Wealth inequality in the UK may be too high, but it is falling, not rising

Toffs and toughs © Getty Images
The gap between rich and poor is narrowing

I wrote here earlier this week about what we reckon Jeremy Corbyn should be lobbying for if he really wants to have a go at reducing income inequality. But I do think that it is worth us pointing out here (again) that income inequality in the UK has not been rising for years.

You might think it is too high – but it is falling, not rising. As the ONS pointed out recently, last year, inequality in the UK – as measured by the Gini coefficient – fell to its lowest since 1986.

Since the financial crisis, the incomes of the poorest fifth of households in the UK has risen by over 13% in real terms and that of the best paid fifth has fallen 3.4%. Yes, the poorest have gained the most and the richest lost the most – not the other way around.

There are problems within this seeming success. The first is that a lot of it is about pensions: the triple lock has meant that the real gains have gone to pensioners rather than to working people.

And the second is that the changes are mostly about redistribution via the welfare state. Taxing the top more. Taxing the working poor less (the rise in the personal allowance) and handing out lots of benefits along the way.

It’s good that this works. But it would be much better if it didn’t have to – if wages were rising faster at the bottom for example and if there was less excess at the very top too.

However, for that we are going to need to encourage capitalism to do its job better, rather than just demanding, Corbyn style, the continual divvying up of a static cake.

That means serious productivity gains on one hand and some serious shareholder action on the other (see the orginal article!).

  • Mark Bishop

    As you rightly point out, inequality is only falling because of taxes and transfers (state pension triple lock, tax credits etc). Without, it’s rising.

    It seems to me that few wealthy people like paying tax, and despite media attempts to portray benefit claimants playing the system, even fewer poor people enjoy dependency. The challenge for politicians should therefore be to improve the market for labour to undermine the pricing power of those in rent-seeking industries and professions at the top and to strengthen the hand of those selling their labour in less skilled occupations at the bottom.

    Often labelled ‘populism’ and associated with the right because it opposes the unrestricted freedom of movement of low-skilled workers, I believe this school of thought transcends traditional political labels, but enjoys more support among the electorate than it does within the political establishment. This may be due to the fact that the instincts of politicians of all colours are to like ‘big government’, taxes, transfers and all…

    • Momoko Miyamoto

      to protect the low skilled through policies such as immigration controls and higher minimum wage would render the UK economy uncompetitive and generate high unemployment as employers invest in machines/robots/off-shoring/automation. Current technology could already render many jobs redundant, but a plentiful supply of cheap low skilled labour means it is more profitable to hire instead. Given the size of the population and the historic lack of a widespread scholastic culture, to increase the global earning power of the population would require a mammoth investment in education and a substantial cultural shift.

      • Mark Bishop

        I think your argument would have been more true in the past than it is today, or will be in the future.

        For a start, the UK economy is dominated by the service sector, almost all of which must be provided close to the point of consumption: I’d like my pizza delivered from just down the road from me, not Poland.

        When it comes to manufacturing – and the part of your argument I agree with – the amount of labour needed per unit of output of finished goods is likely to decline rapidly due to technological developments. Paradoxically, this levels the playing field between developed nations such as the UK and low-wage economies, because the differential in labour costs becomes less important as the amount of labour in the cost price of a product diminishes. We will quickly find that any additional costs involved in re-shoring (higher land values and wages for the handful of people needed to look after the machines and manage the enterprise) fall below the offshoring costs (transportation and additional working capital requirements due to having more goods in transit and in hand to cover delays).

        So I agree that in manufacturing there will be a need for fewer but higher-skilled workers; this will be true globally, not just in the UK. But in services, for the foreseeable future there will be the need for people in the UK. And as the cost of manufactured goods continues to fall and fewer people will be needed to produce them, I suspect that it’s services that will experience the most growth in employment. Which augurs well for employment prospects in the UK – and for the wages of those who might fill those roles, provided we improve their pricing power by constraining inward migration.

  • Quote: income inequality in the UK has not been rising for years… As the ONS pointed out [last year], inequality in the UK – as measured by the Gini coefficient – fell to its lowest since 1986.

    Unfortunately the Gini coefficient and other inequality metrics are statistical confidence tricks.

    Inequality always worsens, because incomes in UK diverge – this is provable fact not mere opinion. Incomes never converge to improve inequality.

    Think about it – the gap between the rich and poor always gets wider. The poorest hardly get any rise and are still in poverty – those of us above get little more – whilst rich fat-cats increase their incomes by up to 30%, compounded year on year into a massive annual fortune. Like I say, incomes never converge to improve inequality.

    The government and authorities think the public are idiots. They are helped by the media such as yourselves. This is not just the Gini coefficient but also other inequality metrics – including even the praised new Palma ratio.

    The Palma ratio is much praised as it is supposed to show inequality better – being the poorest 40% compared to richest 10% of the population. In both groups inequality widens – yet if total income of lowest group rises most then they lie that inequality improved. They pretend they are two large families when the truth is different. They are, of course, millions of separate families on differing divergent incomes, divided into two large groups.

    Indeed, the UK Statistics Authority (Deputy Head of Regulation) actually admitted to me about the Gini, “I agree with your observation that it is not ideal if your particular interest is in inequalities at the top or bottom of the spectrum”. Thus admitting is “not ideal” if you care about rich or poor. The first time perhaps they disclosed the fact they know it hides the inequalities of the rich and poor.

