Green gold in Tanzania
Lots of examples of opportunity cost and market failure in this video report from Africa about jatropha, a crop that can be used to produce biofuels. It has a number of advantages; it can’t be used for food, so avoids the dilemma of competing demand or supply suffered by crops like maize and soya, it grows naturally in tough conditions and is fairly drought resisitant so can be cultivated in areas which won’t support other crops, and is poisonous to animals so crops are unlikely to be spoiled by animals looking for food. On the other hand it takes some years to reach productive maturity, so requires investment, and time and money put into producing it could be used to grow food crops for people and livestock in exceptionally poor areas of Africa. There are a number of small scale european businesses trying to invest in this part of the world by setting up plantations on a commercial scale, but they face a long timescale to receive any payback on that investment, once they have negotiated with government and local tribes for access to the land and local labour supply and developed the infrastructure to support transport power and irrigation. How should the government intervene, in order to ensure short term provision of food and facilities for local people living on a dollar a day, and also long term potential for inward investment in infrastructure and jobs? What are the advantages and disadvantages of allowing this to be developed by outside investors rather than by local co-operatives?
New figures show extent of wealth inequality in the UK
The Office of National Statistics have released updated figures on the distribution of national wealth.
The richest fifth have nearly two thirds of the wealth. More startling is that the poorer half of us speak for just 9p in every £1 of privately held wealth.
Private household net wealth in Great Britain totalled £9 trillion in 2006/08 and nearly 80% of this is accumulated in property and private pension entitlements.
Median household net wealth was £204,500 in 2006/08. The least wealthy half of households accounted for only 9 per cent of wealth, while the wealthiest 20 per cent of households had 62 per cent of total wealth.
The least wealthy 10 per cent of households had negative total net wealth
Median net wealth – including pensions, houses and cars, but excluding mortgages and other debt – of a household in the South East is £287,900. In Scotland, it is £150,600.
The Lorenz curve for wealth is more skewed than it is for income and it is an interesting exercise for students to explain why and discuss the consequences for over-lapping generations.
Really clear income inequality chart
One of the clearest charts explaining the gini coefficient that I have seen. And here is another one on foreign direct investment.
Market failure in city gender inequality
Study of the labour market includes market failures and gender inequality. It seems to me that, ever since the start of the financial crisis that led to the recession, there has been a series of reports suggesting that if there were more women in positions of power in the city institutions that lost control of their lending, this would never have happened. This is now confirmed by a committee of MP’s (which includes only one woman) which is currently studying the role of women in the City and has been told by a (male) professor from the London School of Economics that a more cautious approach, rather than an “alpha male” one, would be beneficial. Professor Charles Goodhart explained that the more cautious and long-term outlook of women could prove to be a more positive trait than the more aggressive risk-taking stance of men. However, another LSE professor told the committee of MPs that there is a need for a change of culture in the City before this can happen. It seems that women are well-represented on the boards of the FTSE top 250 companies, but very under-represented on the boards of the FTSE 100. In Norway there is a quota system; 40% of board members must be female. Clare Dobie, of the City Women’s Network told the committee that recruiters could do much to help the problem which her organisation sees as an issue of too little demand rather than a shortage of supply of women who are good enough for the job. A report last month from the Equality and Human Rights Commission found that women working in the city are paid on average 39% less than men doing the same job. Women start on a lower salary and never make up the difference. They also earn bonuses which are up to five times smaller than those earned by their male colleagues - on average, women get bonuses of £2,875 compared with £14,554 for men.
However the gender pay gap should be addressed there does remain a practical difficulty though: John Cridland, deputy director general of business group the CBI, said “As in many other areas of business, women applying for the top jobs need more flexibility with hours and childcare responsibilities” . How long will it remain the case that it is the women who need this flexibility, and not the men?
Escaping from the Poverty Trap
There is a timely article on the existence of the poverty trap here in the Financial Times. The article draws on some of the recent research by the Centre for Social Justice which has looked at the disincentives facing people who want to earn extra income either by leaving the unemployment register or by taking a second job or working some extra hours. There are hundreds of thousands of people whose ‘effective marginal tax rate’ is well in excess of sixty per cent.
