Pearson - Always learning

All your resources for Economics

RSS icon Subscribe | Text size

Posts Tagged ‘poverty’

The best news in the world: but just how good is it?

According to a an article in The Guardian, The best news in the world, by the president of the World Bank, Jim Yong Kim, there has been a dramatic fall in global poverty over the past two decades. The number of people in extreme poverty is projected to fall this year to below 10% of global population for the first time. This has been made possible, he claims, by unprecedented economic growth, especially in China.

But this raises three questions.

The first is whether, in the face of falling growth rates, progress in poverty reduction can be maintained.

The second is whether the World Bank is measuring extreme poverty in the right way. It is now defined as living on less than US$1.90 a day in 2011 prices – until a few weeks ago is was $1.25 in 2005 prices. As a result of this rebasing, global poverty falls from 14.5% of the world’s population (or 1011 million people) under the old method to 14.2% (or 987 million) under the new.

The third question is whether countries can improve their data collection so that a truer estimate of poverty can be made.

As far as the first question is concerned, Kim states that to stimulate growth, ‘every dollar of public spending should be scrutinised for impact. Every effort must be made to improve productivity.’ What is more, three things must happen:

Economic growth must lift all people. It must be inclusive.
Investment in human beings is crucial – especially investing in their health and education. Malnourished and poorly educated children will never reach their full potential and countries, in turn, will fall short of their economic and social aspirations.
We must ensure that we can provide safety nets that prevent people from falling back into poverty because of poor health, economic shocks, or natural disasters.

As far as the second question is concerned, there are many who argue that $1.90 per day is far too low a measure of the extreme poverty threshold. It is a purchasing-power parity measure and is equivalent to what $1.90 would buy in the USA in 2011. But, according to the Jason Hickel article linked below, ‘the US Department of Agriculture calculates that in 2011 the very minimum necessary to buy sufficient food was $5.04 per day. And that’s not taking account of other requirements for survival, such as shelter and clothing.’ Peter Edward of Newcastle University, claims Hickell, ‘calculates that in order to achieve normal human life expectancy of just over 70 years, people need roughly 2.7 to 3.9 times the existing poverty line.’

But even if living on below $1.90 a day is defined as extreme poverty, it is important not to see the problem of poverty as having been solved for people who manage to achieve an income slightly above that level.

The third question is how to improve data. There is a paucity and unreliability of data in many developing countries. According to Kim:

Our report adds that data is sparse and inconsistent across the region and globally. Some 29 countries around the world had no poverty data from 2002 to 2011, so they could not track their progress. Another 28 had just one survey that collected poverty data during that time.

This is a situation that must change to improve the world’s ability to tackle poverty. In fact, we can’t accomplish our goal if we do not have enough information to know whether people are actually lifting themselves out of poverty. For that we need to address huge data gaps. We need robust data.

The best news in the world: we have made real progress towards ending extreme poverty The Guardian, Jim Yong Kim (3/11/15)
Could you live on $1.90 a day? That’s the international poverty line The Guardian, Jason Hickel (1/11/15)
Making international trade work for the world’s poorest The Guardian, Jim Yong Kim and Roberto Azevêdo (30/6/15)
Global Poverty Will Hit New Low This Year, World Bank Says Huffington Post, Lydia O’Connor (23/10/15)
The international poverty line has just been raised to $1.90 a day, but global poverty is basically unchanged. How is that even possible? World Bank blogs, Francisco Ferreira, Dean Mitchell Jolliffe and Espen Beer Prydz (4/10/2015)
Why Didn’t the World Bank Make Reducing Inequality One of Its Goals? World Bank blogs, Jaime Saavedra-Chanduvi (23/9/13)
$1.90 Per Day: What Does it Say? Institute for New Economic Thinking, Rahul ​Lahoti and Sanjay Reddy (6/10/15)

Reports and papers
The Role of Trade in Ending Poverty WTO and World Bank (2015)
Poverty in a Rising Africa World Bank (1/10/15)
Ending extreme poverty and sharing prosperity: progress and policies World Bank, Marcio Cruz, James Foster, Bryce Quillin and Philip Schellekens (October 2015)


  1. Explain how the World Bank calculates the extreme poverty line.
  2. Why, if the line has risen from $1.25 per day to $1.90 per day, has the number of people recorded as being in extreme poverty fallen as a result?
  3. Why has the number of people in extreme poverty been rising over the years and yet the percentage of people in extreme poverty been falling?
  4. What policies can be adopted to tackle poverty? Discuss their practicality?
  5. Are reduced poverty and increased economic growth consistent policy goals? (See the blog post Inequality and economic growth.)
  6. What are the inadequacies of using income per day (albeit in ppp terms) as a measure of the degree of poverty? What other indicators of poverty could be used and how suitable would they be?
  7. How could international trade be made to work for the world’s poorest?
Share in top social networks!

