Thatcherism and poverty: did the poor get poorer?

The conventional wisdom in the mainstream poverty literature is that Margaret Thatcher’s policies caused an explosion of poverty. As one standard work puts it:

‘During the 1960s, just over 10% of the population lived in a low-income household. This rose slightly under the Conservative administration and following the oil shock in the 1970s, and then declined to about 8% during the mid-1970s. In 1979 [...] changes in economic and social policy resulted in a trebling of the proportion of people living in low-income households from 8% to 25% – clearly showing that governments do have an effect on the amount of poverty in a country and that social policy does make a difference.’

A look at the lower half of the income distribution (the part which is relevant for relative poverty rates) shows where this impression comes from. Over the 1980s, real incomes in the middle of the distribution increased by about a quarter, while incomes at the lower end recorded only modest increases. At the very bottom, they even fell slightly. The change in the income gradient over the decade therefore looks more like an outward rotation rather than a parallel upward shift. Even at the end of the 1990s, those at the lower end of the income spectrum did not seem massively better off than they had been in 1979, while most of the rest of the distribution had pulled away. For most poverty researchers, this settled the case against ‘Thatcherism’ once and for all.

Figure 1: The income distribution (lower half) in 1979, 1989 and 1999, equivalised annual figures in today’s prices

-based on data from IFS

However, in the mid-1990s researchers found that there was something wrong with the income data. They checked how closely income was related to expenditure, and found a fairly close relationship over most of the distribution – but not at the tails. In the bottom decile, expenditure levels were far above recorded income levels; and indeed they had to be, because in the very bottom percentiles, reported incomes were around zero. The authors repeated the same exercise for older data from 1979, and found that this problem had not existed back then. It must have been during the 1980s that in the bottom decile, income became decoupled from expenditure. This finding has subsequently been confirmed by numerous other studies (see here, pp. 123-133).

If we express living standards by consumption data rather than income data, a rather different picture emerges. There is no arguing with the fact that the UK became a more unequal society during and in the aftermath of Thatcherism. The gradient of consumption, too, became steeper over time. But the notion that the poorest have been cut adrift from the rest of society is a peculiarity of the income data. When Margaret Thatcher left office, consumption levels of the least well-off were about a quarter above their 1979-level.

Figure 2: The consumption distribution (lower half) in 1979, 1989 and 1999, equivalised annual figures in today’s prices

-based on data from IFS

This does not mean that the Thatcher/Major years were a wonderful time for the poor. In the early 1980s, the employment rate among low-skilled men dropped by about ten percentage points, and never fully recovered. There was a basic problem with the sequence of economic reforms, even if these reforms themselves were entirely reasonable. Under Thatcherism, attempts to subsidise economically unviable industries forever were abandoned, and so was the use of monetary policy as a tool for employment creation. From then on, job creation was to be achieved through freeing the labour market from trade union power and from state interference with the wage-setting process.

Very well, but unfortunately, the former happened before the latter was completed. Thus, when the major industry shake-outs occurred, people were left to look for work in a still largely unreformed labour market, which was not fit for reintegrating them.

So yes, there were things that could have been handled differently. When it comes to poverty, the 1980s were not an especially glorious decade. But poverty did not jolt up during this period. The received wisdom is the product of a statistical artefact.