Inequality is growing in most countries. This can be illustrated by examining what has been happening to countries’ Gini coefficient. The Gini coefficient measures income inequality, where 0.00 represents perfect equality, with everyone in the country earning the same, and 1.00 represent perfect inequality, with one person earning all the country’s income. (Note that sometimes it is expressed as the ‘Gini index’, with 100 representing perfect inequality). In virtually all countries, the Gini coefficient has been rising. In the OECD countries it has risen by an average of 0.3% per annum over the past 25 years. The OECD average is now 0.31.
But despite the fact that the Gini coefficient has been rising, its value differs markedly from one country to another, as does its rate of change. For example, Finland’s Gini coefficient, at 0.26, is below the average, but it has been rising by 1.2% per annum. By contrast, Turkey’s Gini coefficient, at 0.41, is above the average and yet has been falling by 0.3% per annum.
The most unequal of the developed countries is the USA. According to OECD data, its Gini coefficient is 0.38, well above the values in the UK (0.34), Japan (0.33), Germany (0.30) France (0.29) and Denmark (0.26). What is more, inequality in the USA has been increasing by an average of 0.5% per annum since the mid 1980s.
According to the United Nations’ Human Development Report 2010, the USA’s Gini coefficient is even higher, at 0.41 (see Table 3 of the report). But this is still below that of Russia, with a figure of 0.44, a figure that has markedly worsened over time, along with those of other former Soviet countries. According to the report (page 72):
The worsening is especially marked in countries that were part of the former Soviet Union – which still have relatively low Gini coefficients because they started with low inequality. Transition has eroded employment guarantees and ended extensive state employment. Before the fall of the Berlin Wall, 9 of 10 people in socialist countries were employed by the state, compared with 2 of 10 in Organisation for Economic Co-operation and Development economies. While the privileged elite (the nomenklatura) often attained higher material well-being, the measured differences in income were narrow.
The Gini coefficient for Russia is the same as the average of the 39 developing countries with the lowest level of human development &nbash; and developing countries are generally much less equal than developed ones. Of course, some developing countries have an even higher Gini coefficient: for Angola the figure is 0.59; for Haiti it is 0.60.
The following three webcasts look at aspects of the growing inequality in Russia.
Webcasts
Gap between rich and poor widens in Russia BBC News, Jamie Robertson (29/5/11)
Corruption slows Russian modernisation BBC News, Emma Simpson (29/5/11)
Corruption and poverty in Russia’s far east Al Jazeera (28/2/11)
Articles
Russia’s rich double their wealth, but poor were better off in 1990s Guardian, Tom Parfitt (11/4/11)
Russia’s growing wealth gap BBC News, Jamie Robertson (28/5/11)
A Country of Beggars and Choosers Russia Profile, Svetlana Kononova (16/5/11)
Rich and poor, growing apart The Economist (3/5/11)
Data
Distribution of family income – Gini Index CIA World Factbook (ranked by country in desending order)
Society at a Glance 2011 – OECD Social Indicators OECD: see particularly the Excel file 6. Equity Indicators: Income inequality (click on No if prompted about a linked workbook)
Russia Distribution of family income – Gini index Index Mundi
Chart of the week: inflation stoking inequality in China and India Financial Times, Andrew Whiffin (24/5/11)
List of countries by income equality Wikipedia
Reports
Growing Income Inequality in OECD Countries: What Drives it and How Can Policy Tackle it? OECD Forum on Tackling Inequality (2/5/11)
Human Development Report 2010 United Nations Development Programme
Questions
- Explain what is meant by the Gini coefficient. How does it relate to the Lorenz curve? What does a figure of 0.31 mean?
- Why has income inequality been growing in most countries of the world? Has the process of globalisation dampened or exacerbated this trend?
- What specific factors in Russia can explain the growing inequality?
- How is privatisation likely to affect income distribution??
- Why is it difficult to quantify the extent of inequality in Russia?
- What maxim of taxation has been used in setting income tax rates in Russia?
- What role does corruption play in determining the degree of inequality in Russia?
- What policy measures, if any, could realistically be adopted in Russia to reduce inequality? What constraints are there on adopting such policies?
As the new tax year begins, many changes are taking place. In order to cut the large budget deficit, sacrifices have to be made by all. The tax and benefit changes could make households worse off by some £2bn this year – definitely not good news for those households already feeling the squeeze. However, the Coalition say that the poorest households will be made better off relative to the rich.