    Analogy: If the government measured weight problems by ignoring the obese and dangerously underweight – you would say they were corrupt and trying to hide the problems – wouldn’t you? That is how they measure inequality – ignore the richest and poorest groups – those millions of people most affected by what is being measured.

    Most people are intelligent enough to understand that analogy – though they pretend not.

    • Mark Bishop

      I share your view that the Gini coefficient tells us relatively little about inequality. Palma is better, though even that’s imperfect as it is generally measured after taxes and transfers. On the basis that poverty in rich countries is as much about lack of opportunity, social mobility and emotional wellbeing, I’d prefer it to capture differences before redistribution.

      • rory

        Problem is statisticians can only use measurable criteria and journo’s/politicos can only quote the stats in soundbites made up of very short words. Ergo what gets out into the public domain for discussion is utter rubbish.

      • Sorry – it seems all measures of inequality are statistical confidence tricks – as I explain on my skilful.com website:

        Scotland ‘improved’ since 2011/12 to 2014/15, falling from 118% to 112% with Palma. Good news for Scottish people and government – or deception?

        To explain: they pretend the 40% and 10% groups are two large families – the simple comparison that the Palma ratio shows.

        That is where professors ‘go wrong’. They are, of course, millions of separate families on differing divergent incomes, divided into two large groups.

        If you can think for a moment about just the richest 10% group – concentrate on that.

        In any one year the bottom of that range will rise relatively little, whilst the richest at the top income can rise by millions.

        Quote: FTSE 100 directors enjoy 27pc pay rises [during recession]

        So even in that range alone, inequality has worsened.

        Now think about the poorest 40% range of population – similar will happen there.

        The bottom of 40% range raises little or not at all (with poorest staying in poverty) whilst the top of the 40% range rises much more e.g. minimum wage.

        Inequality has worsened in this range also.

        The outcome being that both ranges may have increased – but undeniably so has inequality – the gap between bottom and top of population most.

        So at the end of this you could see ‘inequality’ using the Palma has improved, purely because of the bottom range total rising more – a statistical con.

        Just because the lower range total (with increased inequality) has risen more than the upper range total (with increased inequality) – they say ‘inequality’ has improved.

        What The Flip – are people really that thick?

        These people are intellectual professors of mathematics and economics – I mean, you understand and you think they do not?

        That is how the deception in similar comparison inequality measures work e.g. S80/S20.

        Very intelligent people have been been told how to do something simple and have not understood what they are doing – which is unbelievable to me.

        The public are all treated as though they would never be able to understand or work this out, like imbeciles.

        It is most important to note – we are not taught to think for ourselves – just taught to think the same way as others – why lies continue.

        • Mark Bishop

          I follow your argument, which might suggest that comparing the very extremes – perhaps the top and bottom one percent – would make more sense.

          Also, if everyone gets richer in a given period by, say, one percent, then the absolute gap becomes larger, which might suggest measuring the financial size of the gap is more important than the ratio.

          Finally, we also need to consider assets. For me one of the sad developments over the past couple of decades is the extent to which the super-rich have bid up the price of assets such as London property, making it far more difficult than a decade ago for people from outside the capital (but within the UK) to migrate there. Geographical mobility is a precondition for the social variety, given the very unequal distribution of opportunity within the UK.

  • Momoko Miyamoto

    ONS: In the financial year 2014/15, the UK government spent £258 billion on welfare, which made up 35% of all government spending. As is well known, certain means tested benefits such as housing benefit and in-work tax credits mean that many “low-income” households are in fact better off than the “squeezed middle” classes who face marginal tax rates up to 90% depending on circumstances. The tax system discourages work, the harder you work, the less you keep of the extra you earn (the poverty trap). I would also suggest that the current system is a morally bankrupt method of wealth redistribution and that the poor should be lifted by equality of opportunity, specifically in education. It pains me to say this as a beneficiary of private education but equality of opportunity and genuine social mobility will only be achieved if both selective and private education are abolished, to be replaced by school allocation by lottery (within a large enough catchment area). Teachers should also be paid more and freed of nanny state bureaucratic box ticking.

  • LG

    The average person living in London (or Oxford for example) will retire after 45 years work – and their house will have made more money than they have.

  • rory

    I would suggest that a true measure of finacial inequality would be a comparison of net worth. The income of the poorest might well have gone up by 13% but so have all their costs and I would be suprised if any actually have an extra penny piece to show for it. Whereas I would suspect that your average HNW is squirelling away chunks of capital regardless of minor changes in income.

  • Kevin Hoque

    The Institute for Fiscal Studies has something to say about wealth inequality. Unsurprisingly, it is far higher than income inequality.

    https://www.ifs.org.uk/publications/8239

    Btw, the title of this article seems to suggest that the subject is wealth inequality, but the content highlights only income equality?

  • cornishtinmine

    Merryn, I do believe you’re getting “income” and “wealth” confused – income inequality has indeed decreased, however wealth inequality has increased massively, largely due to asset price inflation, particularly land/property. Those with land/property have seen their wealth increase significantly during the Blair government and again since 2013 following QE and low interest rates. Wealth inequality, extortionate house prices/land values and our debt-led (rather than investment-led) growth are responsible for many of the economic problems we currently face.

    I agree Corbyn’s plans will not address the issues, we need fundamental change: a completely new economic model, introduce LVT and a UBI to replace existing taxes and welfare and replace FIAT money.

Merryn

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