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Inequality: what do we know, and why do we care?

What’s on offer?

Each year early career economists at IFS deliver a day of public economics talks, aimed at A-level and undergraduate students who have an interest in economics or might want to pursue a career in public policy research. As part of this year’s Festival of Social Science, we will be live streaming a selection of lectures from the series to anyone who is interested in finding out more about economics. There will be time allowed for Q&A on each topic.

What’s it about?

Why do we care about inequality? What should be done about it? This lecture explores the debate over which inequalities the government should act to reduce, and why. It focuses on the contributions that can be made by economic theory and empirical research, and also introduces some of the tools used to measure different inequalities, applying them to UK income inequality to show how different measures can give us different insights.

Who’s leading the event?

Tom Wernham, Research Economist at IFS

Open to

These webinars are primarily aimed at final year undergraduates studying economics, but should be useful to anyone interested in the subject.

Inequality: what do we know, and why do we care?

Video transcript

hi good afternoon everyone and welcome to today's event inequality what do we know and why do we care i'm shari shu and i'm a senior research economist at the ifs and i'll be chairing today's session this is um the second in a series of lectures on public economics which will run at the same time each week so every monday from four to five o'clock next week we'll be looking at the effects of graduating into a recession so if you're interested please do register for that as well and you can find last week's lecture and pensions on our website and on my youtube channel so what will happen today is that my colleague tom wernham will talk to you about inequality why we as economists might care about inequality what policy can do what's happened to inequality in the uk and how different measures of inequality can tell a different story tom will talk about for about 45 minutes and then we'll have 15 minutes for questions and answers we'll be taking questions on slider so please post your questions there and vote up the questions you'd like to see answered you can find the slider link on the website so without further ado i'm going to pass on to tom thank you very much charlie so as i shall i said this lecture is going to be on inequality what do we know and why do we care and so just give you a brief outline of what we're going to talk about in part one we're going to think about what it is we mean by inequality and we're going to see that people are interested in inequalities in a range of different outcomes between different units of comparison i'll give a couple of examples as well and then in part two we're going to ask why it is that we care about inequality specifically what arguments are made for and against policy intervention in different qualities and what can economic research and economic theory contribute to that debate and then uh in part three one of the major contributions economists can make is contributing to a measurement of inequality so we're going to think about how it is we measure inequality um and what can different measures tell us we're going to see that many different measures and different measures give us different insights into how inequalities change and i think the overall message to take from this lecture is that inequality is a really complex topic um different inequalities have changed in different ways and different arguments for and against intervention may apply to some inequalities and not to others so let's jump straight to why what it is we mean by inequality as i said people are interested in plotting a range of different outcomes so one of those quite a popular one is earnings for example the attention given to the uh gender pay gap or to pay differentials between in large firms on the other hand we might be interested in disposable income so that's income from earnings but also other sources like investments benefits etc and the taxes taken away and that's because this take-home disposable income is often seen as a proxy for living standards another thing we're often interested in is is wealth inequality and that's because that wealth in a good is a significant a key mechanism by which other inequalities can be transmitted through generations um it's not just these material inequalities we're interested in though uh i think with the pandemic in particular inequalities in health outcomes or well-being have come into focus um and another interesting inequality which uh gets a lot of attention is inequality of opportunity and there might be one strand of thought some people may argue that inequalities of outcome don't matter so much as long as people had equal opportunities in the first place to achieve those different outcomes and of course there are there are many more uh inequalities that we might be interested in but there's also different ways of different units of comparison when thinking about these different outcomes so we might be interested in between grouping quantities between men and women or people from different ethnic backgrounds or different towns and cities on the other hand we might be looking at inequality across the population so so called interpersonal or into our school properties which raises the question of what populations we can look at inequalities just in the uk for example or in the developed world or in the whole world we get very different answers depending on what populations uh just a couple of examples to motivate the rest of the discussion um so start with a health one given um the attention that's received recently so it was the beginning of the pandemic black people in the uk were over four times more likely to die from pronounced than white people when adjusting or age other inequalities that have received potentially pandemic are educational uh or opportunity so for example at the beginning of 2020 nine percent of children um in the uk did not have access to a computer at home according to offcom which is really important for um equality of opportunity given the fact that during the first lockdown uh schools were shut and much education provision was over the