How are Inequality and Poverty Linked? Abigail McKnight Associate Director Centre for Analysis of Social Exclusion, London School of Economics UN expert meeting: New Research on Inequality and Its Impacts 12 th and 13 th September 2018 Motivation • There is a well documented upward trend in inequality in high and middle income countries since 1970s; although not everywhere, and trends are not uniform across countries and vary across different measures • A growing concern about potential harmful effects of inequality on societies, including the role inequality played in the lead up to the financial crisis • Recent shift in thinking away from the assumption that policy can successfully target poverty reduction (including in rich and middle income countries) without addressing income inequalities • Big players - World Bank, United Nations, World Economic Forum, OECD, Oxfam, etc – setting twin goals and outlining recommendations that policy needs to simultaneously tackle poverty and inequality in rich as well as poor countries • … but knowledge and evidence gaps on the nature of the relationship between economic inequality and poverty Measurement issues • Measures of income inequality and poverty are summary statistics often calculated from the same distribution (household income), therefore we would expect these measures will be linked in a ‘mathematical/mechanical’ sense • The strength of the relationship between inequality and poverty will depend on the extent to which any inequality measure is sensitive to dispersion of income in the lower half of the income distribution • Theoretically it is possible to have: (1) no relative income poverty (income < 60% median income) but high inequality (high concentration of income among a small group of very rich households); high relative income poverty but low inequality (very low dispersion of income above the median) but in practise this is rarely observed 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1961 1962 UK Poverty and Income Inequality Trends Trends Inequality Income and Poverty UK 1963 Top 1% income share-adults (RHS) 1% share-adults income Top (BHC) (RHS) coefficient Gini ratio (BHC) 90/10 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1961 1980 <60% median (AHC) (RHS) (AHC) median <60% ratio (BHC) 50/10 1981 1982 1983 1984 1985 - 1986 2015/16 1987 1988 1989 1990 1991 1992 1993-94 1994-95 1995-96 1996-97 1997-98 Top 1% income share-married couples & single adults single & couples 1% share-married income Top ratio (BHC) 90/50 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (RHS) 2012-13 2013-14 2014-15 2015-16 0 5 10 15 20 25 30 35 40 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1961 1962 UK Poverty and Income Inequality Trends Trends Inequality Income and Poverty UK 1963 Top 1% income share-married couples & single adults single & couples 1% share-married income Top (BHC) (RHS) coefficient Gini ratio (BHC) 90/10 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 (RHS) 1978 1979 1961 1980 Top 1% income share-adults (RHS) 1% share-adults income Top (RHS) (AHC) median <60% ratio (BHC) 50/10 1981 1982 1983 1984 1985 - 1986 2015/16 1987 1988 1989 1990 1991 1992 1993-94 1994-95 1995-96 1996-97 1997-98 <60% median (BHC) (RHS) median <60% ratio (BHC) 90/50 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 0 5 10 15 20 25 30 35 40 Relationship between UK poverty and income inequality (Gini) Before housing costs After housing costs 0.25 0.30 y = 0.7261x - 0.0496 y = 0.5735x - 0.0132 0.25 0.20 R² = 0.6862 R² = 0.8819 0.20 0.15 0.15 0.10 0.10 Poverty rate (<60% median) (<60% rate Poverty Poverty rate (<60% median) (<60% rate Poverty 0.05 0.05 0.00 0.00 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 Inequality (Gini) Inequality (Gini) Relationship between poverty and income inequality (decile ratios) – before housing costs 0.25 0.25 0.20 y = 0.2432x - 0.3061 0.20 y = 0.165x - 0.1528 R² = 0.9246 R² = 0.7022 0.15 0.15 0.10 0.10 Poverty rate (<60% median) (<60% rate Poverty median) (<60% rate Poverty 0.05 0.05 0.00 0.00 0.0 0.5 1.0 1.5 2.0 2.5 0.0 0.5 1.0 1.5 2.0 2.5 Inequality (50/10 ratio) Inequality (90/50 ratio) Relationship between poverty and income inequality (decile ratios) – after housing costs 0.30 0.30 0.25 y = 0.161x - 0.1518 0.25 y = 0.2308x - 0.2636 R² = 0.8772 R² = 0.8926 0.20 0.20 0.15 0.15 0.10 0.10 Poverty rate (<60% median) (<60% rate Poverty median) (<60% rate Poverty 0.05 0.05 0.00 0.00 0.0 0.5 1.0 1.5 2.0 2.5 0.0 0.5 1.0 1.5 2.0 2.5 Inequality (50/10 ratio) Inequality (90/50 ratio) Relationship between poverty and top 1% share – before housing costs 0.250 19901992 1989 1988 1991 0.200 1993 19961997 