Increased proportion of jobs paying below the living wage (update)

In a recent post, we looked at the rising number of people being paid less than the (voluntary) living wage. The Living Wage Foundation has just published the latest annual update to the living wage. This brings it to £9.40 per hour in London and £8.25 outside London – well above the statutory National Minimum Wage of £6.70 for those aged 21 and over. Even when employers are required to pay at least the so-called National Living Wage (NLW) of £7.20 per hour from April 2016 to those aged 25 and over, the NLW will still be well below the living wage.

Read the earlier post and then answer the questions in the light of the new living wage rates and the new linked articles.

Living wage rate increased by 40p an hour BBC News (2/11/15)
London ‘living wage’ rises to £9.40 an hour Financial Times, Sarah O’Connor (2/11/15)
Living Wage now £8.25 across the UK and £9.40 in London Independent, Jon Stone (2/11/15)
Special report: The Living Wage and its impact on workers and businesses Manchester Evening News, Adam Jupp (2/11/15)
Living Wage: Number Of Employers Paying It Doubles In A Year, While Six Million Workers Still Go Without Huffington Post, Jack Sommers (2/11/15)
Living wage rate increases announced as campaigners call for more businesses to go beyond legal minimums Living Wage Foundation (30/10/15)

Data and Reports
Estimates of employee jobs paid less than the living wage in London and other parts of the UK ONS (12/10/15)
Annual Survey of Hours and Earnings ONS
Living wage rates: the calculation Living Wage Foundation
National Minimum Wage rates GOV.UK


  1. By referring to the Living Wage Foundation site, explain how the living wage is calculated. If you were defining the living wage, would you define it in this way? Explain.
  2. Distinguish between low pay and poverty. Does pay give a good indication of poverty?
  3. For what reasons has the number of jobs paying below the living wage increased? Does marginal productivty theory provide an explanation?
  4. Is it best to base statutory minimum wages on median earnings, mean earnings or the cost of living? Explain.
  5. If more 6 million jobs pay below the living wage, does this mean that 6 million people, more than 6 million people or fewer than 6 million people receive average hourly wages below the living wage? Explain.
  6. For what reasons might firms volunteer to pay the living wage to their employees? Is doing so consistent with the aim of profit maximisation?
  7. Why are more women than men paid wage rates below the living wage?
  8. Why does the proportion of people being paid the living wage vary from one part of the UK to another? Is this likely to be purely a reflection of differences in the cost of living?
Share in top social networks!

Increased proportion of jobs paying below the living wage

In 2014, 19% of jobs in London and 23% of jobs outside London paid less than the living wage. This is according to figures just published by the Office for National Statistics. The figures compare with 17% and 22% respectively in 2013. The problem is that while the living wage rises with the cost of living, median wages have not kept pace with prices: in other words, in real terms median wages have fallen.

The living wage has been calculated annually since 2003 for London by the London Mayor’s Office and since 2011 for the rest of the UK by the Centre for Research in Social Policy (CRSP) at Loughborough University for the Living Wage Foundation.

According to the London Mayor’s Office:

The London Living Wage is an hourly rate of pay, calculated according to a combination of the costs of living in London and 60% of the median wage. This gives the wage rate needed to give a worker in London enough to provide their family with the essentials of life, including a cushion against unforeseen events. Unlike the compulsory national minimum wage, the London Living Wage is a voluntary commitment made by employers, who can become accredited with the Living Wage Foundation.

As the Chart 1 illustrates, the living wage is above the National Minimum Wage. Since November 2014, the living wage in London has been £9.15 in London and £7.85 in the rest of the UK. It is due to be uprated at the beginning of November 2015. From 1 October 2014 to 30 September 2015, the National Minimum Wage (for people aged 21 and over) was £6.50. It rose to £6.70 on 1 October 2015.

Note that the (voluntary) living wage is different from the compulsory ‘National Living Wage’ announced by the Chancellor in his July 2015 Budget, which will come into effect in April 2016 as a top-up to the National Minimum Wage (NLW) for those aged 25 and over. This will be only 50p above the National Minimum Wage and thus considerably below the living wage, although the Chancellor has pledged to increase the NLW to 60% of median wage rates for those aged 25 and over by 2020. According to the Office for Budget Responsibility, “the NLW will rise from £7.20 in April 2016 (equivalent to around 55 per cent of estimated median hourly earnings for employees aged 25 and over) to around £9.35 in April 2020 (reaching 60 per cent of expected median hourly earnings for that group) in steps that imply the rise relative to median hourly earnings is a straight line.”

