A new report by the OECD, Growing Unequal? Income Distribution and Poverty in OECD Countries, warns: “Poverty is rising in OECD countries. Over the past 20 years, it has risen from 9.3% to 10.6%, as an average for the 30 member countries.”
The report contains a lot of useful information on the various dimensions of inequality and their correlation with other variables. However, a major criticism is that the analysis relies heavily on a measure called “relative income poverty”, defined as the share of a country’s population that earns less than 50% of that country’s median income.
This figure gives some information about the distribution of income between the bottom and the middle of the spectrum, but little information on actual poverty. Or does it make sense to claim that poverty has been more prevalent in Switzerland and Luxembourg than in the Czech Republic and Hungary?
Defenders of this measure usually argue that:
1. Low-income earners in, say, the UK, do not assess their own situation by comparing themselves with people in Bolivia, but to people in geographical proximity to themselves.
2. Even if living standards rise across the board, a rising poverty rate stills shows that the proceeds of growth are not shared equally.
As for the first statement, even if we accept it, it still does not follow that the comparison group will coincide with the inhabitants of the national territory. Taking this logic at face value, one could argue that almost all Hungarians who live close to the Austrian border are “poor”, while most of those who live close to the Romanian border are not. Inside Austria, “poverty” would then rise the closer one gets to Switzerland.
The second statement is even more problematic because it treats wealth creation and wealth distribution as two “black boxes” unrelated to one another and pretends that policies affecting one of them would leave the other one untouched. But there is substantial empirical evidence, some of it produced by the OECD itself, suggesting that high taxes and steep progression hinder economic growth and job creation. The same measures that reduce relative poverty are therefore likely to raise absolute poverty and vice versa. This is the danger of using flawed measures of poverty: it can lead to policies that actually end up harming the poor.