internet and then an example of the inequality before the pandemic so the wealthiest 10 in the uk um and almost 45 percent of the total world so not far off half and i think it's fair to say that inequality is a really controversial topic thinking about some of the previous elections has been a key dividing line between the parties and different inequalities provide different reactions from people some some are seen as problematic some odds and there's also huge disagreement about what should be done about them so with that in mind let's move on to the next section of the lecture where we're going to think about arguments for one against intervening in different inequalities and what really is that people think is wrong with with with inequalities um now this is a really question of what's wrong with inequality really complicated uh philosophical and moral question and if you want a good overview of these different moral arguments i'd really recommend just recently by don't process what is wrong with inequality um it's impossible to do justice the whole debate here but i'm going to give a bit of an overview to some of the key arguments but what i'm also going to try and do is bring that back to the contribution that economic research and economic theory can make to the debate so to start with let's actually think about why we might not want to reduce inequality or some inequalities um so it's not obvious it shouldn't be taken for given that all inequalities are a bad thing that all inequalities are very intervention so what are some of these arguments that i can make well on the one hand it might be argued that some inequalities are actually fair or meritocratic and they're just not a problem so this is the idea that people who make unequal contributions perhaps it should be awarded unequally and those inequalities that are awesome that aren't problematic a very simple case would be um that some people choose to work more than others um even imagine a world where everyone had the opportunity to earn the same hourly wage simply because people have different preferences and some people prefer more leisure some people prefer more consumption and would choose to work more hours we would still see inequalities in earnings rising and maybe that isn't so problematic um but on the other hand it gets more controversial when we start to think about how fair inequalities are uh than aren't food choice um because people can't work because they've got to look after children not because you know highly skilled people are paid much more than uh lower skilled people and whilst you know some empirical contribution can be made um to that debate looking at where like whatever inequalities are through earnings or inheritances and so on this is inherently a really difficult moral and moral question the question of fairness whether differences in pay we see are actually fair on the other hand another sort of argument while we might not want to reduce inequality may accept that some inequalities are problematic in some way but also warned that measures we might want to take to reduce them would also have their own negative consequences for example it might be accepted that some of the large differences in pay between high-skilled workers and low-skilled workers aren't fair necessarily um but if you wanted to redistribute incomes you'd have to finance that through taxes and that could start to you know drive a wedge between the wages paid by firms received by individuals and causing their inefficiencies um so you know the idea is that in a perfectly competitive equilibrium all the wages and all the prices are such that they're diverting numbers of people to do the right jobs buy the right things so we get market clearing outcomes um start to drive wedges between that and it causes inefficiency and this is where this idea of an equity efficiency trade-off comes in so perhaps inequality is unfair but to reduce their unfairness you need to reduce efficiency similar arguments might be that some inequalities motivate innovation or entrepreneurship and to reduce weight you know stifle growth um now the thing is this this trade-off will of course exist in some cases but it's not a given that it will always exist it's quite possible that some inequalities might either have been caused by inefficiencies in the market or actually go on to cause inefficiencies in the market we'll talk about this a bit later but in those cases it's possible that we could both increase um both reduce inequality and also increase market efficiency and answering the question of when that's possible that is a key contribution that economists can make as we'll see so let's move on to reasons why people do care about inequality why the government maybe should intervene to reduce certain quantities and i think there's two main categories of argument if you like um one is that um some inequalities are undesirable which should be reduced because they arise from causes that are in some way problematic unfair unjust and so on on the other hand some inequalities may warrant intervention because they have consequences that are deemed to be undesirable or problematic in some way and i'm going to go through some examples of each of these in turn uh to make a bit clearer so let's start with one of the causes of some inequalities which might be deemed to warrant intervention and that's historical injustice so this is the idea that where inequalities have arisen due to discrimination or colonialism or exploitation that is a reason why it might be imperative for the government to intervene and produce so as an example that satsang might give they argue that uh wealth inequality in the us today is to a large extent between equality and homeownership and we see significant differences between ethnicities there precisely because in the 20th century african americans suffered discrimination in access to housing market and to credit and so on now in cases such as these where inequalities arise directly from past injustice it probably seems clear-cut that there's a problem there but even in this case uh the question of what to do about them can be uh controversial um we can think about some policy responses that might be proposed to these sorts of inequalities um uh redistribution uh in the country or reparations uh if we're thinking about um dealing with the impact of colonialism in the past or