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.
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 cost-benefit principle in your AS exam
The cost-benefit principle is one of those core ideas that can be brought into so many discussions both in micro and macroeconomics – you should be using it in your papers
read more...»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
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
Anguished of Edinburgh
The BBC’ Business Editor Robert Peston offered a rapid fire tutorial in the credit crunch in his address to the Edinburgh Book Festival today. Some people have perhaps unfairly labelled him as “Pessimistic Peston”, the man who first revealed the state of the liquidity crisis at the Northern Rock in early September 2007. But he delivered an engaging and witty talk to a large group of the well heeled of Edinburgh who clearly have weighty financial issues on their minds.
read more...»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
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..
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
A2 Macro Diagrams
In our revision session today we were discussing which diagrams can be used in A2 macro questions. Here is the initial list we came up with ... can students and teachers suggest more? I will happily put together a powerpoint with the diagrams suggested.
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