6%8%

10%

1962 1970 1978 1986 1994 2002 2010

60% of AHC Median 60% of BHC Median

Source: HBAI Data (FES and FRS)

© Institute for Fiscal Studies

Page 17: What is happening to inequality? Paul Johnson September 13 ...

Absolute poverty among working-age adults without children similar to 1970s levels...

20%25%30%35%40%

0%5%

10%15%20%

1962 1970 1978 1986 1994 2002 2010

AHC BHC

Source: HBAI Data (FES and FRS)

© Institute for Fiscal Studies

Page 18: What is happening to inequality? Paul Johnson September 13 ...

1.5%

2.0%

2.5%

Aver

age

annu

al re

al in

com

e ga

in

Children

Individuals in childless households

Families with children have done better than the childless across the

distribution since 1998-99

0.0%

0.5%

1.0%

10 20 30 40 50 60 70 80 90

Aver

age

annu

al re

al in

com

e ga

in

Percentile point of household income

Notes: Changes in income at the 1st

, 2nd

, 98th

and 99th

percentiles are not shown on this graph due to very high levels of statistical uncertainty. Incomes have been measured before housing costs have been deducted. Source: Authors’ calculations using Family Resources Survey, 1998-99 and 2010-11.

Growth in median income

Page 19: What is happening to inequality? Paul Johnson September 13 ...

So the story seems to be

• Big increase in inequality since 1979

• Modest increase during 2000s driven by the tails

• Childless working age done particularly badly

• But inequality growth is overwhelmingly within • But inequality growth is overwhelmingly within identifiable groups

© Institute for Fiscal Studies

Page 20: What is happening to inequality? Paul Johnson September 13 ...

200

250

300

350

Ineq

ualit

y (lo

g va

rianc

e x

1000

)

Employment StatusHealth

Ethnic group

Education

Age

Income inequality – factor decomposition

0

50

100

150

200

1968 1972 1976 1980 1984 1988 1992 1996 2000 2004

Ineq

ualit

y (lo

g va

rianc

e x

1000

)

Age

Gender

Household typeRegion

Residual

Source: HBAI Data (FES and FRS) and authors’ analysis

Page 21: What is happening to inequality? Paul Johnson September 13 ...

But is that the whole story?

• Two good reasons for thinking we are (increasingly) underestimating living standards lower down the distribution

– First: important elements of benefit spending appear to be very poorly captured in the data

© Institute for Fiscal Studies

Page 22: What is happening to inequality? Paul Johnson September 13 ...

Only half of tax credit and two thirds of Income Support spending captured in the data

Coverage Spend (£m/yr)

Retirement pension 95% 66,480

“Other” 52% 27,970

Working and child tax

credits 50% 21,270

Rent rebates and

Notes: based on Barnard (2011) analysis of LCFS 2009 and 2010

allowances 83% 18,930

Income support &

pension credit 68% 16,580

Child benefit 96% 11,880

Incapacity benefit 74% 6,670

Maternity/Statutory

maternity pay 119% 1,900

Jobseekers allowance 80% 1,200

War pensions 33% 1,020

Student support 236% 970

Page 23: What is happening to inequality? Paul Johnson September 13 ...

But is that the whole story?

• Two good reasons for thinking we are (increasingly) underestimating living standards lower down the distribution

– First: important elements of benefit spending appear to be very poorly captured in the data

– Second: incomes at the bottom of the distribution – Second: incomes at the bottom of the distribution don’t match consumption

© Institute for Fiscal Studies

Page 24: What is happening to inequality? Paul Johnson September 13 ...

Those with the lowest cash incomes do not have the lowest cash outlays...

£280

£350

£420

£490

Median Expenditure

Notes: LCFS 2009; Great Britain only

£0

£70

£140

£210

£0 £100 £200 £300 £400 £500

Median Expenditure

Income

Median expenditure

Page 25: What is happening to inequality? Paul Johnson September 13 ...

...but those with the lowest cash outlays do have the lowest cash income

£280

£350

£420

£490

Median Expenditure

Notes: LCFS 2009; Great Britain only

£0

£70

£140

£210

£0 £100 £200 £300 £400 £500

Median Expenditure

Income

Median expenditure

Median income

Page 26: What is happening to inequality? Paul Johnson September 13 ...

