Monday, 7 June 2010

Do the poor do better under Labour?

From Burning our Money, this interesting graph.

We regularly hear about how the gap between rich and poor is growing in the UK (See also here). But it seems to me that surely the important thing (at least if one is motivated by concern for the less well off rather than ideological egalitarianism) is not the size of the gap between rich and poor, but how well the less well off are doing in real terms. And figures released by the Institute of Fiscal Studies show that, in real terms, they have been getting richer rather than poorer over the past 50 years.

The graph shows that households at the 25th percentile point for Before Housing Costs income (i.e. those that earn less than the richest 75% but more than the poorest 25%) have seen their income rise by 89% in real terms between 1961 and 2009. (The figures for those at the 5th and 15th percentile point are 80% and 88% respectively, while for those at the 50th percentile point it is 109%.)

Interesting stuff, and Wat Tyler has discoursed thoughtfully on the meaning of poverty.

However, I found myself wondering about something else. Do these less-well-off people (i.e. those at the 25th percentile point) do better under Labour governments or under Conservative governments. Accordingly, I adjusted the graph.

Upon studying it, I was not much the wiser, so I crunched the numbers, and made some interesting discoveries. I calculated that over the 25 years the Conservatives were in power, the people at the 25 percentile point increased their income by, on average, 0.987% per annum, while over the over the 23 years Labour were in power they increased their income by, on average, 1.714% per annum.

And so I might have concluded that the poor do better under Labour.

But I didn't, because there are three obvious problems with the methodology I employed.

1. Britain isn’t isolated from the outside world - and the prosperity of people in Britain is affected by events over which our government has no control.

2. The household income of people in Britain at any given time is affected by where we are in the boom and bust cycle.

3. The economic policies of a new government don’t start having an effect the day they take office - it takes months, perhaps even years. So surely it would be fairer to assume that the prosperity of the country in the first year of a new administration is actually the result of the policies of the outgoing rather than incoming administration.

I don't have the data to take into account the first two factors, but it was easy enough to recalculate the figures on this basis of the third, and so I did so.

The results were very, very different. Under Labour, the average rise in household income for these folk was 1.289% per annum, while under the Conservatives, it was 1.373% per annum*. And the reason is largely that there was such a huge jump in basic household income for people at the 25 percentile point between 1964 and 1965 (I have no idea why) that whichever party gets the credit for this jump comes out ahead.

And so the conclusion that I would be inclined to draw is that over the past 50 years, at least as far as household income of the less well off is concerned, it really didn’t make much difference which party was in power.

*(Incidentally, the figures indicate that the most successful administration was that of Mr. Heath in the early 1970s; the least successful were the Wilson administrations of the 1960s and 1970s.)


Albert said...

The question that interests me is what "real terms" means and how it is determined.

Young Mr. Brown said...

It means "adjusted for inflation", apparently.

Albert said...

I wonder how useful that is then. After all, if other people have got much richer, it may be that someone who is poor is unable to compete as well within society as they were when, in "real terms", they were poorer.

Young Mr. Brown said...


Sorry, but I don't understand.

Albert said...

If I was an economist I could probably put this better, and I may well make errors but here goes:

It's obviously a good thing if the poorest are "in real terms" richer. However, this is only a general inflationary measure. So such a person might be able to buy more bread, but may be less able to compete in society because (for example) the Government has introduced tuition fees for universities. So whereas before they went to university if they were able enough, now perhaps they don't.

bethyada said...

I am not certain your lag time of 1 year is enough. You need to vary it from 1 to perhaps 5 years and compare the growth.

Does your data take into account redistribution of money (eg. is that group getting government supplements)? One can make the poor obtain more money by giving them more, but if their wealth goes up without redistribution then the economic policies are more efficacious.

Young Mr. Brown said...


I don't know if this really answers you, but here are a couple of thoughts:

1) More people now go to university in the UK than did 40 years ago - which presumably means a higher proportion of less well off people will have gone to university.

2) I'm not sure that going to university actually helps one to compete in Britain today. A lot of people I know get well paid jobs without going to university; a lot of people who do go to university don't get well paid jobs.


I am not certain your lag time of 1 year is enough.

I'm not either. The problem is that there are just too many variables involved. To really compare the effects of the different parties, one would have to give each of them a shot at being in power for 30 years!

Does your data take into account redistribution of money (eg. is that group getting government supplements)?

I suspect that it does, though I doubt that it makes much difference.

Albert said...

I'm sure you're right YMB about universities - my example was just an illustration of a principle and I couldn't think of a better one. Of course, that may be because my principle is wrong.