The percentage of people being paid below the living wage varies by occupation, location of jobs (see map in Chart 2 – click to enlarge), sex and age and whether the job is full or part time. For example, in accommodation and food services, in retail and in sales and customer services, more than half the jobs paid less than the living wage. A greater percentage of women than men were paid below the living wage (29% and 18% respectively outside London). As far as young people are concerned, 48% of 18–24 year olds were paid less than the living wage in London and 58% outside London (see Chart 3). In London 45% of part-time jobs paid less than the living wage; in the rest of the UK the figure was 43%.

As The Guardian article linked below reports:

A spokesman for the Living Wage Foundation, which sets the figure each year, said despite ‘significant progress’ in many sectors, more jobs than ever were below the voluntary rates.

“These figures demonstrate that while the economy may be recovering as a whole, there is a real problem with ensuring everyone benefits, and low pay is still prevalent in Britain today,” he said.

The following articles look at the evidence presented by the ONS and examine the incidence of low pay in the UK.

More jobs paying below living wage BBC News (12/10/15)
A fifth of UK jobs pay less than living wage – ONS Financial Times (12/10/15)
The proportion of workers not being paid the living wage is rising Independent, Jon Stone (12/10/15)
Almost 30 per cent of women are paid below the living wage Independent, Jon Stone (12/10/15)
More UK jobs fail to pay a living wage The Guardian, Hilary Osborne and Damien Gayle (12/10/15)
Six million jobs pay below the living wage Full Fact, Laura O’Brien (19/10/15)

Data and Reports
Estimates of employee jobs paid less than the living wage in London and other parts of the UK ONS (12/10/15)
Annual Survey of Hours and Earnings ONS
Living wage rates: the calculation Living Wage Foundation
National Minimum Wage rates GOV.UK


  1. By referring to the Living Wage Foundation site, explain how the living wage is calculated. If you were defining the living wage, would you define it in this way? Explain.
  2. Distinguish between low pay and poverty. Does pay give a good indication of poverty?
  3. For what reasons has the number of jobs paying below the living wage increased? Does marginal productivty theory provide an explanation?
  4. Is it best to base statutory minimum wages on median earnings, mean earnings or the cost of living? Explain.
  5. If 6 million jobs pay below the living wage, does this mean that 6 million people, more than 6 million people or fewer than 6 million people receive average hourly wages below the living wage? Explain.
  6. For what reasons might firms volunteer to pay the living wage to their employees? Is doing so consistent with the aim of profit maximisation?
  7. Why are more women than men paid wage rates below the living wage?
  8. Why does the proportion of people being paid the living wage vary from one part of the UK to another? Is this likely to be purely a reflection of differences in the cost of living?
Share in top social networks!

Stiglitz, Hilton and Gessen

You may be used to these types of blogs by now … On my commute to work on the 18th May, I listened to Start the Week on BBC radio 4 and happened upon a fascinating discussion on inequality.

Of those discussing the issue, one certainly needs no introduction: Joseph Stiglitz, a prominent economist, author and commentator on economics, in particular on inequality. He was joined by Steve Hilton, who has worked for David Cameron for many years in providing advice on a range of issues, including inequality and strategy and has written on existing institutions and their effectiveness. The final panellist was Masha Gessen, who has written extensively on Russia and in particular on the journey of the infamous Boston Bomber.

Though the discussion covers a variety of areas relevant to economics, one key area that is addressed is inequality and the policies that are being used to address the causes and the symptoms. You can access the 45-minute discussion at the link below.

Joseph Stiglitz and Steve Hilton on inequality BBC Radio 4 (18/5/15)


  1. How would you measure inequality?
  2. Why is it important to distinguish between the causes and symptoms of poverty when designing government policy?
  3. To what extent do you believe that education is an essential requirement for growth and development?
  4. Why has inequality grown in some of the most developed nations?
  5. How is it possible that inequality in the developed world has grown, while global inequality has fallen?
  6. Why does the report argue that the reforms they suggest would help boost growth?
  7. Do you agree that existing institutions are not suitable for society today?
Share in top social networks!

Nigeria: An African success story?

A new group of economies, known as MINT, are seen as strong current and future emerging markets. We’ve had the BRICS (Brazil, Russia, India, China and South Africa) and now we have the MINTs (Mexico, Indonesia, Nigeria and Turkey).