things like positive discrimination to try and you know equalize the opportunities where people come from disadvantaged backgrounds and all these sorts of policies are um quite controversial i think part of that does come down to this idea of equity efficiency trade-off again if you're going to finance redistribution or if you're going to have low entry requirements people from certain disadvantaged backgrounds that might introduce um inefficiencies there's also another reason why this is controversial is because given these injustices are historical the people who might need to finance their reparations of rectification of these injustices aren't necessarily people who committed them in the first place um and then we move on to another another cause of uh inequality which might be into our intervention that's market failure and a few ways in which market failure might um cause equalities one is market power so here we have the idea that um some large firms um the seller side might be able to um charge a markup over their costs because they have market power they don't face competition and make excess profits and these excess profits might contribute to inequalities in income and wealth because um they accrue to the owners and owners of ownership of businesses is not evenly spread throughout the existing income wealth distribution it's also possible some of these excess profits will go to paying the high salaries of ceos or highly skilled workers but perhaps not to low-skilled workers and the reference there that denied out does find evidence of increasing market power in the us and globally which might be one explanation as to why we've seen uh international trends of increasing income inequality on the other hand we might see market power on the uh in the labour market on the um buyer site so um monopsony power in the labor market the economic theory tells us that if you have a small number of firms hiring labor and there's they don't face much competition with other firms they may have incentives to uh reduce wages and reduce employment in order to increase their profits and that may also contribute to inequality in incomes as you know workers have their wages pushed down towards the bottom of the distribution um in order to increase the profits of their company owners and the reference i've given their ability to um look at minoxidil power in the uk labour market and they do find evidence of nozzle power reducing wages and crucially though it looks like as if the fed is confined to workers who aren't part of collective bargaining arrangements such as trade unions which which makes sense from economically perspective now other sorts of market failures that might be into problematic but also cause inequalities are asymmetric information which means some risks such as unemployment risks or health shocks cannot be insured um privately um and therefore in the absence of state provision of insurance of these risks they won't necessarily cause some degree of inequality now in these cases where we think that inequalities are caused by these market inefficiencies that may lead us naturally to policy responses that target the underlying market affections rather than perhaps you know some simple redistribution so we might look at um competition law firm controlling monopolies minimum wages was in collective bargaining arrangements or provision of health care unemployment insurance which we see quite widely um on the other hand if those measures aren't able to go far enough perhaps they can't be implemented or perhaps we're worried about inequalities that have been already been caused by past market failures then we still might want to look at redistribution in which case we're back to this equity efficiency trade-off so that's some of the causes of inequality that some might feel more intervention but now let's think about some of the consequences um now i think one of the simplest arguments could be made here that could be made here is that inequality is somehow directly harmful to people's welfare and there's a few ways we can think about this one might be that people simply have you know pure preferences for equality they prefer a world in which there is more equality rather than the world in which there is less so i think in this sort of case we can think about inequality essentially entering the utility function so i've put an example here that inequality a version utility function from erin smith this is the utility function representing the preferences of agent i and if we imagine the x is our income so we can see that agent i has preferences over their own income which is natural they want more income but they also have preferences over the incomes of the other agents j the other in minus one agents in this case so we can see here there is a um term here procedured by the alpha coefficient this is disutility that the agent i uh gets whenever other agents have more income than them you could potentially think of it as an envy term in the utility function on your home this second term uh preceded by the beta this is this utility that agent i gets when um other agents have less income than or maybe these two terms together represent agenda's preferences for social justice and so or equality more you know generally um because this is there's only one specific example in inequality you seem to function in many ways um but if we want to evaluate whether this is true this is the sort of thing that can be researched um could be done through polling simply asking people about their preferences on inequality or you could have um behavioral experiments and i've got an example of paper by stephanie which reviews some of these sorts of experiments looking at how people's preferences for inequality depend on their incomes or information they have and so on so this is the sort of thing that's uh testimony um on the other hand there may be a more deeper and more complicated way which inequality can be harmful for welfare and one way i think thinking about this is um the capabilities approach to relative poverty popularized by a much descendant not further than others now this is the idea that in order to achieve a given absolute standard of well-being but the resources you need to do that depend on the resources held by the rest of the population for example we can think about social standards to social expectations to furnish your home in