As this article in the Times makes clear “Marginal tax rates actually refer to the extra tax you pay in proportion to every extra pound you earn as your income rises.:
And for others, the net gains from earning higher gross incomes are even smaller.
The poverty trap comes about because for every £10 of higher incomes many lower-income families
1: A loss of income from tax and national insurance
2: The withdrawal of means-tested social security (welfare) benefits
Add in the financial costs of child care, traveling to and from work and the deterrent to finding a job or accepting some extra hours can be tough to overcome.
Disincentives matter hugely in the labour market and benefit reforms are likely to figure prominently in the manifesto of the Conservative Party at the next general election. It seems at the moment that they are taking a lead in developing a more radical approach to labour market reform. The Centre for Social Justice appears to be influential in reshaping their strategies to get people off benefits and into work.
Income inequality in the USA
The Economist carries a short feature on the scale of income inequality in the USA and finds that a quarter of America’s total income is earned by the top 1% of the population.
“The concentration of income earned by this top percentile now stands at its highest since 1928. Two-thirds of the country’s total gains in the five years to 2007 accrued to the top 1%, whereas the bottom 90th percentile saw only 12% of the extra income.”
We have been looking at income inequality as part of our study on measuring the standard of living. Wikipedia carries up to date information on measures such as the Gini coefficient for countries where the relevant data is available.
The boy who harnessed the wind
This fantastic true story of boy’s dream to improve the standard of living in his village in Malawi is both inspiring and full of good economic examples (and therefore a winning combination!). William Kamkwamba’s family had to pull him out of school in Malawi as they could no longer afford the £50 annual fee; however, he continued to use his local library to study science and set out on a project to use items of junk and waste to build a windmill in order to bring electricity and running water to his village. There are some lovely examples here relating to development in terms of grassroots approaches, some of the problems faced by those living in developing countries, the positive externalities associated with education, alternative measures to tackling climate change as well as an inspirational entrepreneurial story. I for one will be buying the book telling the story of this young man’s vision.
One family in six in the UK has no one in work
There are now over 3 million households in the UK where no one of working age is in any form of work - the relentless rise of the ‘workless household’ is highlighted by new figures from the Office for National Statistics who have found that the number of working-age people in workless households jumped by 500,000 to 4.8 million in the year to June. 17% of households with people of working age have no one participating in the formal labour market. 2 million children belong to them and the risks of persistent and deep poverty are greatest for these groups. Little wonder that benefit dependency is rife for such families - the paradox is that those on the lowest incomes or whose main source of income are transfer payments, often face the highest effective marginal tax rates. Crucially the depth of non-employment is highest among lone-parent families - the workless household rate was highest for lone parent households, at 40.4 per cent,
Here is a regional snapshot of the problem - with the North East, Inner London and Northern Ireland suffering from the highest rates of economic inactivity among families with one or more people of working age
What is poverty?
Michael Blastland has an excellent piece on the difference between absolute and relative poverty in this article on the BBC news website Very clear on medians, means and where to draw the line when measuring official levels of relative poverty.
Economics Snapshot - The Impact of Tax and Benefits on Inequality
Progressive income tax and cash welfare benefits help to reduce the gap between the richest and poorest households in the UK. In 2007/08, original income (before taxes and benefits) of the top fifth of households in the UK was £72,600. This is approximately 16 times as great as the figure of £4,700 for the bottom fifth. After taking account of all taxes and benefits, the top fifth had an average final income of £52,400 per year compared with £14,300 for the bottom fifth of households, a ratio of four to one.
The latest figures for the impact of tax and benefits on the UK income distribution reveal the importance of cash benefits such as Income Support, Pension Credit, Child Benefit, Incapacity Benefit and Retirement Pension as a means of redistribution. play a major role in reducing income inequality. Of the total amount of cash benefits received, the bottom two quintile groups together receive 57 per cent. Cash benefits represent around 58 per cent of gross income for the bottom quintile group and 36 per cent for the second quintile group, falling to 2 per cent for the top fifth of households.