Personal allowance is increasing by £1,000, which is expected to benefit £800,000 people who will no longer pay any tax. At the same time, the 40% tax bracket is being reduced from £43,875 to £42,475, which will bring another 750,000 people into this higher tax bracket, bringing in much needed revenue for the government. Employee’s national insurance contributions will rise by 1% and according to Credit Action, this will leave households £200 worse off per year. Benefits do rise with inflation, but they are to be indexed against the CPI rather than the RPI. The RPI is usually higher and hence benefits will not increase by as much, again leaving some people worse off. Child benefit will be frozen for all and will then be removed for higher rate tax payers from 2013. According to the Treasury, it is the top 10% of households who will lose the most from these needed changes. However, as Justine Greening, the Economic Secretary to the Treasury said:
‘Labour left behind a complete mess with no plan to deal with it, apart from to run up more debts for the next generation to pay off.’
In order to cut the deficit, which stands at an estimated £146bn, spending must fall and tax revenue for the government must rise. The government argues that if cuts are not made today, even higher cuts will be necessary in the future and this will harm the poorest even more. Whilst the Treasury have accepted that there was a ‘marginal loss’ across the population, it is the highest earning households that will suffer the most.
Wednesday of woe as the taxman bites: Changes could leave you £600 worse off Daily Mail, Becky Barrow (6/4/11)
Benefit cuts: Labour warns of ‘Black Wednesday’ BBC News (6/4/11)
Tax and benefit changes: row over financial impact BBC News (6/4/11)
Black Wednesday will hig millions in tax changes and cuts Metro, John Higginson (5/4/11)
Taxman to take extra £750 from families this year Scotsman, Tom Peterkin and Jeff Salway (6/4/11)
Tax and welfare changes will hit women and children hardest, says Ed Balls Guardian, Helene Mullholland, Polly Curtis and Larry Elliott (6/4/11)
Black Wednesday for millions of British families Telegraph (6/4/11)
Majority of households ‘better off’ The Press Association (6/4/11)
Questions
- Where does the term ‘Black Wednesday’ come from?
- What is the likely impact of the 1% rise in NICs? Think about the income and substitution effects. Can you illustrate the effect using indifference analysis?
- Why are Labour arguing that women and children will be hit the hardest and the coalition arguing that it is the highest income households who will lose the most? Can both parties be right?
- What are the arguments (a) for and (b) against bringing in tax and benefit changes today rather than in a few years?
- How might these changes affect the economic recovery?
- Is it equitable that child benefit should eventually be removed from those paying the higher rates of income tax?
- Why has the government indexed benefit payments to rise in line with the CPI rather than the RPI?
An interesting article by Stephanie Flanders, the BBC’s Economics editor. She asks just how much (or how little) the pound in our pocket is now worth. With inflation above target, growth very slow and tax and benefit changes to cut the government deficit, everyone is feeling the squeeze. A key fact that Flanders identifies is that only those in the highest income quintile have actually lost from changes in the tax and benefits system: everyone else has (or will) gain. A very interesting read!
The shrinking pound in your pocket BBC News, Stephanomics (21/3/11)
Questions
- What are the main factors that have contributed to lower living standards this year? Explain how each factor works.
- What changes to taxes and benefits have occurred and what changes can we expect over the coming months and years? Who is likely (a) benefit and (b) lose from each change?
- Is it right that the richest families have been affected the most? Find an economic argument for both sides of the debate.
- Why have pensioners lost relatively more than other groups?
Ahead of Lord Davies’s report on Boardroom equality, he will be somewhat alarmed by the survey results carried out by the Institute of Leadership and Management, which found that 73% of women felt that they still face barriers to top-level promotion. Quotas are a suggestion to break down this barrier. As Sheelagh Whittaker, a non-executive directive of Standard Life said:
‘I am a big supporter of quotas. I believe that we will only have true equality when we have as many incompetent women in positions of power as incompetent men.’
However, others say that quotas are not the answer, as they don’t actually change the fundamentals. Forcing compliance for equality in the workplace is not the same as equality in the workplace. There are a number of other reasons behind fewer women in top level positions, including less confidence and ambition, a more risk-averse attitude to promotion, as well as more women than men aspiring to run their own company, rather than seek promotion within a firm. So does discrimination still remain in the workplace or are there other explanations for the fact that only 12% of FTSE 100 directors are women?