In 2014, Nigeria became Africa’s fastest growing nation. A large part of Nigeria’s success has to do with growth in some of its key industries.

Nigerian’s reliance on the oil and gas industry created an attractive economy for further development and it now has high growth in a diverse range of sectors, including mobile phones, champagne, private jets and ‘Nollywood’. Despite the uncertainty and political unrest caused by Boko Haram, Nigeria is attracting a significant amount of Foreign Direct Investment (FDI) in a range of sectors, indicating its growing diversity and attractiveness to some of the world’s largest multinational companies.

Boko Haram has certainly had a dampening effect on Nigeria’s growth, as has the lower oil price, but this may create opportunities for further diversification. Furthermore there are concerns about how the wealth of the nation is concentrated, given that poverty is still prevalent across the country. However, Nigeria is certainly emerging as a success story of Africa and surely the question that will be asked is will other African nations follow suit?

The following article from BBC News considers the Nigerian economy.

Nigeria’s ‘champagne’ economy bucks Boko Haram effect BBC News, Vishala Sri-Pathma (27/3/15)


  1. Is a falling oil price necessarily bad for the Nigerian economy?
  2. Explain why Boko Haram is likely to have a dampening effect on economic growth in Nigeria.
  3. Do you think other African nations will be able to replicate the success of Nigeria? Which factors may prevent this?
  4. If the number of millionaires is increasing significantly, but poverty is persisting, does this tell us anything about what is happening to inequality in Nigeria?
  5. Is is possible to reduce inequality in Nigeria while maintaining economic growth? Might it even be posible for greater equality to be a driver of economic growth?
  6. The Nigerian currency is weakening. What has caused this and why may this be a cause for concern?
Share in top social networks!

Inequality and economic growth

What is the relationship between the degree of inequality in a country and the rate of economic growth? The traditional answer is that there is a trade off between the two. Increasing the rewards to those who are more productive or who invest encourages a growth in productivity and capital investment, which, in turn, leads to faster economic growth. Redistribution from the rich to the poor, by contrast, is argued to reduce incentives by reducing the rewards from harder work, education, training and investment. Risk taking, it is claimed, is discouraged.

Recent evidence from the OECD and the IMF, however, suggests that when income inequality rises, economic growth falls. Inequality has grown massively in many countries, with average incomes at the top of the distribution seeing particular gains, while many at the bottom have experienced actual declines in real incomes or, at best, little or no growth. This growth in inequality can be seen in a rise in countries’ Gini coefficients. The OECD average Gini coefficient rose from 0.29 in the mid-1980s to 0.32 in 2011/12. This, claims the OECD, has led to a loss in economic growth of around 0.35 percentage points per year.

But why should a rise in inequality lead to lower economic growth? According to the OECD, the main reason is that inequality reduces the development of skills of the lower income groups and reduces social mobility.

By hindering human capital accumulation, income inequality undermines education opportunities for disadvantaged individuals, lowering social mobility and hampering skills development.

The lower educational attainment applies both to the length and quality of education: people from poorer backgrounds on average leave school or college earlier and with lower qualifications.

But if greater inequality generally results in lower economic growth, will a redistribution from rich to poor necessarily result in faster economic growth? According to the OECD:

Anti-poverty programmes will not be enough. Not only cash transfers but also increasing access to public services, such as high-quality education, training and healthcare, constitute long-term social investment to create greater equality of opportunities in the long run.

Thus redistribution policies need to be well designed and implemented and focus on raising incomes of the poor through increased opportunities to increase their productivity. Simple transfers from rich to poor via the tax and benefits system may, in fact, undermine economic growth. According to the IMF:

That equality seems to drive higher and more sustainable growth does not in itself support efforts to redistribute. In particular, inequality may impede growth at least in part because it calls forth efforts to redistribute that themselves undercut growth. In such a situation, even if inequality is bad for growth, taxes and transfers may be precisely the wrong remedy.

Inequality ‘significantly’ curbs economic growth – OECD BBC News (9/12/14)
Is inequality the enemy of growth? BBC News, Robert Peston (6/10/14)
Income inequality damages growth, OECD warns Financial Times, Chris Giles (8/10/14)
OECD finds increasing inequality lowers growth Deutsche Welle, Jasper Sky (10/12/14)
Revealed: how the wealth gap holds back economic growth The Guardian, Larry Elliott (9/12/14)
Inequality Seriously Damages Growth, IMF Seminar Hears IMF Survey Magazine (12/4/14)
Warning! Inequality May Be Hazardous to Your Growth iMFdirect, Andrew G. Berg and Jonathan D. Ostry (8/4/11)
Economic growth more likely when wealth distributed to poor instead of rich The Guardian, Stephen Koukoulas (4/6/15)
So much for trickle down: only bold reforms will tackle inequality The Guardian, Larry Elliott (21/6/15)