Direct taxation, with the exception of Council tax and Northern Ireland rates, is progressive; that is households at the lower end of the income distribution pay smaller proportion of their income in direct tax compared with higher income households. As a proportion of their gross incomes, households in the bottom quintile group pay an average of 11 per cent in direct taxes compared with 25 per cent for those in the top quintile group.
In contrast indirect taxes are found to have a regressive effect on the final distribution of income. Overall the latest figures from the ONS find that income inequality in the UK in 2007-08 was little changed from the year before. This BBC news article provides more background.
Using the Big Question
The Big Question feature in the Independent is a reassuringly regular source of useful and interesting background articles. There is often an economic / environmental /social / business perspective to their choice of topics in the news. And the Indy handily provides some vivid graphics that can serve well as student handouts or a prompt for a data response question. Here is a brief selection of recent features
Why is inequality rising in the UK? (July 2009)
Can the G8 meet its climate change targets? (July 2009)
What has gone wrong between the Chancellor and the Governor? (June 2009)
Will there be cuts in public spending whichever party is in power? (June 2009)
Why are games consoles the focus of the battle between computer giants? (June 2009)
World food price inflation
Thursday’s Daily Chart at economist.com shows a wide variation in the rate of food price inflation around the world, from increases of 15% in Russia to a fall of 1.3% in China. Bearing in mind the weight that is attached to food purchases in countries with a lower disposable income, where a higher proportion of income is spent on food than in the developed economies, this is worth looking at to assess how the local economies of the countries will be affected. Also worth looking at the BBC’s World Service Food Price Index from June 1st, which tells a similar story and looks at a basket of five staple foods in seven major cities around the globe.
Life in the Middle - income distribution in the UK
The TUC has published a report ‘Life in the Middle - The Untold Story of Britain’s Average Earners’ surveying ‘Middle Britain’ in particular, and income distribution across the population as a whole. They define Middle Britain as the fifth of the population (quintile) which earns within 10% of the median income of about £20,000 per year for households in the UK in 2006/7, the last year when full figures are available. The results make very interesting reading, and give some good up-to-date figures on income distribution for use in A2 microeconomics papers.
Labour Market Failure - Exploitation of Migrant Workers
Martin Shankleman of the BBC reports on what looks a like a blatant example of exploitation of vulnerable migrant workers who seek employment in the (often unlicensed) UK food processing industry. Gangmasters have monopsonistic power in their own labour markets and, as this report shows, Saphire Trading based in Southampton appears to have shown a disgusting lack of care for many of the people they have taken on. A severe case of labour market failure and one that requires effective regulation - in this case the Gangmasters Licensing Authority.
Beware - women at work
The BBC is running a two-part series called ‘The Trouble with Working Women’ to examine why sexual equality is a distant prospect, which might be of interest in considering this aspect of labour economics and the distribution of income. The first part is broadcast tonight on BBC2 at 9pm, and the second part at the same time tomorrow. Links here are to two associated items on their website, the first to the story of one couple who decided that the father of their new baby should be the one to stay at home and look after her, the second to an article about why women need to think like men if they want more cash - including a quiz to determine how likely you are to earn more or less!
Who’s left holding the baby?
Why XX must think like XY to earn more K
UK Minimum Wage to Rise
The Low Pay Commission has recommended a small increase in the national minimum wage covering hundreds of thousands of Britain’s lowest paid workers and yesterday the government announced that Britain’s minimum wage will rise by 7p, or 1.2%, to £5.80 an hour. The new adult rate for workers aged 22 and over will come into effect in October. The rate for 18- to 21-year-olds will rise from £4.77 to £4.83, while for those 16 and 17, the statutory rate will go up to £3.57 an hour from £3.53. The increase means adults working a 40-hour week will receive at least £232 before taxes and other deductions.