But is that the whole story?

• Two good reasons for thinking we are (increasingly) underestimating living standards lower down the distribution

– First: important elements of benefit spending appear to be very poorly captured in the data

– Second: incomes at the bottom of the distribution – Second: incomes at the bottom of the distribution don’t match consumption

• In addition

– Inequality in consumption has grown much less quickly than inequality in income

© Institute for Fiscal Studies

Page 27: What is happening to inequality? Paul Johnson September 13 ...

Remember the rising Gini

0.32

0.34

0.36

0.38

HBAI Inc

0.20

0.22

0.24

0.26

0.28

0.30

1978 1982 1986 1990 1994 1998 2002 2006 2010

Page 28: What is happening to inequality? Paul Johnson September 13 ...

Doesn’t look so dramatic when you look at consumption

0.32

0.34

0.36

0.38

HBAI Inc

Consumption

0.20

0.22

0.24

0.26

0.28

0.30

1978 1982 1986 1990 1994 1998 2002 2006 2010

n

Page 29: What is happening to inequality? Paul Johnson September 13 ...

While a broader measure of income matters little

0.32

0.34

0.36

0.38HBAI Inc

Broad Inc

Consumption

0.20

0.22

0.24

0.26

0.28

0.30

1978 1982 1986 1990 1994 1998 2002 2006 2010

n

Page 30: What is happening to inequality? Paul Johnson September 13 ...

But is that the whole story?

• Two good reasons for thinking we are (increasingly) underestimating living standards lower down the distribution

– First: important elements of benefit spending appear to be very poorly captured in the data

– Second: incomes at the bottom of the distribution – Second: incomes at the bottom of the distribution don’t match consumption

• In addition

– Inequality in consumption has grown much less quickly than inequality in income

– Relative performance of different groups is highly sensitive to measure of income/consumption used

© Institute for Fiscal Studies

Page 31: What is happening to inequality? Paul Johnson September 13 ...

Relative poverty rate, HBAI income (<60% of median household income)

0.30

0.35

0.40

0.45Children

Working-age

0.05

0.10

0.15

0.20

0.25

1978 1982 1986 1990 1994 1998 2002 2006 2010

Page 32: What is happening to inequality? Paul Johnson September 13 ...

Relative poverty rate, broad income (<60% of median household income)

0.30

0.35

0.40

0.45Children

Working-age

0.05

0.10

0.15

0.20

0.25

1978 1982 1986 1990 1994 1998 2002 2006 2010

Page 33: What is happening to inequality? Paul Johnson September 13 ...

Relative poverty rate, consumption (<60% of median household income)

0.30

0.35

0.40

0.45Children

Working-age

0.05

0.10

0.15

0.20

0.25

1978 1982 1986 1990 1994 1998 2002 2006 2010

Page 34: What is happening to inequality? Paul Johnson September 13 ...

Relative poverty rate by age and time, HBAI income

0.20

0.25

0.30

1978-1982

2003-

0.00

0.05

0.10

0.15

25 30 35 40 45 50 55 60 65 70 75Age

2003-

Page 35: What is happening to inequality? Paul Johnson September 13 ...

Relative poverty rate by age and time, broad income

0.20

0.25

0.30

1978-1982

2003-

0.00

0.05

0.10

0.15

25 30 35 40 45 50 55 60 65 70 75Age

2003-

Page 36: What is happening to inequality? Paul Johnson September 13 ...

So overall

• There may have been more a reduction in inequality in living standards in the 2000s than HBAI data suggests

• Once you account for a broader definition of income pensioners have not only done relatively better than other groups but are now better than other groups but are now significantly less likely to be poor than working age people with or without children

© Institute for Fiscal Studies

Page 37: What is happening to inequality? Paul Johnson September 13 ...

What about the role of government

• Of course the tax and transfer system is important

• 2000s saw an additional £30 billion a year spent on benefits and tax credits

– Mostly focussed on pensioners and families with childrenchildren

© Institute for Fiscal Studies

Page 38: What is happening to inequality? Paul Johnson September 13 ...