a certain way or decorate it or own a certain model of car and so on um or we could think about maybe the rise in ownership of um computers and phones and tablets and so on um bring us back to our example earlier as well so if we um if you live in a world where the majority have access to computers and society will start to be geared towards them and those who can't afford um computers will be will be left behind we saw that potentially with provision of education over the internet during during the first lockdown addis which you know would be the expense of people who couldn't afford it in these cases um the the the people at the bottom of the distribution who aren't able to afford um to meet certain social standards social expectations um are worse often in a world where nobody could afford these things possibly um because they're being excluded um so that's that's the other way in which inequality may be harmful to welfare um now i think in both these cases we can actually think of inequality as an externality if i'm going for a high-paying job i'm not necessarily going to think about the impact that will have on patterns of inequality and how that may affect other people's welfare um so there's an external effect of my actions that i'm not considering um and clearly we couldn't have a private market for reducing inequalities so this is another potential argument uh for intervention and might be a way in which we can increase uh fairness and efficiency if we think that and then i'll just briefly mention a couple of other things um another consequence of inequality that may mean we want to intervene is that it may harm the democratic process for example or indirect effect um so it might be that you need you know rich people find it easier to stand for election or that donations give disproportionate influence to some people in the policy-making process um and these impacts of the inequality on the democratic process may be enough for some people to warrant intervention to reduce them another argument and it's mobile circular argument is that inequalities today might cause more inequalities tomorrow inequalities in income may cause inequalities in wealth and future generations um but also um i think it's an interesting point today's inequality of outcome could lead to tomorrow's inequality of opportunity and this is a a interesting come back to this idea earlier that it's an equality opportunity that matters it's hard to imagine a sustainable system over time where each generation had equality of opportunity and yet there were vast differences in the outcomes um because clearly you know if another receptionist decides you're accumulating wealth that's going to influence the opportunity of the next generation so that's the end of my summary of these arguments um as you can see so hugely complex uh debates to be had around inequality and many of them hinge on you know normal values and judgments about what is fair and so on however i think that almost all of these arguments also rest on factual claims about how the world works so about where inequalities come from or what their consequences are or uh how effective policy measures might be at reducing them and it's in these um empirical questions that i think economists you know have a real opportunity to contribute to the debate um yeah that won't be able to provide us with an answer to the questions but it will allow us to you know judge the different arguments on their lyrics and um yeah be avoiding the focus the argument on the fairness questions if we can establish the facts so yeah that's the contribution i think can be most effectively made by economists and in that vein we're going to look at one of those contributions which is actually to measure inequality um we need to measure inequality um before we can work out or not um and i'm gonna start by i'm gonna introduce a range of methods that economists and statisticians might employ to measure inequality in different sorts of outcomes so first um but not for long we're going to think about between group inequalities the genders or ethnic backgrounds and so on um so one very simple thing you can do here is simply compare two groups and compare the average outcomes between them for example if we think about to our clothing mortality example you could take say all the over 80s and compare the mortality rates of black people and white people fairly straightforward exercise if you have the data um but we often might want to do more than this and that's because lots of these inequalities have many dimensions to them what do i mean by that well it might be that um black people aren't more likely to die of chronic violence than white people and it is uh but there may be other factors that are also relevant such as um household composition poverty where people are from their age their previous health all these different things and these um may correlate with ethnicity to some extent and that doesn't take away from the the importance of the quality but it does um complicate the picture um because these different inequalities between groups can overlap and it's hard to disentangle these effects the one thing that can be done and was done by the ons when they calculate that figure earlier is to do a regression that includes um all of these different factors so for example the ons regressed the probability of dying from comet on not just uh ethnicity if there's two but also a range of these other controls which i talked about earlier and you'll remember i said that if you're just control for age black people are four times more likely that uh to die credibility than white people um but if you include all these other controls there's still a large difference and they still find that black people are twice as likely to die of chronic virus as white people and so really what this regression allows you to do is compare uh like for like um so if you take people of a similar age similar declaration level similar household composition um then what is the uh average difference um that we will see between ethnicities okay um but now for the rest of this section i'm actually going to think about um interpersonal integrity across the whole of the population rather than between really qualities and as an example i'm actually going to use household income um in the household disposable income in the uk and we're going to see how different