Record inequality between rich and poor OECD on YouTube (5/12/11)
The Price of Inequality The News School on YouTube, Joseph Stiglitz (5/10/12)

Reports and papers
FOCUS on Inequality and Growth OECD, Directorate for Employment, Labour and Social Affairs (December 2014)
Trends in Income Inequality and its Impact on Economic Growth OECD Social, Employment and Migration Working Papers, Federico Cingano (9/12/14)
An Overview of Growing Income Inequalities in OECD Countries: Main Findings OCED (2011)
Redistribution, Inequality, and Growth IMF Staff Discussion Note, Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides (February 2014)
Measure to Measure Finance and Development, IMF, Jonathan D. Ostry and Andrew G. Berg (Vol. 51, No. 3, September 2014)

OECD Income Distribution Database: Gini, poverty, income, Methods and Concepts OECD
The effects of taxes and benefits on household income ONS


  1. Explain what are meant by a Lorenz curve and a Gini coefficient? What is the relationship between the two?
  2. The Gini coefficient is one way of measuring inequality. What other methods are there? How suitable are they?
  3. Assume that the government raises taxes to finance higher benefits to the poor. Identify the income and substitution effects of the tax increases and whether the effects are to encourage or discourage work (or investment).
  4. Distinguish between (a) progressive, (b) regressive and (c) proportional taxes?
  5. How will the balance of income and substitution effects vary in each of the following cases: (a) a cut in the tax-free allowance; (b) a rise in the basic rate of income tax; (c) a rise in the top rate of income tax? How does the relative size of the two effects depend, in each case, on a person’s current income?
  6. Identify policy measures that would increase both equality and economic growth.
  7. Would a shift from direct to indirect taxes tend to increase or decrease inequality? Explain.
  8. By examining Tables 3, 26 and 27 in The Effects of Taxes and Benefits on Household Income, 2012/13, (a) explain the difference between original income, gross income, disposable income and post-tax income; (b) explain the differences between the Gini coefficients for each of these four categories of income in the UK.
Share in top social networks!

Even more dwarfs and fewer but larger giants

In his 1971 book, Income Distribution, Jan Pen, a Dutch economist, gave a graphic illustration of inequality in the UK. He described a parade of people marching by. They represent the whole population and the parade takes exactly one hour to pass by. The height of each person represents his or her income. People of average height are the people with average incomes – the observer is of average height. The parade starts with the people on the lowest incomes (the dwarfs), and finishes with those on the highest incomes (the giants).

Because income distribution is unequal, there are many tiny people. Indeed, for the first few minutes of the parade, the marchers are so small they can barely be seen. Even after half an hour, when people on median income pass by, they are barely waist high to the observer.

The height is growing with tantalising slowness, and forty-five minutes have gone by before we see people of our own size arriving. To be somewhat more exact: about twelve minutes before the end the average income recipients pass by.

In the final minutes, giants march past and then in the final seconds:

the scene is dominated by colossal figures: people like tower flats. Most of them prove to be businessmen, managers of large firms and holders of many directorships and also film stars and a few members of the Royal Family.

The rear of the parade is brought up by a few participants who are measured in miles. Indeed they are figures whose height we cannot even estimate: their heads disappear into the clouds and probably they themselves do not even know how tall they are.

Pen’s description could be applied to most countries – some with even more dwarfs and even fewer but taller giants. Generally, over the 43 years since the book was published, countries have become less equal: the giants have become taller and the dwarfs have become smaller.

The 2011 Economist article, linked below, uses changes in Gini coefficients to illustrate the rise in income inequality. A Gini coefficient shows the area between the Lorenz curve and the 45° line. The figure will be between 0 and 1 (or 0% and 100%). a figure of 0 shows total equality; a figure of 1 shows a situation of total inequality, where one person earns all the nation’s income. The higher the figure, the greater the inequality.

The chart opposite shows changes in the Gini coefficient in the UK (see Table 27 in the ONS link below for an Excel file of the chart). As this chart and the blog post Rich and poor in the UK show, inequality rose rapidly during the years of the 1979–91 Thatcher government, and especially in the years 1982–90. This was associated with cuts in the top rate of income tax and business deregulation. It fell in the recession of the early 1990s as the rich were affected more than the poor, but rose with the recovery of the mid- to late 1990s. It fell again in the early 2000s as tax credits helped the poor. It fell again following the financial crisis as, once more, the rich were affected proportionately more than the poor.

