I’ve just returned from a week in Ireland. Since the mid-1980s the Irish economy has achieved rates of growth not seen in a rich nation since Japan in the 1960s. Ireland’s GDP per capita grew at more than 6% per year from 1987 to 2000, and at better than 3% per year in the 2000s so far.
Has this rising tide lifted all Irish boats?
One way to judge is by examining how the incomes of those at the bottom of the distribution have changed. The standard way to do this is via the poverty rate — the share of persons living in households with an income below the poverty line. The following chart shows poverty rates in 1987 and 2000 in Ireland and two comparison countries — Sweden and the United States. The data are from the Luxembourg Income Study database.
While the poverty rate in Sweden and the U.S. fell slightly over this period, it increased in Ireland. Really? Can it be that despite massive economic growth, things got worse for Ireland’s poor?
Well, it’s true that a large chunk of the economic growth during this period was due to multinational companies. Maybe most the proceeds of the growth went to their foreign owners. Yet even if that were the case, it’s hard to imagine how the Irish poor could have been left worse off than before. Lots more people were working; the employment rate jumped from 52% in 1987 to 66% in 2000. And this didn’t just consist of adding second earners in already-high-earning households; the share of working-age households with no employed member dropped by more than half. Moreover, wage levels among low-end workers rose (the statutory minimum wage is now €8.65 per hour).
The problem here lies in the poverty measure. In cross-country comparisons, poverty typically is measured in a “relative” manner: the poverty line used for each country is 50% of that country’s median income. That’s the mesure I’ve used here. Although this type of measure has some value, I don’t think it should be the headline indicator of poverty (more here and here). It depends too heavily on the distribution of income and too little on the absolute level of income. The reason Ireland’s relative poverty rate increased between 1987 and 2000 is not that households at the bottom became worse off in an absolute sense, but rather that the incomes of those households increased less rapidly than the incomes of households in the middle of the distribution.
The following chart offers a more useful way of gauging trends in poverty. It shows incomes at the tenth percentile of the distribution in the three countries. They’re adjusted for inflation and converted into U.S. dollars. (The incomes also are adjusted for household size. They represent those for a single adult; for a household of four, multiply by two.) These data indicate a sharp improvement in the incomes of Irish households at this low point in the distribution. In 1987 they were well below their Swedish and American counterparts, but by 2000 the gap had narrowed considerably.
The rising tide does appear to have lifted most Irish boats. One might, perhaps, complain that the degree of improvement has been disappointing given all that economic growth. But that’s quite different from suggesting, as the relative poverty measure does, that things have gotten worse.
This very helpful book has more discussion and analysis.