measures can tell us different things about um incompetent quality so one good way of illustrating inequality is with the lorenz curve so let me explain what the errance curve is i want you to imagine lining everybody in the population up from uh poorest to richest lowest income to highest income and ask what is the total income owned by burned by all these people everyone in the population then i want you to imagine moving along this line from the lowest and again to the highest and keeping a running total of the income as you go and then if you plot that running total as a proportion of the overall total income that gives you the lorentz curve so this is the the rental curve for those of you in the uk uh so how do we read this well what the loans here tells us is that um the 25 uh 25 percent of people receive about 10 of the income uh whereas the bottom 50 percent of people receive um about 25 of the income okay and that's a mathematical expression of what i just said if you're interested now if you imagine a perfectly equal society which everyone had the same income um then clearly trivially the poorest 20 percent would receive 20 income of course 30 30 and so on and our lorentz curve could actually be this straight line from 0 0 to 100 100 this is the perfect equality line and if we look at how far away our lorenz curve is from the perfect quantity line that starts to give us a way of comparing inequality between different distributions already so the further away the lorentz curve is from the equality line the more bound out it is the more inequality we have just as illustration here this blue line illustrates a society with more income inequality and actually straight from this graph we can start to read one of our headline statistics that we we often see when thinking about inequality and that's the genie coefficient so if you take the area between the perfect equality line and the lorentz curve and you call it a and then talk take the area between the rex curve and the axis and call it b then the genie coefficient is quite simply the area a over the total area a plus b so if we imagine our perfect equality case where everyone has the same income then the area a is on the perfect equality line and so we have a genie coefficient of zero for perfect equality on the other hand imagine a society where no one had any income at all except the richest person who had all the income and maybe we could call this our perfect inequality case um in that case the area a at um is the entire area between the performance unit and the axis and b is zero and our genie coefficient is one so one is the case of perfect inequality and as long as we don't have any negative incomes our gene coefficient is bounded between zero and one so that is our first headline measure of inequality um that's an alternative formulation for it you're interested it's equivalently could be thought of as the [Music] mean deviation between all possible pairs you could extended by the average now the advantage of genie coefficient is it's a it's a good measure that takes account of the whole of the income distribution um so and it has a fairly intuitive derivation if you want to take time to look at it um but it is only a summary measure um so you could have um you know different quite differently shaped income distributions that gave you the same coefficient but on the other hand you can also have income distributions that are fairly similar but have quite different genie coefficients just because there are uh some changes going on at the very top of the distribution that's because the genie collection is very sensitive to extremes it really is a measure of how concentrated income is towards the extreme and that's becomes problematic really when we want to estimate it because often we will estimate the genie coefficient using survey data but if jeff bezos answers your income survey one year and not the next you're going to get very different answers even though not much has changed and you you don't want um small changes just from your sampling to have drastic influences on the statistics you calculate so we do need to make adjustments if we're going to calculate so let's look at what the geneva efficient can tell us about uk dispersed blink so i'm going to plot the genie coefficient since the 1960s and what we can see is that um in that period over the last 60 years or so there has been a significant increase in inequality on the genie measure but that this really was concentrated in the 1980s which as i'm sure everyone knows is a time of significant economic change in the uk and internationally changes to trade unions attacks and benefits systems large structural changes to the economy but since the 1980s there's been very little change really it perhaps a small uptick in anything um up to the financial crisis and then not much going on since then either um so yes we've got this story of a significant increase of the junior coefficient in the last 16 years primarily concentrated on the in the 80s and that has taken that increase has taken the uk towards the top of the league table when considering uh high-income developed countries but um the genie coefficient is as i say is not the only measure we should look at and there are other measures as well um now one which i actually alluded to earlier when talking about wealth is is calculating income shares or wealth shares and this is um something we can illustrate on the curve so if we look say at the 90 level we can say that the poorest 90 percent received just over 70 of the income and from that obviously the top ten percent um receive just under thirty percent of the income and that's what we mean when we talk about income shares um we'd also do it for the top one descendancy they receive nine percent or so of the income so income shares are good for understanding inequalities specifically at the top they so they focus on specific parts of the distribution um so they don't tell you everything but it may well be inequality at the top that you are particularly worried about today that's what you're researching or do you think that has particularly adverse consequences that other inequalities might not um so it depends on your purposes but incoming income shares are one very good way of summarizing a particular um type of inequality uh but again just with us with the ge it could be quite hard to estimate these if