The most up-to-date international data for OECD countries can be found on the OECD’s StatExtracts site (see chart opposite: click here for a PowerPoint). The most unequal developed county is the USA, with a Gini coefficient of 0.389 in 2012 (see The end of the American dream?), and US inequality is rising. Today, the top 1% of the US population earns some 24% of national income. This compares with just 9% of national income in 1976.

Many developing countries are even less equal. Turkey has a Gini coefficient of 0.412 and Mexico of 0.482. The figure for South Africa is over 0.6.

When it comes to wealth, distribution is even less equal. The infographic, linked below, illustrates the position today in the USA. It divides the country into 100 equal-sized groups and shows that the top 1% of the population has over 40% of the nation’s wealth, whereas the bottom 80% has only 7%.

So is this inequality of income and wealth desirable? Differences in wages and salaries provide an incentive for people to work harder or more effectively and to gain better qualifications. The possibility of increased wealth provides an incentive for people to invest.

But are the extreme differences in wealth and income found in many countries today necessary to incentivise people to work, train and invest? Could sufficient incentives exist in more equal societies? Are inequalities in part, or even largely, the result of market imperfections and especially of economic power, where those with power and influence are able to use it to increase their own incomes and wealth?

Could it even be the case that excessive inequality actually reduces growth? Are the huge giants that exist today accumulating too much financial wealth and creating too little productive potential? Are they spending too little and thus dampening aggregate demand? These arguments are considered in some of the articles below. Perhaps, by paying a living wage to the ‘tiny’ people on low incomes, productivity could be improved and demand could be stimulated.

Wealth Inequality in America YouTube, Politizane (20/11/12)

The rise and rise of the cognitive elite The Economist (20/1/11)
Inequality in America: Gini in the bottle The Economist (26/11/13)
Pen’s Parade: do you realize we’re mostly dwarves? LVTFan’s Blog (21/2/11)
Here Are The Most Unequal Countries In The World Business Insider, Andy Kiersz (8/11/14)
Inequality in the World Dollars & Sense, Arthur MacEwan (Nov/Dec 14)
Britain is scared to face the real issue – it’s all about inequality The Observer, Will Hutton (19/1/14)
The tame inequality debate FundWeb, Daniel Ben-Ami (Nov 14)
Is inequality the enemy of growth? BBC News, Robert Peston (6/10/14)

GINI index World Bank data
List of countries by income equality Wikipedia
The Effects of Taxes and Benefits on Household Income, 2012/13 ONS (see table 27)
Income Distribution and Poverty: Gini (disposale income) OECD StatExtract


  1. Distinguish between income and wealth. Is each one a stock or a flow?
  2. Explain how (a) a Lorenz curve and (b) a Gini coefficient are derived.
  3. What other means are there of measuring inequality of income and wealth other than using Gini coefficients (and giants and dwarfs!)?
  4. Why has inequality been rising in many countries over the years?
  5. How do (a) periods of rapid economic growth and (b) recessions affect income distribution?
  6. Define ‘efficiency wages’. How might an increase in wages to people on low incomes result in increased productivity?
  7. What is the relationship between the degree of inequality and household debt? What implications might this have for long-term economic growth and future financial crises? Is inequality the ‘enemy of growth’?
Share in top social networks!

The burden of debt

Household debt in the UK has reached a record level. Individuals now owe £1430 billion. This compares with the UK’s general government debt of £1443 billion – also at a record level. These figures are illustrated in the chart (click here for a PowerPoint).

But these figures are nominal. If you look at the real figures (i.e. corrected for inflation), household debt has been falling. In today’s prices, household debt peaked at £1668 billion in March 2008. Also, if you look at household debt as a proportion of GDP, it fell from a peak of 100.96% in May 2009 to 87.43% in July 2013 (see chart). However, since then it has begun rising again, standing at 87.65% in October 2013.

So has household debt become less of a problem? In aggregate terms, the answer is probably yes. However, it is too early to know whether a continuing recovery in the economy will be fuelled by real debt rising again and whether the recovery will encourage people to take on higher levels of debt?

For many people, however, debt has become more and more of a problem. In other words, the aggregate figures conceal what has happened in terms of the distribution of debt. According to a Centre for Social Justice (CSJ) study:

Indebted households in the poorest 10 per cent of the country have average debts more than four times their annual income. Average debt repayments within this group amounted to nearly half their gross monthly income.

And the poorest families, often with very poor credit ratings, are frequently forced to turn to payday lenders, charging sky-high interest rates (see Capping interest rates on payday loans: a government U-turn?).

