Last month, the Institute for Fiscal Studies released its annual report on poverty in the UK, entitled Living standards, poverty and inequality in the UK: 2019. The media and the left quickly latched on to some of its conclusion, and used the report to highlight “growing inequality”, because it found that the number of poor coming from working households is 8 million and that between 1994 and 2017 the share of poverty accounted for by working households had jumped from 37% to 58%. But what does that mean?
The IFS use two poverty measures. The absolute poverty line is set at 60% of median income in 2010–11, adjusted by CPI. Despite the name, it is actually a relative poverty rate: it is relative to UK incomes and it goes without saying that those who are poor by this standard should not be compared to historical poverty or to the poor in the 3rd world. The IFS’s relative poverty rate is the fraction of individuals whose household income is lower than 60% of median income in the same year. Any rise in real incomes among the poor will lead to a fall in the absolute poverty rate, but incomes need to rise faster than median income for a reduction in relative poverty to be recorded.
The 8 million number for working poor is measured by the IFS’s relative poverty. So already here we should sound a serious note of caution, because those poor can be better off and still fall deeper into poverty because of the way the measure is defined. It really isn’t a poverty measure; it is an inequality measure. And there’s more. One of the key reasons for the increase in working poor is that employment is higher: since the mid-1990s working-age households with no one in paid employment has dropped from 18% to 11%. In other words, as households with low-income – single mothers for example – see an increase in employment, it pushes the number of in-work poor up. Another factor is what happens to people who do not work, and here there is more devil in the detail: as pensioners have had increasing incomes from booming state and (especially) private pensions, working households fall relatively easier into “poverty”. Positive trends result in an increase in a number which can be used as evidence of a negative trend.
The report also found that income inequality is static: the UK Gini coefficient was 0.34 in 2017–18, which is the same as it was in the late 1980s. However, the authors highlights that income inequality is still substantially higher than it was in the 1970s – but of course the UK had a marginal tax rate of 83% on incomes over £20,000 back then, and the lower Gini coefficient was a reflection of the rich losing out (or leaving), not of boom-times for the poorest. Again, be careful with those numbers and the conclusions you draw from them.
The IFS report is perfectly fine as a statistical insight into what happens to the economies of various strata of the UK’s social classes – if you understand what is being measured and how. But the headlines that can be drawn from superficial reading are potent political ammunition, and few will make the effort to understand that positive stories can hide beneath figures which are used by skilled demagogues to showcase any trend which is politically convenient. As former British prime minister Benjamin Disraeli said: “There are three kinds of lies: lies, damned lies, and statistics.”