you're using survey data because of difficulties in capturing um incomes at the very top uh another measure uh which we normally use to focus on the middle of the distribution was uh percentile ratios so i'll show you how we calculate those and this time i'm going to plot uh income distribution um in a slightly different chart so i'm gonna plot income percentiles so what do these mean well again imagine they've got everyone lined up in order of how much you can learn and you're moving along the line um once you get uh 10 of the way along you ask whoever is there uh how much income player they'll tell you about 250 pounds 50 percent of the way on they'll tell you a little over 500 pounds and we plot this on the graph and set our ratios quite simply you take the ratio of the percentiles that you're interested in so as i said um the 10th percentile about 250 pounds per week in income at the 90th percentile um a bit over a thousand pounds a week and that gives us what we call a 90 10 ratio of for 19 obviously four times the income of the death on the other hand if we look at the fifth 1950 ratio um we see a ratio of about two so that's percentile ratios and we can use these to summarize in the quantity income distribution you can choose which percentiles you use um and these are usually focused on the middle of the income distribution i mean middle in quite a broad sense it could be the middle uh 80 percent but um looking at what's going on in bulk of the population without reference to what's going on at the extreme ends and just in case you're interested but um don't worry about it but you can also see percentile is on the lorenz curve so if you take the slope of the lorentz 90th percentile and the slope at the tenth the ratio of the slopes that also gives you uh percentile ratios okay let's see what these measures tell us well start with our 90 10 ratio actually not too different to the significant increase of the last 60 years mostly concentrated in the 1980s perhaps you can tell a little bit of a story of a bit of a decrease since um but really not very much um most of the action again going on in the 80s but on the other hand um if we need to plot the top 1 share we get quite a different story we still see stability in 60s and 70s of increase in the 80s but that increase really carried on um through the 90s up until the financial crisis and that's something that isn't obvious at all from looking at our diversions of inequality so while the genius 9010 ratios tell us the story of fairly flat inequality since the 80s financial crisis the top 1 share tells us quite a different story it's only since the financial crisis that that measure has uh started to stabilize ability and then i'm going to give one final measure and that's actually relative poverty so perhaps it's not always thought of as a measure of inequality but it is and let me show you what we mean by relative property this is how it's defined usually so if we take our percentiles of the income distribution again we ask um what is the median income the 50th percentile we see that's about [Music] that gives us 330 pounds and we ask what proportion of people receive beneath that level and that proportion um 18 13 that gives us our poverty our relative poverty rate um and we we can i showed you just on disposable incomes before subtracting housing costs but we can also calculate this measure after subtracting housing costs there's not a contract to see what's the best but either way uh relative poverty defines the fraction living below sixty percent of the contemporaneous median income is essentially a measure of inequality and it's a measure of lower end inequality so i think this is a it's a good measure it's an interesting measure because it's a particular type of inequality that we might be interested in um perhaps it gets this idea that i was talking about earlier with the capabilities approaches sufficiency for individual standard living is really it really depends on what the rest of the population has so it's almost a proxy for that sort of idea um but i think there's a world of warning that needs to be made here and that's that really this 60 measures is a is an arbitrary cut off um and indeed when we're talking about top income shares percentile ratios the numbers we choose they're arbitrary as well um but it's important to remember that if you're using these measures to evaluate the impact of the policy because you wouldn't want to focus just on relative poverty um relative poverty that a measure that changes the incomes just of people who are already below the poverty line or of people who are you know further up the distribution that's good that's going to have no impact on the rent on tv even though it might have significant distribution of consequences including on the people um that you're interested in so you while renting properties it is a interesting summary measure of lower-end inequality it's not something that you want to focus on in isolation if your aim is to evaluate policy [Music] and if we look at our relative property rate in the uk and this time i have deducted housing costs and we can see not too dissimilar pictures many of our other measures um stability towards before the 80s significant increase um in the 80s bit of a downward trend um up to the financial crisis perhaps but only a partial reversal of the increase we saw in the 80s and then stability since then okay so just to summarize we've seen that uh various measures of inequality we can use if we're looking at between group inequality you can do simple comparisons of group beverages or you can run a regression to disentangle the various different uh groups that we see any quantities between whereas if you're looking at interpersonal inequalities you've got lots of measures you can use the genie coefficient top uh one percent ten percent shares percentile ratios uh relative poverty and um i gave you the example of income but really well perhaps with these top three at least you can apply these to any outcome you like right to wealth consumption um any any outcome that you're interested in okay and different measures give us different insights but on all measures incoming according to has increased in the last 60 years okay so let's just uh wrap up obviously if people are concerned about a huge range of inequalities so there are different outcomes um and the arguments we can see four