Retail and hospitality, account for 44 per cent of all minimum wage jobs. The next largest industries, social care and cleaning, each account for 6 to 7 per cent.
In the light of current economic circumstances should the NMW have been frozen? RPI inflation has fallen into negative territory but CPI inflation remains well above the 2% target - so any NMW freeze would have meant a real wage cut for people at the bottom of the pay ladder. Indeed the rate of inflation experienced by such people is highly unlikely to be either of the two officially published inflation figures.
And decisions on the NMW have important implications for equity and efficiency in the labour market. The TUC argues that low paid workers have done nothing to cause the credit crunch and the subsequent economic crisis - so why should they pay the price with a wage cut? Supporters of a statutory pay floor would also argue that wage cuts could have a damaging effect on worker morale and productivity.
The minimum wage is not a living wage and thousands of people dependent on it have seen their hours cut as employers move to shorter-time working.
In a related story affecting restaurants and many other consumer service industries, employers will be banned from using tips to bring workers’ pay up to the minimum wage from October.
Policy Failure - Rising Inequality
Labour’s long-term aim of abolishing child poverty and scaling back the depths of relative poverty among Britain’s poorest households looks to be falling apart judging from the latest official statistics on the number of families living below average income.
The data finds that the number of people living in poverty has climbed to 11 million by March 2008, a rise of 300,000 since 2006. And nearly a quarter of a million working adults fell below the poverty line last year - the line being families living on less than sixty per cent of median income adjusted for household size. According to the Institute of Fiscal Studies, inequality (or relative poverty - for it amounts to the same thing) has risen to its highest level since 1961. The Gini Coefficient, a measure of income inequality, is now at its highest level since the IFS began compiling figures in 1961
And this before the true effects of the recession on poverty start to show through in published figures.
The core facts are these:
In 2008-08 median income was £393 per week and mean income was £487 per week. (Students should be able to explain the difference!)
The Gini coefficient rose to 0.36 in 2007-08 - the highest recorded figure since 1961
In 2007/08, there were 2.9 million children living in UK households with below 60 per cent of contemporary median net disposable household income - one child in five lives in a family operating below the poverty line. Britain has one of the highest incidences of child poverty in the European Union
In 2007/08, there were 5.6 million working-age adults living in UK households with below 60 per cent of contemporary median net disposable household income Before Housing Costs, and 7.5 million After Housing Costs.
In 2007/08, there were 2.5 million pensioners living in UK households with below 60 per cent of contemporary median net disposable household income Before Housing Costs, and 2.0 million After Housing Costs.
In 2007/08, there were 11.0 million people living in households with below 60 per cent of contemporary median net disposable household income Before Housing Costs (BHC), and 13.5 million After Housing Costs (AHC).
More here
Guardian: Child poverty reduction halted by recession
Telegraph: Gap between rich and poor grows to record levels, official figures show
read more...»Positive Price Discrimination at South Africa 2010
As you can see from several entries on the IB Economics Blog today, Africa is suffering a significant reduction in growth in the global slowdown. The IMF summit taking place in Tanzania this week is looking for ways to combat this. However, demand for some scarce goods remains very inelastic, and it seems likely that even in the midst of the gloom tickets for the football World Cup in South Africa in June-July 2010 will be over-subscribed. Ticket prices for sports events offer opportunities for price discrimination and maximum price setting, and the ticketing process for the World Cup in South Africa takes advantage of this on behalf of local people rather than the supplier, and seeks to ensure that some consumer surplus is available to them. This could be an important factor for a country with almost 22% unemployment, two quarters of negative GDP growth, GPD per capita of $10,400 in 2008 but a GINI index of 65 (2005) indicating significant inequality in the distribution of income (compared with 38 in the EU).
