measuring poverty
Absolute poverty
Absolute poverty measures the number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services.
Relative poverty
Relative poverty measures the extent to which a household's financial resources falls below an average income threshold for the economy. Although living standards and real incomes have grown because of higher employment and sustained economic growth over recent years, the gains in income and wealth have been unevenly distributed across the population.
There is little doubt that Britain has become a more unequal society over the last 20-25 years. Indeed a report published in July 2001 found that inequality had continued to grow during the first four years of the Labour Government, with as many as one children in six in Britain living in poverty.
The Poverty Trap
The poverty trap affects people on low incomes. It creates a disincentive to look for work or work longer hours because of the effects of the tax and benefits system. For example, a worker might be given the opportunity to earn an extra £50 a week by working ten additional hours. This boost to his/her gross income is reduced by an increase in income tax and national insurance contributions. The individual may also lose some income-related state benefits. The combined effects of this might be to take away over 70% of a rise in income, leaving little in the way of extra net or disposable income.
UNDERLYING CAUSES OF POVERTY IN THE UK
Disparities in wages and earnings growth
Wages and earnings in some jobs have grown much faster than others. Workers in industries enjoying fast growth and high profits have benefited from above-average increases in pay and earnings. Examples include business services, the financial sector and information, communication and technology.
In contrast many public sector service jobs have seen a decline in relative pay levels. Real earnings growth is fastest for those workers with high-level skills whose jobs are in demand. The situation is worse for workers in traditional manufacturing where employment has declined and real wages have fallen behind other jobs. The worst paid jobs are still found in low-skill service sector industries - often where there is little trade union protection.
Falling relative incomes of those dependent on state benefits
State welfare benefits tend to rise in line with prices (they are index linked) rather than in line with the growth of earnings of those in work. Therefore, households dependent on welfare assistance see their relative incomes fall over time. The problem of pensioner poverty is particularly acute for those totally dependent on the basic state pension.
Several pressure groups including Age Concern are lobbying for a restoration of the link between average earnings of people in work and the basic state retirement pension. The Labour Government has not as yet acceded to their demands - the financial cost of doing so is potentially huge.
Higher levels of unemployment
Unemployment is a key cause of poverty. Twice in the last twenty years we have seen mass unemployment in Britain and a large rise in relative poverty - the two trends are connected. A related problem is the increase in the number of workless households - households where no one is in paid employment and where members of the family are dependent on state welfare aid to survive.
Tax changes of the 1980s & 1990s
Changes to direct and indirect taxes may have contributed to and increase in relative poverty. Income tax rates have fallen over the last twenty years. The top marginal rate of tax fell from 83% in 1979 to 40% in 1988 (it has remained at this level for the last twelve years). The basic rate has come down from 33% in 1979 to 22% today. These tax reductions allow people in work to keep a higher proportion of their earned income. The benefits from lower taxes have flowed disproportionately to people on above-average incomes.
There has been a structural
shift towards indirect taxes in recent years including higher rates of value
added tax and higher excise duties on petrol, alcohol and cigarettes. Some
economists argue that these tax changes have also worsened relative poverty.
In particular the widening of the coverage of value added tax to household
energy supplies and the hike in tobacco duties is thought to have had a regressive
effect on the distribution of income.
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