Comments: Our real poverty is in a lack of skills

David, good article today. Just thought I'd make a couple of additional points.

First, you don't really go into the source of rising income inequality. I think it's striking that it's not just in the UK where the debate about income inequality is raging. There are similar discussions happening in the US, continental Europe and even in many developing countries, like India. In my mind, this isn't all that surprising. The last ten years have seen some of the fastest rates of growth in the global economy in decades, spurred by a wave of increased integration across the global economy. The evidence about whether growth is good for income inequality or not is mixed. But I reckon most economists would agree that when it's driven by rising openness to trade and increased specialisation, it tends to increase the returns to skills at the expense of the unskilled.

I think I'm with you from here on. Rising income inequality can't be good for the health of the nation. It's detrimental to growth and democracy. As you suggest, the policy response is far from clear. Should we provide a bigger social safety net for the unskilled? This might be part of the solution, but the primary objective should be to provide the opportunity to everyone to gain these skills in the first place. Apprenticeships might help, though I think the government needs to take a harder look at the education system.

Posted by Sell Everything at July 22, 2007 10:10 AM

A similar upswing in furniture prices happened back in March of this year as retailers raised prices prior to Easter "sales". Prices did, as predicted, fall in April, though not back to levels in April 2006, or even February 2007. When averaged out over the first six months of the year to avoid the effect of "sales", the inflation rate of furniture and furnishings in the CPI has averaged about 3.5% over the first 6 months on this year. Last year, it average 0.75% over the same period. Core inflation hasn't been this high since 1997, when the base rate headed up to 7.25%.

Posted by RichB at July 22, 2007 10:28 AM

Good article and good points. But let's just mention immigration again. If we hadn't had so much of it we wouldn't have had such low wage inflation. Without which we wouldn't have had such low interest rates or such high house price inflation. Home owners wouldn't have been sitting on such large assets. We would have had less inequality.

Posted by bears all at July 22, 2007 11:05 AM

Here's an interesting resource on the increasing wealth of the super-rich in the USA.
http://elsa.berkeley.edu/~saez/pikettyqje.pdf

Posted by Mr Naresh Radson at July 22, 2007 04:16 PM

Thanks for comments. As I say, I believe skills are the key explanation for rising inequality, and it is the case that immigration has helped undercut the unskilled, further undermining their labour market position. Mind you, we've also had plenty of immigration at the top end; look at the City and Canary Wharf.

Not sure how much a core CPI of 2% tells us about the appropriate level of interest rates. It was 1.8% in August 2005, when the MPC cut from 4.75% to 4.5%; and it was 1.7% in February 2003, when the Bank was on its way down to a Bank rate of 3.5%.

Posted by David Smith at July 22, 2007 05:44 PM

RichB, not sure where you get your furniture index numbers from?

The CPI index number for "Furniture furnishings and carpets" on 31 December 2006 was 108.3. On the 30th June 2007 (6 months later) it was, er, exactly 108.3. That is a six monthly growth rate of zero %.

This is the problem with seasonal adjustment. You need to make sure that the two figures you are comparing are similar. If you take the figure for January 2007, the middle of the sales, and compare it with June 2007, just before the summer sales (5 months later), the index figures are 98.5 and 108.3 which is an increase of 9.95% in six months!

I do a lot of comparison numbers for CPI/RPI and retail sales for my work. About the only way of ironing out these differences is to compare the average of the last 3 months index numbers with the average of the same 3 months a year ago.

For funiture furnishings and carpets this figure is 3.75% (Apr-Jun 06 vs Apr-Jun 07) which ties in neatly with the increase in the general index. What is interesting is the fact that furniture prices rose much less in anticipation of the sales last year, about 3% between April and June, whereas this year they have risen 7.5% in the same period. A sure sign that the retailers are trying to force through price increases. How well they succeed we will see in the July retail sales figures which we will come out in late August. Of course we may find that the floods cause a major increase in the sales of 3 piece suites - but so far I have not perfected my "flood adjustment model" :-)

Month to month, and unadjusted year to year numbers, are next to useless.

Posted by Matthew at July 23, 2007 11:05 AM

Matthew,

To clarify, the figures I cited are the average of the six Year-over-Year changes from Jan 07 to June 07 and the average of the six Year-over-Year changes for Jan 06 to June 06 for Furniture and furnishings, item 05.1.1 of the CPI hierarchy.

Posted by RichB at July 23, 2007 07:37 PM

David - You said that you would respond to various comments made over the past couple of weeks about inflation adnt eh outlook for interest rates. You haven't yet. Have you gone quiet because you've realised that you have been wrong on inflation and consequently wrong on rates? It would be very interesting to know the rate at which you think this cycle will peak at now. Any references to NZ would be welcome (for context).

Posted by Thomas Gumbrell at July 24, 2007 04:40 PM

Thomas, don't be so silly. The response to comments made at the end of last week was in Sunday's piece, as I promised, and it is always worth reading it, particularly before commenting. As I said, the reaction to the inflation figures was hysterical. I would add that the GDP numbers, while slightly stronger than the National Institute had expected, were in line with the Bank's forecast. You'll have seen evidence today from the CBI of an easing back of price expectations among businesses.

The New Zealand situation reminds me of the early days of Margaret Thatcher, when interest rates were raised over and over again, pushing the currency to new highs. New Zealand already has very high real interest rates and the central bank seems bent on hitting the economy hard, to the point where the government is considering force majeure intervention to stop it doing so.

Posted by David Smith at July 24, 2007 05:39 PM

"Our real poverty is in a lack of skills"

Arse-about-face yet again, David.
You really are hopeless at this economics stuff, arent you?

The 3 or 4 best qualified and most able people I know are unemployed. Got a PhD? MSc? Then go somewhere else - the UK only wants people who push can buttons, flip burgers or pack shelves.

Know how to use Powerpoint? 38k pa.
Ability to sell dodgy financial products to vunerable pensioners? 100k. Take it.
Can you walk and chew gum? 25k pa.

Got a PhD in Comp.Sci and worked in Aerospace and advanced research? Sorry, no jobs here.

(Whats that you say Herr Deutschland, you've got a job paying 180k and you need my skills? I'll be right there.)

Posted by contradictifier at July 28, 2007 01:41 AM

Well if they're as daft as you are, I'm not surprised they're out of work, and I'm not surprised you hide behind a ridiculous nom-de-plume. We don't have a problem in this country with a lack of tertiary-level skills - we produce an ample supply of graduates and postgraduates - as every survey ever conducted on this issue has shown. What we do have is not enough people with intermediate skills, and too many with no skills at all, hence the piece.

You really are hopeless, aren't you?

Posted by David Smith at July 28, 2007 02:44 PM