read more...»Programme on unemployment
Equality of unemployment
Getting more women into the labour force and into employment has been a deliberate aim of government intervention over the last 30 years or so. Benefits, training, flexible working and childcare schemes have all focused clearly on encouraging women to work rather than to choose not to do so. Your study of employment figures in the UK will show that the increases in employment over the last 10 years or so have favoured women; more of them are in work, women now earn more than men in a fifth of couples, and more households depend upon a woman’s wage. A quarter of households with children are headed by lone parents, 90 per cent of whom are women.
read more...»Trends in UK Income Inequality
Source: The distribution of household income 1977 to 2006/07, Statistics Commission, December 2008
In a week dominated once more by macroeconomic headlines it is important not to lose sight of some of the deeper structural changes taking place within our economy and society. The distribution of income and wealth and the extent to which the benefits of economic growth and development are dispersed across society remains one of the the most important issues facing every country - the UK is no exception.
The Office of National Statistics has just released the latest data on household income and the inequalities of pre and post tax income across households from bottom to top of the income scale. The figures suggest that the progress made by Labour in reversing the steep rise in relative poverty from 1977 through to the turn of the 1990s has faltered. The BBC reports that the UK income gap ‘same as in 1991’. Britain continues to have above average levels of income inequality - our gini coefficient is the 9th highest in the European Union.
The full report which is available as a pdf file can be downloaded here
Panorama: addicted to aid
The scale and depth of child poverty
It is one of those aspirations that seems synonymous with New Labour – a bold plan to abolish child poverty by 2020 and halve the risk of poverty by 2010. It is an aim that is almost impossible to achieve because of the lack of political will to devote the economic resources needed to bring it about. Government is happy to pledge tens of billions of pounds to bail out the financial system, but it seems less prepared to meet their pledges on poverty with hard cash.
read more...»Income inequality and growth
William Bernstein writes in a guest spot for the Freakonomics blog and considers how extreme income and wealth inequality can hinder growth and development in the long run. Quite apart from the increased burden of spending on defensive expenditure such as home security, prison guards and home and contents insurance - when the gap between the haves and the have-nots reaches staggering levels there is a real fear that respect for property rights is fundamentally undermined.
“The paradox of economic growth is that the same mechanisms that create great wealth –secure property rights and rule of law guaranteed by an independent judiciary — also give rise to great inequalities in its distribution. Private property provides a powerful incentive to produce wealth for oneself while simultaneously denying that same wealth to others. Wealth does trickle down to the rest of the population, but often not fast enough to avoid political strife and worse.”
The remainder of his post is here
Globalisation and the skills bias of world trade
The latest edition of the Economic Journal contains new research by Paolo Epifani and Gino Gancia that focuses on the skills preium for highly skilled workers in an age of globalisation. Whilst increasing economic integration between countries has undoubtedly contributed to a process of income convergence across nations, one of the paradoxes it that it can also lead to greater pay and earnings inequalities within countries - this research helps to explain why.
“Since the mid-1970s, the wage gap between high-skilled and low-skilled workers has widened. At the same time, world trade has increased dramatically: between 1980 and the late 1990s, the share of countries ‘open to trade’ rose from 35% to 95%, and the volume of trade of the average country rose from 59% of national income to 74%....Globalisation increases the size of the market firms can access. Some industries can take advantage of a larger market more easily than others as they benefit from ‘economies of scale’.The study argues that those industries that take advantage of a larger market are more likely to employ skilled workers, and so the wages of skilled workers will rise faster than unskilled workers in a period of globalisation.”
The rest of the media briefing on this new research is available here
TUC calls for minimum wage for apprentices
The Trades Union Congress (TUC) is lobbying for the UK government to extend the statutory minimum wage to cover apprentices as an intervention designed to improve incentives and combat employer exploitation of younger workers. Their submission to the Low Pay Commission can be found here. What was striking to me about their report was the low completion rates for apprenticeship schemes for those workers not covered by pay floor legislation. And also the persistent gap in apprenticeship pay between males and females. It is an area of the labour market where monopsonistic employment practices are prevalent and damaging to the long term skills base of the economy.