Effects of tax benefit changes 1997-2010

5%

10%

15%

20%

25%

30%

Loss as a percentage of net income

© Institute for Fiscal Studies

-15%

-10%

-5%

0%

Poorest 2 3 4 5 6 7 8 9 Richest All

Loss as a percentage of net income

Income decile group

Families with children Pensioners Working-age without children All

Page 39: What is happening to inequality? Paul Johnson September 13 ...

Couple, 3 children, no

work

Lone parent, 1 child, no

work

Lone parent, 1 child, part-time

work

Change in BHC relative

child poverty rate in UK

1999-00 + + + -

2000-01 + + + -

2001-02 + + + -

2002-03 + - + -

2003-04 + + + -

A very close correspondence between movements in benefit levels and child poverty levels

2003-04

2004-05 + + + -

2005-06 - - - +

2006-07 - - - +

2007-08 - - - +

2008-09 + + + -

2009-10 + + + -

2010-11 + + + -

© Institute for Fiscal Studies

Notes: Ignores Housing Benefit, Council Tax Benefit and the value of free school meals. The working lone parent earns an amount that is below the personal income tax allowance and the primary threshold for National Insurance contributions.Source: Authors’ calculations using TAXBEN, the IFS tax and benefit micro-simulation model.

Entitlements grew faster than relative poverty line (median income) Entitlements grew more slowly than relative poverty line (median income)

Page 40: What is happening to inequality? Paul Johnson September 13 ...

What about the role of government

• Of course the tax and transfer system is important

• 2000s saw an additional £30 billion a year spent on benefits and tax credits

– Mostly focussed on pensioners and families with childrenchildren

• This had a big effect on inequality

© Institute for Fiscal Studies

Page 41: What is happening to inequality? Paul Johnson September 13 ...

Actual income changes 1997-2009 favoured deciles 2 to 4 (and 10)

30.0%

35.0%

40.0%

45.0%

overall % change

© Institute for Fiscal Studies

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1 2 3 4 5 6 7 8 9 10

overall % change

Page 42: What is happening to inequality? Paul Johnson September 13 ...

Very heavily driven by tax and benefit changes

30.0%

40.0%

50.0%

© Institute for Fiscal Studies

-10.0%

0.0%

10.0%

20.0%

1 2 3 4 5 6 7 8 9 10

overall % change

of which, taxben

Page 43: What is happening to inequality? Paul Johnson September 13 ...

Without those changes pattern is much less progressive

30.0%

40.0%

50.0%

© Institute for Fiscal Studies

-10.0%

0.0%

10.0%

20.0%

1 2 3 4 5 6 7 8 9 10

overall % change

of which, taxben

implied change w/out taxben

Page 44: What is happening to inequality? Paul Johnson September 13 ...
Page 45: What is happening to inequality? Paul Johnson September 13 ...

I MITIGATED THE INCREASE IN THE GAP BETWEEN RICH AND

POOR, LEAVING THE GAP SMALLER THAN IT OTHERWISE

WOULD HAVE BEEN (UNDER RPI UPRATING OF THE 1996-97

TAX AND BENEFIT SYSTEM)TAX AND BENEFIT SYSTEM)

Page 46: What is happening to inequality? Paul Johnson September 13 ...

What about the role of government

• Of course the tax and transfer system is important

• 2000s saw an additional £30 billion a year spent on benefits and tax credits

– Mostly focussed on pensioners and families with childrenchildren

• This had a big effect on inequality

• Other spending is also equalising

– At least in the sense that cost of service provided is a higher proportion of income of poor than of rich

© Institute for Fiscal Studies

Page 47: What is happening to inequality? Paul Johnson September 13 ...

Benefits in kind matter a lot

© Institute for Fiscal Studies

Page 48: What is happening to inequality? Paul Johnson September 13 ...

What about the role of government

• Of course the tax and transfer system is important

• 2000s saw an additional £30 billion a year spent on benefits and tax credits

– Mostly focussed on pensioners and families with childrenchildren

• This had a big effect on inequality

• Other spending is also equalising

– At least in the sense that cost of service provided is a higher proportion of income of poor than of rich

• And spending on the welfare state has become much more important over time

© Institute for Fiscal Studies

Page 49: What is happening to inequality? Paul Johnson September 13 ...

