A vital fact lies buried in the recent IFS study on income inequality: the most effective way to alleviate poverty. This was true even though the IFS study, and UK government statistics, don’t actually measure poverty but rather inequality. Maybe it’s best to say the IFS study contains the secret to reducing both phenomena.
Whichever metric one uses, according to the IFS report the most effective way to reduce that number is through work. The UK government defines “poverty” as earning 60 percent less than the national median income, and “persistent poverty” as being in “poverty” this year and two of the previous three years. With that said, the IFS reports that persistent poverty is virtually unknown for children in households with at least one working parent.
“The rate of persistent poverty for children in households that have had someone in work in each of the last four years is just 5%,” the report states. “On the other hand, children in households that have had no one in work for at least three of the last four years account for slightly over 40%.”
It seems anti-climactic to say that the way to reduce the percentage of children living in a long-term, low-income home is for someone to start earning an income. Similarly, the best way to reduce income inequality is to reduce the number of households earning zero income. Perhaps that is why the point seems stubbornly absent from media coverage of the report.
The good news is that unemployment in the UK stands at a 40-year low. And those who begin to work will not necessarily be trapped in mythical “dead-end jobs.” The IFS report says, “Over a four-year period, most people experienced substantial change in household incomes.” (Emphasis in original.)
Yet there is still more to do. The London-based Institute of Economic Affairs (IEA) found that employment regulations and a heavy, graduated income tax on above-average earners discourage people from opening businesses and hiring employees. Lucy Minford wrote in a 2014 IEA study that “reducing tax progressivity for the income bracket between 100 and 167 per cent of average earnings stimulates nascent entrepreneurship. … However, tax rates cannot be seen in isolation from other costs on business formation such as regulatory costs.”
Pursuing this theme in the Spring 2017 issue of the think tank’s EA magazine, Len Shackleton describes the process by which “the cost of a [government employment] mandate normally falls on some combination of consumers (in the form of higher prices or lower quality), employees (in the form of wage reductions and/or job losses) and potential employees (who cannot find jobs as employment opportunities dry up).” (Emphasis added.)
One may infer from the IFS report that programs designed to redistribute income have reduced or eliminated many citizens’ incomes altogether. History would seem to bear this out. No Labour government in 90 years has left office with a lower unemployment rate than it started with. This indicates that government interventions create market distortions that hurt society’s most vulnerable.
In the same issue of EA, Minford shares testing data that a sustained reduction in the impact of taxes and regulations increases annual growth by nearly one percent a year.
“A 10 per cent fall in the tax and regulation index relative to the trend in the index generates growth over a 30- year period, leaving output 24 per cent higher at the end of the period than it would have been be with policy unchanged,” she writes. “This is equivalent to a higher average annual growth rate over that period of 0.8 percentage points.”
Work does not merely lift ourselves – and our dependents – out of poverty. Theologians say that, in some sense, it helps us fulfill our mystical purpose on earth.
Work is “an obligation, that is to say, a duty on the part of man,’” wrote Pope John Paul II in his 1981 encyclical, Laborem Exorcens. The Catholic Church’s Compendium of the Social Doctrine of the Church elaborates that “[m]an must work, both because the Creator has commanded it and in order to respond to the need to maintain and develop his own humanity.”
Fostering a culture of work, reducing tax and regulatory burdens, and unleashing the creative power of the free markets may be the most effective way that transatlantic governments can improve the condition of their poor populations – and help all people express their full humanity.
(Photo credit: Public domain.)