1998 1994 1999 20012000 2007 1987 1995 2002 2006 2003 2005 2004 2009 1972 1986 2010 2011 2014 2012 2013 0.150 1971 1963 1985 197419811973 1969 19781979 1970 19671966 19621965 1975 19831984 1976 1982 1968 1964 1977 y = 0.0057x + 0.1039 0.100 R² = 0.3308 Poverty (<60% median) (<60% Poverty 0.050 0.000 0 2 4 6 8 10 12 14 16 18 20 Top 1% income share (%) Levels of income inequality and relative income poverty are strongly correlated across countries Inequality and relative income poverty risk in 2014 for 26 European countries 25 25 greecespainlatviaestonia latviaestoniagreecespain 20 italy portugallithuania 20 italy lithuaniaportugal germanypolandunitedkingdom germanyunitedkingdompoland belgiummaltaluxembourgireland belgiumluxembourgmaltaireland 15 sweden hungary cyprus 15 swedenhungarycyprus austriafrance franceaustria finlandslovakiadenmark denmarkfinlandslovakia norway netherlands norwaynetherlands 10 czechrepublic 10 czechrepublic Relative poverty risk (%) risk poverty Relative iceland (%) risk poverty Relative iceland 5 r=0.87*** r=0.95*** 5 20 25 30 35 40 2 3 4 5 6 Gini P90:P10 25 25 greecespain estonia latvia latviaestonia greecespain 20 italy portugallithuania 20 lithuania italyportugal germanypolandunitedkingdom belgium maltaluxembourgireland luxembourgmaltaunitedkingdomgermanypoland 15 sweden hungary irelandbelgium austria cyprus 15 swedenhungary france francecyprusaustria denmarkslovakiafinland finlanddenmarkslovakia norway netherlands norwaynetherlands 10 czechrepublic 10 czechrepublic Relative poverty risk (%) risk poverty Relative iceland (%) risk poverty Relative iceland r=0.81*** r=0.94*** 5 5 1.6 1.8 2 2.2 2.4 1.6 1.8 2 2.2 2.4 2.6 P90:P50 P50:P10 Eleni Karagiannaki (2017) “The Empirical relationship between income poverty and income inequality in rich and middle income countries”, LIPpaper 3, Centre for Analysis of Social Exclusion, London School of Economics …so are changes in inequality and changes in poverty – European countries 1996-2014 Eleni Karagiannaki (2017) “The Empirical relationship between income poverty and income inequality in rich and middle income countries”, LIPpaper 3, Centre for Analysis of Social Exclusion, London School of Economics Relationship between income inequality and material deprivation and multidimensional poverty • We also examined the link between the way a country's most deprived individuals experience disadvantage across multiple dimensions of life and its level of income inequality. • By expanding the definition of disadvantage beyond income poverty, we sought to overcome some of the criticisms that might be levelled at a mechanical link between strictly income-based measures of poverty and inequality. • We used three measures of material deprivation and multidimensional poverty, and focused our analysis on European countries. • The main findings are that broader multidimensional poverty measures are also positively linked to income inequality, but (over a short period) changes in them are not. Lin Yang and Polly Vizard (2017) “Multidimensional poverty and income inequality in the EU” LIPpaper 4, Centre for Analysis of Social Exclusion, London School of Economics What drives the relationship between inequality and poverty – review of mechanisms • Social aspects: Public opinion and shifts in cultural and social norms – underestimating inequality/perceptions of reasons for ‘success’ and ‘failure’ • Spatial aspects of inequality and poverty – segregation/public expenditure and investment • Political aspects: the relationship between riches and access to political power and decision making, political representation, legal frameworks and voting • Crime and the legal system: crime, punishment and unequal access to justice Public opinion and shifts in cultural and social norms • Standard models predict that an increase in inequality will lead to an increase in demand for redistribution and as a result inequality and poverty will fall (Meltzer and Richard, 1981). However, empirical evidence is mixed. Why? Current income alone doesn’t shape individuals’ redistributive preferences – expectations of upward mobility. Evidence shows that people underestimate the level of inequality and overestimate the level of social mobility. This is important because there is a positive (negative) correlation between people’s perceived level of inequality (social mobility) and the demand for redistribution. People’s knowledge of inequality, the tax and benefit system and redistribution is limited (Orton and Rowlingson, 2007) ‘Failure attribution argument’ – redistributive preferences are influenced by beliefs on why individuals are poor or rich (hard work/lazy/luck/etc).