The Perverse idea of 'Relative Poverty'

The idea of "Relative Poverty" is normally put forward as a useful indicator and an evaluation of whether a government policy was successful or not. Especially by leftist organisations and debators, claiming that absolute poverty is not relevant, but it is relative poverty (that is, income in relation to others) that actually matters. In this post I'll explain to you just how perverse such a nonsensical idea is.

The commonly used definition of Relative Poverty is "60% of national median income", used by the EU and the UK Government. As the UK median income is something around £420/week, the relative poverty line would come down to £250/week.

The intention is to show poverty in relation to neighbours, friends and others around you. The underlying assumption is that, even if you are far wealthier than poor people in absolute terms (that is, below $2/day), you still feel poor, because everyone around you earn more than you do (adding various social implications etc).

Needless to say, this is absolute rubbish. With this definition, holding everything constant, (including my earnings, prices etc), if we'd give the poorest person a million pounds in income, so he ends up on the upper scale of the income distribution, the median income would increase, thus pushing some other person below the 60% of median income. Bottom Line: If some random people would see increased incomes, YOU'D become poorer. The fallacy is unbelievable.

Now I have a chart for you to illustrate this a whole lot better. Since New Labour came into power in 1997, they have more or less aimed for reducing poverty (Blair even commited to "Eradicate Child Poverty" at some point). Below I added numbers from the UK Institute for Fiscal Studies, showing the development of Median Income in UK and the percentage of the population at that point falling below the 60% "Relative Poverty Line".

The Red Line shows median income, referring to the right axle of £.
The Blue Line shows the Proportion (in %) of the population falling into the catagory of "Relative Poverty", referring to the left axle of %.

The proportion of the population living in relative poverty initially fell, then increased to its peak around 2007. That is, whatever the UK Government done during this period it had effects both on reducing and increasing Relative Poverty by small amounts (+-1% point).

However, when the financial crisis hit in 2007-2008, throwing the world economy into a crises (with lower wages and unemployment), the median wage consequently fell. The perverse effect then is that the proportion of relative poverty ALSO fell - from almost 19% down to 16% of population. Why? Because the line is tied to median income; when median income falls, the crucial amount earned to fall below the defining line of relative poverty dropped, resulting in less proportion of the population being catagorized as in "Relative Poverty".

That is, focusing on "Relative Poverty" meant that the effects of a global financial crisis did a lot more to help UK people to escape relative poverty than did the UK government in the decade leading up to it. An absolutely perverse effect, and an outrageous claim.

Needless to say, whenever you hear someone talk about "Relative Poverty Line" or "Poverty Increasing in the UK", you know it's a load of rubbish. It has no relevance to actual poverty.

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Seen on a global scale, however, the median income is £10, resulting in a "world relative poverty line" of £6. Bottom Line: barely NOONE in the UK falls below the world relative poverty line, using the fallacious definition of 60% of median income. That's about how useful the idea of "Relative Poverty" is.