As mainstream banks reduced access to credit following the financial crash, the market for short-term high-cost credit (payday lenders, pawnbrokers, rent-to-buy and doorstop lenders) increased dramatically and is now worth £4.8 billion a year.

Payday lenders have increased business from £900 million in 2008/09 to just over £2 billion (or around 8 million loans) in 2011/12. Around half of payday loan customers reported taking out the money because it was the only form of credit they could get. The number of people going to loan sharks is also said to have increased – the most recent estimate puts it at 310,000 people.

With rising energy and food bills hitting the poorest hardest, this section of the population could find debt levels continuing to rise, especially if interest rates rise. As Chris Pond, who chaired the CJS study, stated:

The costs to those affected, in stress and mental disorders, relationship breakdown and hardship is immense. But so too is the cost to the nation, measured in lost employment and productivity and in an increased burden on public services.

£1,430,000,000,000 (that’s £1.43 trillion): Britain’s personal debt timebomb Independent, Andrew Grice (20/11/13)
Average household debt ‘doubled in last decade’ The Telegraph, Edward Malnick (20/11/13)
UK household debt hits record high BBC News (29/11/13)
UK debt crisis: poorest face ‘perfect storm’ Channel 4 News (20/11/13)
One in five struggle with serious debt The Telegraph, Nicole Blackmore (27/11/13)
It doesn’t matter what we do with Wonga: personal debt is about to rocket The Telegraph, Tim Wigmore (26/11/13)
Poorest families ‘need more help over debt’ BBC News (20/11/13)

More than 5,000 people a year ‘homeless’ as household debt crisis deepens, CSJ warns Centre for Social Justice Press Release (20/11/13)

Monthly amounts outstanding of total (excluding the Student Loans Company) sterling net lending to individuals and housing associations (in sterling millions) seasonally adjusted Bank of England
Public Sector Finances First Release – Public Sector Consolidated Gross Debt ONS
Household debt (Economics Indicators update) House of Commons Library (29/11/13)


  1. What are the macroeconomic implications of rising levels of household debt?
  2. Why may an economy which has high levels of household debt be more subject to cyclical fluctuations in real GDP?
  3. What are the problems of having a recovery driven largely by increased consumer expenditure?
  4. Why have many people in the poorest sectors of society found their debt levels rising the fastest?
  5. Why may rising levels of debt of the most vulnerable people make it harder for the Bank of England to use conventional monetary policy if recovery becomes established?
  6. What policies could be pursued to try to reduce the debts of the poorest people?
  7. Discuss the effectiveness of these various policies.
Share in top social networks!

The end of the American dream?

Growing inequality of income and wealth is a common pattern throughout the world. In the boom years up to 2008, the rich got a lot richer, but at least those on low incomes generally saw modest rises in their incomes. Since 2008, however, the continually widening gap between rich and poor has seen the poor and many on middle incomes getting absolutely poorer.

The problem is particularly acute in the USA. Indeed, in his 2012 State of the Union address, President Obama said that it was the ‘defining issue of our time.’

No challenge is more urgent. No debate is more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.

The good news for the poor in the USA is that at last their incomes have stopped falling, thanks to stronger economic growth. But their share of the growth in GDP is tiny. As The Economist article states:

The main message is a grim one. Most of the growth is going to an extraordinarily small share of the population: 95% of the gains from the recovery have gone to the richest 1% of people, whose share of overall income is once again close to its highest level in a century. The most unequal country in the rich world is thus becoming even more so.

Apart from the ethical question of whether it is desirable for a society, already highly unequal, to become even more so, there is the question of whether this growth in inequality threatens economic recovery. Joseph Stiglitz argues that the rich have a low marginal propensity to consume and that this is threatening recovery.

Then there is the question of investment. Because most Americans have not seen any significant rise in incomes, it is easy for them to believe that the country cannot afford to invest more. And certainly it is difficult to persuade people that higher taxes are warranted to fund education, infrastructure or research.

The following articles consider the problem and its implications and look at various policy alternatives.