are against reducing inequality and particularly the state taking action using the quantity whilst they depend on moral values and complains about fairness they're also contingent on cultural claims about inequalities causes and consequences and of the consequences of policy and these can be evaluated by economists now there are many ways of measuring inequalities and different measures could give us different inequalities into how a different insights and how the quantities have changed um and as we as we've just seen um inequality has increased in the uk in incomes in the last 60 years um but apart from at the very top most of this change in the quality happened during the 1980s there's been first now stability since except for the top one percent who really have um continued to hurt the way all the way up to the financial crisis when income started to stabilize okay um so that's all from me and i'm now able to take questions keep posting your questions and slide it so i'll stop sharing i'm back to shower that's brilliant thanks so much tom um yeah so we've now got some time for questions as tom said please uh do post your questions on the slider and vote up the questions you'd like to see answered and i see that we've got a couple of questions but i think we should have time for more than this and so the top rated question at the moment is how income inequality in the uk compares to other countries internationally okay yeah so i i did mention this um briefly and if we think about the um gene measures one of our headline measures um and if we if we focus on other wealthy developed countries the uk really is actually quite high it's towards the top i think it's really only the uh us that stands out above the uk that the uk does stand out as well um if we think about the top one percent uh share then again the uk is fairly high up up the uh international league table if we look at similar countries but i would say it doesn't stand out quite as much as still closer to the massive countries as opposed to the us which really it does stand out on that measure as well so yeah but overall i think it's fair to say uh looking at similar countries that incoming equality in the uk is quite high great um another question we have is on data um so there's a question on um how we get the data that feeds into these inequality graphs um and whether the the quality of that data has got better or worse over time that's uh it's yeah it's an interesting question so um there's yeah there's you could essentially divide the data we could use into two categories so it's administrative data and survey data so administrative data is data that the government um or you know other authorities will hold for operational purposes so for example hmrc might know uh people's earnings um and that data is very useful in that it is very comprehensive it should include everybody or almost everybody um but uh disadvantages of using that sort of data are that um well there's limits to what we can know from it they won't hold informational information characteristics so they'd only hold the information they need to know and also it can be very difficult for researchers to get their hands on their data sometimes so the alternative is survey data now with survey data the disadvantage is you're relying on a sample you're hoping that that sample is going to be representative or you can adjust it so that it becomes representative and you might not get that right however you can ask a much broader range of questions and if we're interested in inequalities between different groups for example different characteristics and then that's when survey data really comes into its own into um understanding um these trends um in terms of how quality of data has changed over time um well i'd say that there's always there's lots been lots of there's research going on into how we can use the data we've got better um so i've mentioned there's difficulties in understanding what's going on at the top to measure top incomes and capture those so there's lots of research going on to try and develop better ways better techniques of dealing with that issue and also all the time we get large new surveys introduced for example since about 2006 i think we've had a lot of an asset survey which has helped us look at wealth inequality um so new surveys appearing and that really helps as researchers as well that's great yeah i might just add to that that sometimes um we also try to combine these data sources so for example we know that top incomes and people earning um a high very high levels are underrepresented in survey data so we might use an administrative tax data to adjust for incomes at the top um i think in terms of you know trends over time um one thing that we are aware of is that if you use tax data from the uk of course your your um capturing comes that reported to uk's tax authorities and if people are perhaps increasingly using tax havens to channel their funds then it might be that we're missing um part of that data so i think there's been some work done at lse on how much um wealth or income we might be missing through those channels um and there's a related question to you to this question on data on um informality so i think i think this is referring to um public burnings in the informal economy so the question is how do we factor in informality when measuring inequality yeah that's a very important question and i think here here um this is an example of when administrative data um is unlikely to be very helpful uh these are precisely this sort of arrangements where for example hmrc won't know about the earnings that are being received potentially um so in these cases um we're probably going to rely on surveys of um some description but even then it it may well be difficult um these earnings in informal arrangements might not be measured very well or people may not disclose them even even just in a survey um so yeah i think it is a valid point that it is quite difficult to factor in informality when measuring these equalities but at the end of the day if there is a way of doing it it really it's important to consider it because you know it's income inequality we're considering uh then we need to know about incomes from as many sources as we can it's just a matter of overcoming the informational limitations there are yeah and perhaps in these these circumstances and measures