Is inequality on the rise?

published 1 June 2019

949_MW_P12_Briefing — There's more to poverty than income

What has happened?

The Institute for Fiscal Studies (IFS) has launched a new five-year project, the Deaton Review, which aims to analyse the nature and causes of inequalities primarily in the UK, but also globally and "develop a comprehensive agenda for change".

The purpose of the review, chaired by the Nobel laureate economist Sir Angus Deaton, is not just to look at the gap between rich and poor, but also to carry out the "most comprehensive scientific analysis of inequalities yet attempted" including of differences relating to health outcomes, political participation, educational attainment, and so on, as well as differences related to gender, ethnicity and geography. To begin with, the IFS has published a paper focused on economic inequality.

How does Britain do by global standards?

The UK has a relatively high level of income inequality compared with similar countries, but the widely held idea that it has got worse over the past decade is wrong.

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The most commonly used measure of income inequality is the Gini coefficient: zero represents complete equality (all households earn the same) and one represents complete inequality (in which one household has all the income). The UK is among the more unequal of similar developed countries, with a figure of 0.35 (on the most recent OECD figures).

That puts us alongside the likes of New Zealand and South Korea. OECD countries that are notably more unequal than us include the US, Mexico and South Africa. In turn, we are more unequal than almost every other country in the EU.

But it's not getting worse?

Not in recent decades, no. In the 1960s the UK's Gini score was around 0.25 (where the likes of Iceland, Norway and Denmark are now). It zoomed up in the 1980s to just under 0.35, where it has stayed, more or less, for the past 30 years. And in the past ten years it has in fact fallen a little, from slightly more than 0.35 to just below.

Another popular measure of income inequality is the "90:10 ratio", which is the household income of the 90th percentile person (that is, one of the richest) expressed as a multiple of the person at the tenth percentile. Currently, that ratio is four (the 90th percentile person's household income is four times as big as the tenth's). But after shooting up from three in the late 1970s to almost 4.5 in 1990, it has gradually fallen back over the past 30 years.

This means that rather than becoming more unequal, says the IFS, "household incomes are now more evenly distributed across most of the distribution than they were 25 years ago".

What about the very wealthiest?

Here the picture is mixed. The share of wealth owned by the top 1% of the population is about 20%, which is not especially high by developed-world standards, and is lower than in Denmark or Germany, for example.

Over the course of the 20th century, the top percentile's share of wealth collapsed as developed countries became far more equal in the case of Britain from more than 70% in 1900 to around 14% in the mid-1980s. Since then, it has ticked up again, and in the last few years has plateaued at the 20% mark, around the same level as the late 1970s.

That gentle rise reflects a more marked rise in incomes at the very top. The share of household net income going to the richest 1% of households rose sharply from 3% in the late 1970s (on IFS figures) to 8% now. Strikingly, though, the whole of that jump happened in the 1980s and 1990s. Since 2000, the proportion has remained close to 8%.

Is inequality always a bad thing?

No. As Deaton points out, the perception of fairness is key. There's a big difference between a lazy "fat cat" who got his high-paying job through cronyism, and a hard-working "fat cat" who brings prosperity to others. Capitalism depends on risk-taking individuals being prepared to start businesses, and if a hugely successful entrepreneur makes a fortune by developing a popular new product, that will increase income inequality. But it will also provide work and raise tax revenues that can be (and are) spent on the common good.

One of the most interesting charts in the IFS paper (on page 7 of the report) plots the growth in average earnings and net incomes for working households across the income distribution between 1994 and 1995 and 2017/2018. The earnings line rises steadily: the richer the household, the greater the rise in real incomes over the past 25 years. But the line showing household net income is astonishingly flat. Except for the top and bottom 5% of households, there has been a consistent real-terms rise of about 31% in net household income (after tax and benefits) across almost the whole (90%) of the income distribution. In other words, earnings inequality has risen, but overall income inequality has remained stable.

What does this imply?

That redistribution is working. In the 1980s Britain really did suffer a genuine inequality crisis, the effects of which we are probably still digesting, says Ed Conway in The Times. But "just as remarkable was what happened next". While income inequality in the US, for example, continued to rise, net income inequality in the UK has more or less flatlined, in particular due to the rapid expansion of tax credits from the late 1990s onwards. "This is, in other words, a story not of crisis, but of triumph."

That's not to say everything is rosy: it isn't. Why are differences in life expectancy across social classes rising? Why are "deaths of despair" increasing in middle-aged men? Why are the poor becoming less likely to live with a partner (a key marker of health and wellbeing), while richer and better-educated people are becoming more likely to do so? Why is there far more divergence in the socio-emotional skills of young children (a key predictor of outcomes in later life) than a few decades ago? And why is the average height of an English man falling? "The sooner we drag ourselves away from our imaginary economic inequality crisis and focus on this stuff, the better."

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.