Economics for public policy week 2

What is poverty?

Poverty is when a person’s resources are not sufficient to meet their minimum needs, however this is different to inequality as inequality is when different people have different opportunities or outcomes, there can be a lot of poverty with no inequality and there can be a lot of inequality with no absolute poverty.

Why is poverty a concern of government?

.Many people believe that we have a moral obligation to protect the most vulnerable in society, therefore using societies resources to help the poorest and most vulnerable might increase social welfare because it shifts resources to this group.

.externalities: poverty might cause infectious disease, increase crime, or impact on other people in society in other ways

.Failures in insurance markets: private markets dont allow people to adequately insure themselves against unexpected adverse events, such as losing a job or getting very ill, which led to poverty.

.Individual failures: evidence suggests it can be difficult to break out of poverty because poverty reduces cognitive capacity; someone in poverty can be overwhelmed by concerns that consume mental resources, leaving less capacity for other tasks which might help move them out of poverty.

Relative poverty

.poverty line defined as a fraction of median or average income

.this changes over time as the median or average income changes, so the definition of what is adequate changes over time

.currently in the UK a common measure is 60% below median income.

Absolute poverty

.poverty line defines as a fixed level of real income

.this aims to keep the definition of an adequate income fixed over time, but can become irrelevant over time if society’s views on what is adequate standard of living change

.currently in the UK a common meausure is 60% below (inflation-adjusted) median income in a base year, in the US (inflation-adjusted) cost of minimal food diet x3

measuring poverty- persistent poverty and material deprivation

.being in poverty for a long time has much worse consequences than being in poverty only temporarily, these measures try to capture who is in persistent or long-term poverty (now and in ata least 2/3 previous years)

measuring poverty- social metrics commission

.aims to develop a more comprehensive and systematic single approach to measuring poverty in the UK

.Counts both wealth and income, deducts inescapable costs, considers lived experience, measures depth and persistence

Equivalised income

The equivalised household income scale accounts for the number of people and their age (not characteristics).

households consist of different numbers of people and the cost of achieving the same standard of living are different for households of different sizes and compositions as its more expensive to feed a 15 year old than a 3 year old

and its cheaper to cook for two people than one and the cost to heat a flat is the same if one person lives in it or two people

equivalised household income scale with table

using the numbers in the table:

• a single person is a household with

one head, so their equivalence

scale = 0.67

• a couple is a household with one

head and one subsequent adult,

so their equivalence scale =

0.67+0.33 = 1

• a couple with a child aged 10 is a

head, a subsequent adult and

child aged 0-13, so their

equivalence scale =

0.67+0.33+0.20 = 1.2

who is in poverty in the UK?

24% of the overal population are in poverty

36% of children are in poverty

75% of people living in workless families are in poverty

9% of people living in full-time work families are in poverty

42% of people living in a household with the head being black/ african/ caribbean are in poverty

20% of people in families living with a head who is white are in poverty

30% of people living in families that include a disabled child or adult are in poverty and 47% for those with both.

poverty- depth and persistence

The social metric commission defines persistent poverty as when someone is in poverty this year and in at least 2 of the past 3 years.

being in deep poverty, or in poverty for a long time can have worse consequences than being in poverty for a long time.

persistent poverty- statistics

53% of all people in poverty are in persistent poverty- thats 11% of the UK population are in persistent poverty.

inequality versus poverty

poverty is when a household’s material resources are not sufficient to meet their minimum needs

inequality is a statement about the overall distribution of the resources (usually income) across all households

There can be a lot of poverty with no inequality

There can be a lot of inequality with no absolute poverty- inequality and relative poverty are somewhat related but very different concepts.

Why is inequality a concern of government?

There is no right or wrong level of inequality

it is a concern of government when the government can increase social welfare by achieving a more preferred distribution of resources

most people think it is reasonable that some people have different incomes, their views often depend on what they believe is the cause of the differences in income.

many people feel that existing levels of income inequality in the UK are higher than they should be thus some redistribution of income to reduce the level of inequality might increase social welfare beacuse it makes resources more equally distributed

economic analysis can help us to design policy to reduce income inequality and to understand the social efficiency costs of these policies.

What is the relationship between income inequality and economic growth? (from a theoretical perspective)

From a theoretical perspective it is unclear

1. its clear that a system that insisted on perfect equality of income would (severely) stifle growth

2. higher incentives for people to make productive investments encourages growth and typically leads to greater inequality

3. if higher inequality causes political instability and social unrest this could hamper growth

what is the relationship between income inequality and economic growth? (empirical evidence)

empirical evidence is unclear

1.there is a negative correlation between income inequality and growth in cross country data- regions with more inequality experience lower growth

.although this correlation does not imply causation as there could be factors that cause both inequality and low growth therefore there is no robust evidence of a causal impact

How do we measure income inequality and what types of measures can we use?

when talking about income inequality, we are talking about the shape (in particular dispersion) of the entire distribution of income

measures that can be used to capture the width of the distribution

1. gini cofficient

2. ratio of income at 90th percentile to 10th percentile

we can also look at the extent of skewnwess since distribution is quite skewed to the right- income share of top 1% for example

The gini coeffcient graph and description

if income is perfectly equal then A=0 so the gini coeffcient=0

if income is very unequal, so one person has all the income then B is nearly 0 so the gini coefficient= 1

measuring inequality

comparing the share of all income in the economy that is going to the top 1% of households (by income) which means that perfect equality would mean their share of income was 1%

What has driven the rise in UK income inequality?

Over the last 50 years incomes in the Uk has risen resulting in less poverty, but the distribution of income has become more unequal; growth at the top of the income distribution has been stronger than att he bottom

The cause for this is workers in high-income jobs have experienced strong earnings growth while those in low income jobs have experienced little pay progression:

1. skill-biased technological change

2. increased in competition from trade

3. changes in job market institutions, reduction in unionisation and weakening in the bargaining power of workers

4. changes in the types of jobs people do (more self-employed and more zero-hour contracts