“The TUC believes that bringing all apprentices under the NMW enforcement regime is the most effective way of addressing low pay and tackling the minority of employers that treat apprentices as cheap labour. Recent Government data revealed that five per cent of apprentices received less than £80 a week and 12 per cent received no pay at all.”
The current minimum wage rates are £3.40 for 16-17 year olds, £4.60 for 18-21year olds and £5.52 for people aged 22+.
Unjust rewards?
Polly Toynbee and David Walker from the Guardian have a new book out this week - available on Amazon - which looks at the depth of inequality in modern Britain.
“The top 10% of income earners get 27.3% of the cake, while the bottom 10% get just 2.6%. Twenty years ago the average chief executive of a FTSE 100 company earned 17 times the average employee’s pay; now it is more than 75 times. Since Labour came to power in 1997 the proportion of personal wealth held by the top 10% has swelled from 47% to 54%.”
A gross income of just under £40,000 is sufficient to get you into the top decile of the income distribution (making an adjustment for household size). The book will be a timely reminder that - eleven years into a Labour government committed to a mild form of redistribution through policies such as New Deal, tax credits and the minimum wage, there are incredibly powerful forces that drive inequality higher in modern economies. One way of measuring income inequality is to use the gini coefficient - the latest figures for the UK are available here..
Making both ends meat
Two minimum wage stories
A Sheffield butcher has become the first employer to be prosecuted for not paying the minimum wage to its employees - this BBC report covers the story - Jackson, from Pontefract, and Smout, from Sheffield, were charged with non payment of minimum wage and failing to keep adequate pay records. Reading between the lines, I was surprised to read that so few prosecutions have been brought forward since the NMW came into force in April 1999.
And today BBC London exposes the Hard Rock cafe for paying a basic wage of just £2.06 an hour in a story linked to the debate about whether restaurants are routinely using customer tips to supplement the wages of their workers.
The current minimum wage stands at £5.52 for workers over 22 years of age. If you worked 48 hours a week, that translates into £13,772 a year - a few weeks ago, the Joseph Rowntree Foundation published survey research which indicated that a single person in Britain today needs to earn at least £13,400 a year before tax to afford a basic but acceptable standard of living.
Meeting basic needs and wants
According to a fresh report from the Joseph Rowntree Foundation “According to members of the public, a single person in Britain today needs to earn at least £13,400 a year before tax to afford a basic but acceptable standard of living. The minimum income is above the official “poverty line” of 60% median income, for nearly all household groups. This shows that almost everybody classified as being in poverty has income too low to pay for a standard of living regarded as “adequate” by all members of the public who took part in this research.”
This research will be terrific to use in the classroom when teaching about living standards, positive and normative statements, and disagreements between people about what constitutes a modest but adequate income required to meet our daily needs and wants. Crucially it tries to identify how we should define a minimum income standard.
“A minimum standard of living in Britain today includes, but is more than just, food, clothes and shelter. It is about having what you need in order to have the opportunities and choices necessary to participate in society. The minimum seeks to exclude items that may be regarded as ‘aspirational’ – it is about fulfilling needs and not wants.”
The full copy of the research is available here in pdf format
Labour’s failure on inequality
Gary Duncan has a really important and useful article in The Times today on the issue of persistent and deep-rooted relative poverty in the UK - something which transcends the political posturing of recent days and weeks over the furore about the abolition of the 10% starting rate of income tax.
“The stark truth is that after a decade of Labour Government, Britain is a nation of greater income inequality, in which the plight of the very poor has worsened. True, Labour has succeeded in lifting half a million children out of poverty since 1998. Yet the Government’s figures are based on a poverty line drawn at 60 per cent of average incomes. If it is placed, instead, at 40 per cent - officially defined as “severe poverty” - the picture looks much bleaker, with the numbers of children in such dire straits no lower than in 1997.”
This is a superb article to read for those students revising for exam questions on income and wealth inequality. A BBC news article from March highlighted the widening wealth gap and here is a reminder that inequality is not solely a question of disposable income.
