Inequality and Poverty

A key goal of any welfare state is to promote social justice by tackling inequality and poverty. This chapter reviews some of the ideas and evidence that have informed the debate about the causes of differences in inequality and poverty, including alternative interpretations of the meaning of both as policy objectives and how each can be measured. Although the two concepts are often related, they are conceptually distinct: inequality captures differences in economic outcomes, while poverty covers those with inadequate economic resources. Estimating the impact of policy on either variable is difficult because of the many other factors involved. Examining cross-country differences provides an insight into the impacts of different policies introduced in otherwise broadly similar countries. These studies have shown that transfers and taxes reduce inequality and poverty, and also that those countries that spend more on social programmes have less inequality and lower poverty rates, but the relationship is weak and there are many exceptions. While considerable progress has been made in understanding the role of the welfare state in accounting for these differences, we are a long way from fully understanding the many complex interactions that are the drivers of inequality and poverty.