EC 1001 - Macroeconomics Essay

The UK Labour Government wishes to abolish child poverty by 2020; it reached its
intermediate step of reducing it by a quarter by 2004 and yet measures of income inequality
show a steady increase. Discuss the relationship between poverty and inequality.

Firstly I would like to explore the definitions of poverty and inequality. There are two kinds
of poverty; absolute (subsistence) poverty which refers to a definitive level of income at
which it is perceived to be insufficient for life (usually less than $1 per day), and relative
poverty which involves the comparison of other people in a country or society to determine
who the relatively poorer people are within that group. For the purposes of this essay,
relative poverty will be the more prominent of the two kinds as the whole population is
taken into account allowing it to be compared to measures of inequality which also involves
analysis of the population.

Inequality, specifically income inequality, refers to the uneven distribution of all income
within a population. Graphically, income inequality can be viewed as a Lorenz Curve;
showing the total percentage of income against the total percentage of households of a
given population.

In order to better quantify and compare different Lorenz curves the Gini coefficient is used.
This finds the ratio of the two areas between the line of perfect equality and the Lorenz
curve and the second area below the Lorenz curve. Assuming the curve can be expressed as
a function of x, the Gini index can be calculated by:


 1  2  


The resulting number, the Gini index, can be used to compare different regions against each
other or the same region over time. The closer the number is to 0, the closer the population
is to having perfect equality, meaning that the region is less prone to poverty. Over the past
15 years, the UK has consistently had a gini index of around 321 which, compared with other
EU countries over the same period is slightly higher than the average. Therefore it is
reasonable to assume the UK has a slightly higher amount of poverty than its EU relatives.
An increasing Gini index could also mean increasing levels of poverty due to rising inequality
and therefore a greater potential of being poverty prone.

However, the Gini index has some measurable disadvantages which could distort the true
nature of each country’s levels of income inequality and poverty. Firstly, the Lorenz curve
only accounts for the incomes currently earned by the entire population and not their
lifetime earnings or wealth. Therefore a person earing a low income may not be particularly
poverty prone as long as they have a substantial amount of wealth to support them. Also, as
the Gini index can be used as an overall measure for the entire country, regions within the
country may have very different costs of living, and hence, for a more accurate reading of
inequality, incomes would need to be adjusted according to purchasing power parity. These
factors may explain how a seemingly increasing level of income inequality may not
necessarily reflect the true nature of the poverty level and how measures of inequality could
be rising and not affect the poverty level detrimentally.

As for a comparison of poverty and inequality, poverty is a result of income inequality; the
more unequal the society, the greater the amount of poverty there will be. This goes for not
only income inequality but also other various inequalities: wealth, social, etc. Any form of
bias towards a specific group of people within a society will always result in an unequal
distibution. Poverty is therefore when inequality is taken to extreme cases and [. . . might be
considered as that part of inequality which is unnecessary, and consequently unfair]2 which
allows us to view poverty more graphically. The following graph depicts income inequality
for the UK.
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1
http://www.eurofound.europa.eu/areas/qualityoflife/eurlife/index.php?template=3&radioindic=158&idDom
ain=3
2
R. Berthound – The Disadvantages of Inequality - Macdonald and Jane’s (1976) p.20
3
http://www.ifs.org.uk/wheredoyoufitin/
Berthound’s definition allows us to place an imaginary line on the income distribution
(shown in red) known as the poverty line, as people below this line are living with sufficient
standards to be classed as living in relative poverty. However, the point at which the line
occurs is highly debatable as each person may have a different view as to what poverty is
due to personal lifestyle choices, preferences, etc indicated by the multilpe poverty lines on
the graph below. This is easilly resolved to some extent as the government sets an absolute
level of income for the poverty line at which people below the line live in relative poverty.
Also, the percentage of people who fall below the poverty line is the poverty rate.
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To conclude, although inequality and poverty are very closely related, the latter relying
strongly on the former, the level at which the two become distinguishable is still uncertain
and depends upon the person setting the level. It could be possible to find a mean level of
poverty and therefore a variance also to find a range in which the level defined as poverty is.
This would involve gathering the necessary data from people of all backgrounds and
positions in the population to gain an accurate measurement. Although poverty is strongly
reliant upon inequality, I believe the definition of inequality first needs to be honed in order
to provide a better reading of both what poverty is and the level at which poverty is at.

4
http://www.ifs.org.uk/wheredoyoufitin/