Public spending in 2010-11

29%

5%

6%

2%

3%1%

10% Social protection

Personal social services

Health

Education

Transport

Defence

© Institute for Fiscal Studies

4%

18%13%

3%

6%

5%

Public order and safety

Gross debt interest

Housing

TIEEE

AFF

Other

Page 50: What is happening to inequality? Paul Johnson September 13 ...

Public spending in 1978-79

23%

2%6%

9%

1%

9%Social security

Personal social services

Health

Education

Transport

Defence

© Institute for Fiscal Studies

10%

12%

4%10%

4%

10%

Law, order & protection

Gross debt interest

Housing

TIEEE

AFFF

Other

Page 51: What is happening to inequality? Paul Johnson September 13 ...

What about the role of government

• Of course the tax and transfer system is important

• 2000s saw an additional £30 billion a year spent on benefits and tax credits

– Mostly focussed on pensioners and families with childrenchildren

• This had a big effect on inequality

• Other spending is also equalising

– At least in the sense that cost of service provided is a higher proportion of income of poor than of rich

• And spending on the welfare state has become much more important over time

• A lot of that spending now more skewed to those on low incomes© Institute for Fiscal Studies

Page 52: What is happening to inequality? Paul Johnson September 13 ...

Funding focused more deprived schools

3,000

4,000

Premium (2010-11

Primary Secondary

© Institute for Fiscal Studies

0

1,000

2,000

2005 2006 2007 2008 2009 2010Implicit FSM Premium (2010

Prices)

Notes: Implicit FSM Premium calculated as the extra funding associated with one extra pupil eligible for FSM, holding other pupil and school characteristics constant.

Sources: For a full list of sources please see Table 2.2. (link)

Page 53: What is happening to inequality? Paul Johnson September 13 ...

Though we don’t know how much value that adds

60%

70%

80%

90%

100%

£5,000

£6,000

£7,000

© Institute for Fiscal Studies

0%

10%

20%

30%

40%

50%

60%

£0

£1,000

£2,000

£3,000

£4,000

Deciles of school deprivation (% FSM)

Spending per pupil (left axis)

Page 54: What is happening to inequality? Paul Johnson September 13 ...

What about the role of government

• Of course the tax and transfer system is important

• 2000s saw an additional £30 billion a year spent on benefits and tax credits

– Mostly focussed on pensioners and families with childrenchildren

• This had a big effect on inequality

• Other spending is also equalising

– At least in the sense that cost of service provided is a higher proportion of income of poor than of rich

• And spending on the welfare state has become much more important over time

• A lot of that spending now more skewed to those on low incomes

• And just as with measuring living standards

© Institute for Fiscal Studies

Page 55: What is happening to inequality? Paul Johnson September 13 ...

VAT reform: effects by income

£0

£2

£4

£6

£8

4%

5%

6%

7%

8%

% rise in non-housing expenditure

% rise in income

cash gain/loss (£/week, RH axis)

© Institute for Fiscal Studies

-£8

-£6

-£4

-£2

£0

0%

1%

2%

3%

4%

Poorest 2 3 4 5 6 7 8 9 Richest

Income Decile Group

Page 56: What is happening to inequality? Paul Johnson September 13 ...

VAT reform: effects by expenditure

£2

£4

£6

£8

5%

6%

7%

8%

% rise in non-housing expenditure

% rise in income

cash gain/loss (£/week, RH axis)

© Institute for Fiscal Studies

-£8

-£6

-£4

-£2

£0

£2

0%

1%

2%

3%

4%

5%

Poorest 2 3 4 5 6 7 8 9 Richest

Expenditure Decile Group

Page 57: What is happening to inequality? Paul Johnson September 13 ...

To conclude

• The HBAI story tells us what has happened to household incomes over time

– But only on a particular measure

– Using a broader measure of income changes the picture between groups

– And inequality in measured consumption has grown – And inequality in measured consumption has grown much less

• Redistribution through the welfare system over recent years has been very important

– Though very costly and being partially reversed

• And don’t forget the wider role of the state in redistributing

– Nor the costs (as well as the benefits) inherent in that redistribution

© Institute for Fiscal Studies


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