Women still face a glass ceiling Guardian, Graham Dnowdwon (21/2/11)
Female managers say classing ceiling intact – survey BBC News (21/2/11)
The ‘glass ceiling’ is all in the mind: women lack confidence and ambition at work says new survey Daily Mail, Steve Doughty (21/2/11)
Women hit glass ceiling while report rejects boardroom quotas Independent, David Prosser (21/2/11)
Poll: Glass ceiling still a barrier The Press Association (21/2/11)
Men not to blame for the glass ceiling The Australian, Jack Grimston (21/2/11)
Questions
- How are equilibrium wages determined in perfect and imperfect markets?
- Is it efficient for a firm to pay men more than women or to hire/promote more men than women?
- Illustrate the concept of discrimination against women in the labour market. Think about the effect on the MRP curve and hence on equilibrium quantity and wage. How does this affect the MRP curve for men?
- What are the other causes of less women being FTSE 100 directors besides ‘the glass ceiling’?
- To what extent would a quota be effective in achieving gender equality in the workplace?
- Are there any other policies that could be used to tackle discrimination of any kind? What are the pros and cons of each?
One of the key areas discussed in the election was welfare and in particular what to do about those who remain long term dependent on welfare. How can the UK government encourage people back to work? A key issue is the poverty trap: some people are simply better off living on benefits than they are getting a job. Here, we’re talking about the marginal-tax-plus-lost-benefit rate. When you start earning, you get taxed, pay national insurance contributions and lose some of your benefits. All this leads to a situation where work doesn’t pay.
In a paper ‘Escaping the Poverty Trap’ by Lawrence Kay, he considered how much better off people are moving from different benefits into work, taking into account the high costs of actually finding a job and then starting work. He found that after 16 hours of work, someone on Job-seekers’ allowance would be £15.07 poorer and someone on Employment and Support Allowance would be £39.35 worse off. In many cases, people were facing a marginal effective tax rate in excess of 100%. Given this, it’s hardly surprising that Lawrence Kay found that ‘Long term welfare claims have been Britain’s blight for many years’.
However, the Coalition has plans to change this and make sure that those in work are paid more and are better off than those on benefits. By making working life a more attractive option, this should encourage those for whom work doesn’t pay to enter the labour force. This will obviously benefit them, increase the potential output of the economy (hence growth) and improve net taxes, as tax revenue rises and benefits expenditure falls. While this may not lead to tax cuts for those in work (as benefits spending falls), it may mean that more tax revenue is devoted to areas such as health and education or that the government can close the budget deficit.
The ‘universal credit’ aims to simplify the current system and make work pay, by re-introducing a culture of work in households. There is also a plan to place sanctions on those turning down work and place a cap on benefits to any single family. There was also be tax changes aimed at helping those moving into work keep more of their money, thereby removing, or at least reducing, the poverty trap. However, some families will lose out – as the IFS noted, any reform ‘creates winners and losers’. However, the reforms are a step in the right direction. As David Cameron said:
“I think that will, over time, solve the whole poverty trap issue that has bedeviled governments of all colours.”
The Labour party does back some of the changes, but questions whether there is enough help for people finding work. Another issue that must be considered is while it is undoubtedly a good plan to encourage more people to move into work and off benefits, which jobs will they move into? With unemployment still high, now is not exactly the best time to be looking for a job. However, whatever the state of the economy, providing incentives for people to move from benefits into work is definitely a good plan, but of course the methods used will be under constant scrutiny.
Articles
Iain Duncan Smith sets out Welfare Reform Bill plans BBC News (17/2/11)
Bill ditches housing benefit cut The Press Association (17/2/11)
Life on benefits is no longer an option Mail Online, James Chapman (17/2/11)
Universal Credit welfare switch ‘to hit 1.4m homes’ BBC News (12/1/11)
Nick Clegg blocks housing benefit cut for jobless Guardian, Patrick Wintour (17/2/11)
It’s time to end this addiction to benefits Telegraph (17/2/11)
Report
Escaping the Poverty Trap Policy Exchange, Lawrence Kay 2010
Questions
- What is the poverty trap? Which factors make it worse?
- Why does the poverty trap act as a labour supply disincentive for those on benefits?
- If taxes of those in work have to be increased, what happens to their incentive to work more hours? Think about the income and substitution effects of a real wage change.
- Why is it that working may not pay?
- How does the Universal Credit aim to alleviate the poverty trap? Who are likely to be the winners and losers from the government’s proposed welfare reforms?
- What is a marginal-tax-plus-lost-benefit rate? How do you calculate it?
- Are there any other policies that could also reduce the poverty trap? How effective are they likely to be?