New IEA report debunks myths surrounding inequality
Politicians are often too quick to conflate poverty with inequality, either due to a lack of understanding, or in an attempt to score political points, and continual emphasis on the importance of reducing inequality is misplaced. In reality the gap between high and low earners tells us nothing about the material living standards of the poor. In the Chinese growth miracle, inequality increased as everyone got better off. In the UK post-recession, inequality fell as living standards stagnated. Someone too worried about reducing the gap would have to denounce the first, and celebrate the second.
The risk we run by continually focusing the spotlight on inequality levels is that we will lose sight of the main priority: to improve living standards generally, and for the poorest in particular. In order to achieve this, the focus should be to ensure there is healthy economic growth, which in turn leads to higher paying, more productive jobs.
Debunking the myths about levels of and trends in inequality
- Income inequality is not rising. After rising in the mid to late 1980s, most measures of income inequality peaked in around 1990 and have fallen since. The Gini coefficient, for example, is currently lower than it was in 1987 and is close to the EU average. The average income in Britain was twice as high in 2013/14 as it was 1977 despite the recession, and incomes in the bottom fifth increased by 77 per cent in real terms.
- In absolute terms everyone is in fact getting richer and ‘rising inequality’ is only evident in the form of the income share of the top 1%. The gap has only widened between the rich and the super-rich, which has been brought about by technological progress, globalisation and the birth of ‘winner takes all’ markets.
- Wealth inequality has not exploded in the past decade as claimed by many in the political sphere. In the UK it is actually lower than in most other developed countries.
- Global income inequality has actually been falling in the past few decades, whilst net wealth inequality statistics constantly cited by Oxfam give a very misleading picture of poverty and wealth.
Why inequality is the wrong focus
- Inequality is simply an economic indicator; its causes may be good, bad or neutral, but it cannot be good or bad in itself. It is a summary statistic arising from millions of interactions, endowments, exchanges, policies, and historic factors.
- Contrary to popular belief less equality does not necessarily indicate the success and prosperity of a nation. For example: the UK has seen a fall in income inequality thanks to a sustained fall in wages caused by financial meltdown. By contrast, China has seen rising inequality as a result of increased productivity and prosperity.
- Inequality levels are often described in terms of ‘income distribution’ which wrongly suggests there is a fixed pie of wealth being allocated by a central source. But inequality stats tell us nothing about how that distribution has actually arisen.
- The government cannot control inequality directly – it can only affect distribution by interfering in economic interactions which could have adverse effects on economic growth: for example the new National Living Wage may further reduce inequality by raising incomes or it might increase it by causing unemployment.
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