Articles and videos
Inequality: Growing apart The Economist (21/9/13)
What is income inequality, anyway? CNN, John D. Sutter (29/10/13)
Inequality is literally killing America Press TV (22/11/13)
It’s Economic Inequality Stupid – What to Do About the Biggest Crisis Facing America Huffington Post, Robert Creamer (14/11/13)
US Inequality Now Literally Off the Chart Truthout, Salvatore Babones (8/6/13)
Inequality moves to the front line of US politics Financial Times, Richard McGregor (20/11/13)
Is wealth inequality slowing growth? BBC News, Linda Yueh (21/11/13)
American Inequality in Six Charts The New Yorker, John Cassidy (18/11/13)
Income Inequality ‘Profoundly Corrosive’ Wall Street Journal, Larry Summers (19/11/13)
21 Charts On US Inequality That Everyone Should See Business Insider, Gus Lubin (12/11/13)

Data, information and reports
Income inequality in the United States Wikipedia
Inequality Data & Statistics
Income Main United States Census Bureau
World of Work Report 2013: Snapshot of the United States ILO
World of Work Report 2013 ILO
StatExtracts OECD (Search for Gini)


  1. How may income inequality be measured?
  2. Comment on the Gini coefficients in the above link to the StatExtracts site.
  3. Why has inequality grown in the USA?
  4. The Swiss have just voted in a referendum to reject a proposal to limit executive pay to 12 times that of the lowest paid worker in the same company. What are the arguments for and against the proposal?
  5. What features of an unequal society tend to perpetuate or even deepen that inequality over time?
  6. What features of a well functioning market economy would help to reduce income inequality?
  7. Are higher marginal tax rates and higher welfare payments the best way of reducing inequality? What other policy options are there?
  8. Compare the views of Paul Krugman and Joseph Stiglitz on the effects of growing inequality on economic growth. How significant is the difference in the marginal propensity to consume of the rich and the poor in explaining the relatively low rate of US economic growth?
Share in top social networks!

Should people be paid a ‘living wage’?

Pressure has been growing in the UK for people to be paid no less than a living wage. The Living Wage Foundation claims that this should be £8.55 per hour in London and £7.45 in the rest of the UK. The current minimum wage is £6.19.

There has been considerable support for a living wage across the political spectrum. Ed Miliband, the Labour leader, has stated that a Labour government would ensure that government employees were paid at least the living wage and that government contracts would go only to firms paying living wages. Other firms that paid less could be ‘named and shamed’. The living wage has also been supported by Boris Johnson, Conservative Mayor of London. The Prime Minister said that a living wage is ‘an idea whose time has come’, although many Conservatives oppose the idea.

The hourly living wage rate is calculated annually by the Centre for Research in Social Policy and is based on the basic cost of living. The London rate is calculated by the Greater London Authority.

Advocates of people being paid at least the living wage argue that not only would this help to reduce poverty, it would also help to reduce absenteeism and increase productivity by improving motivation and the quality of people’s work.

It would also bring in additional revenue to the government. According to a report by the Institute for Public Policy Research and the Resolution Foundation, if everyone were paid at least a living wage, this would increase the earnings of the low paid by some £6.5bn per year. Of this, some £3.6bn would go to the government in the form of higher income tax and national insurance payments and reduced spending on benefits and tax credits. Of this £6.5bn, an extra £1.3 billion would be paid to public-sector workers, leaving the Treasury with a net gain of £2.3bn.

But what would be the effect on employment? Would some firms be forced to reduce their workforce and by how much? Or would the boost to aggregate demand from extra consumer spending more than offset this and lead to a rise in employment?. The following articles look at the possible effects.

Living wage for all workers would boost taxes and GDP Independent, Nigel Morris (28/12/12)
Living wage could save £2bn – think tank research BBC News (28/12/12)
‘Living wage’ would save money, says study Financial Times, Helen Warrell (28/12/12)
Why the Resolution Foundation and IPPR can go boil their heads Adam Smith Institute, Tim Worstall (30/12/12)
Living wage for public servants moves a step closer The Observer,
Yvonne Roberts and Toby Helm (15/12/12/)
Living wage: Ed Miliband pledge over government contracts BBC News (5/11/12)
‘London Living Wage’ increased to £8.55 by mayor BBC News (5/11/12)
Q&A: The living wage BBC News (5/11/12)
Scrooges in UK firms must pay a Living Wage This is Money, John Sentamu (23/12/12)

What price a living wage? IPPR and The Resolution Foundation, Matthew Pennycook (May 2012)


  1. How would you set about determining what the living wage rate should be?
  2. Distinguish between absolute and relative poverty. Would people being paid below a living wage be best described as absolute or relative poverty (or both or neither)?
  3. What do you understand by the term ‘efficiency wage’? How is this concept relevant to the debate about the effects of firms paying a living wage?
  4. Under what circumstances would raising the statutory minimum wage rate to the living wage rate result in increased unemployment? How is the wage elasticity of demand for labour relevant to your answer and how would this elasticity be affected by all firms having to pay at least the living wage rate?
  5. What would be the macroeconomic effects of all workers being paid at least the living wage rate? What would determine the magnitude of these effects?
Share in top social networks!