consumption inequality could be used to sort of supplement the income data yeah absolutely yes yeah i think yeah consumption inequality is i mentioned in the lecture that um income inequality is often thought of as oh sorry that incomes are often as a proxy for um living standards um but they're not the only property we have available um one problem with using incomes is that incomes can vary quite a lot over the lifetime people don't tend to have much income when they're very young for example or when they retired um they might have less than when they were working and that consumption we might think of as an alternative property because people might smooth their consumption a bit more over time so they may borrow when they're younger for example as a student they may save some of their income when they're working and then divest their savings in retirement so yeah these other measures are also using different proxies for uh living standards isn't definitely i agree another way of getting this issue great um so there's one final question on uh covert 19 so what covets done to inequality um so i guess you've already talked to um you know some results on inequality and mortality by race but maybe you could talk to some other forms of inequality so for example what's happened to inequality in incomes uh maybe between the rich and poor the young and old men and women that sort of thing yes so it's it's a really obviously topical question and it's uh because it's such early days really in terms of getting data on this it's hard to answer it definitively um but really thinking about um disposable income the evidence so far is that there hasn't been drastic changes to the income distribution as as a result of cobit um even though there were obviously significant shocks to the um labor market and people's employment and that uh between different groups quite substantially we've seen huge government spending in terms of the furlough scheme uh self-employed income scheme universal credit and um which really we it does look like have helped us smooth out some of these shocks and since then as these schemes have been wound down we actually haven't seen the big permanent shocks to employment that perhaps we might have been fearing so um i wouldn't say there's been drastic changes so far in terms of incomes but that really is only so far we don't know what the long-term effects are going to be for example you know lots of people were out of work for long periods during the pandemic they had less work experience less obtuse for training and that may have so-called scaring effects so in the future they may become less productive in that way her earnings um another long-term consequence which i think is really important is um education in the qualities and again very briefly but um children from different backgrounds have very different um educational provision available to them during the pandemic and we have seen correlations between parental earnings and socioeconomic background of these children how much um education remote education they got during lockdowns and that could have much longer uh consequences for earnings inequality as well um we know that children's earnings often correlate with what their parents earned and that could become even more true if lower earning uh children would have had a stronger negative effect their education is more condemning than uh children from higher education backgrounds so that really here we need to watch what policies the government uh uses to try and compensate for education last year if we're going to get an answer to that question so we've got another question that's related to um um this idea of intergenerational transmission so um it mentions that many of the measures you've you've used so far relate to income but you know what what evidence is there on wealth inequalities and in particular measures related to inherited wealth yeah so um there has been work looking at um in wealth in general and inherited wealth and there's lots of mechanisms um by which um wealth inequalities persist um between the generations clearly direct inheritances are very big component of that um but we can also see that um there are correlations between um children's earnings and parental wealth or um you know where children are educated savings behavior all sorts of factors as well um and so i i encourage you ever ask that question to um search the ifs website for i think a fairly recent paper a few months ago which uh covered some of that in more detail but yeah there is evidence inheritance is definitely important but it's not the only driver of wealth inequalities and how they persist over time yeah absolutely i think um some ifs work maybe it was the same paper also found that inheritances are becoming an increasingly large um driver of wealth inequalities um between people the same generation in that you know younger people are building up wealth more slowly so the inheritance they get from their parents is becoming a larger share of their wealth and therefore differences in that the level of that inheritance is driving inequalities in the world for more than before and i would also add on the wealth point that is that is another uh impact of the um pandemic that we have been able to see already um there have been huge changes to uh the wealth distribution um partly driven by changes to property prices we've seen big increases in housing prices in particular um also due to increases in global equities and i think what the pattern we've seen there is that the wealth of the uh middle and the top of the pre-economic health distribution has increased especially in the middle whereas uh those at the bottom of the distribution haven't really seen much gaining wealth and tools and so so that is another pandemic rated inequality which we do know something about which is increasing wealth inequality but in particular that's lower enforcement fantastic thanks tom well we've run out of questions on slido and i think we've just about run out of time as well and so i think we'll end here um just a reminder that this is a series of lectures on public economics and next week we'll have another lecture um monday 4-5 p.m on the effects of graduating into a recession um so don't forget to register for that if you're interested um so i guess i'll leave it here thanks very much for tuning in and thanks very much tom for presenting