Income and Inequality

What is happening to inequality?

Commentary
Posted on: 4th March 2020
James Browne
Head of Work, Income and Inequality Analysis
pound coins

As the new Chancellor Rishi Sunak prepares to deliver the first Budget of a government committed to ‘levelling up’ those who have been left behind, new figures from the ONS released today show the scale of the challenge. The figures show that headline measures of income inequality have remained largely unchanged since the early 1990s, having jumped in the 1980s. James Browne digs deeper into the figures and argues that although policies have been relatively successful in keeping a lid on income inequality over the last 30 years, these are running out of steam and new approaches are needed to tackle inequalities, particularly those forms that have been rising.

Headline measures of income inequality are essentially unchanged for the last 30 years. But beneath the surface the figures show that most people have experienced increasing equality between themselves and those they meet on a day-to-day basis. Looking at incomes measured at the household level adjusted for household size, the difference in incomes between someone at the 90th percentile of incomes (that is, someone whose household income adjusted for family size is higher than that of 90% of people and less than that of the other 10%) and someone at the 10th percentile has narrowed significantly since 1990. In 2017–18, someone at the 90th percentile had an income four times higher than someone at the 10th percentile; in 1990 this was nearly four and a half times.

Figure 1: Little evidence of increase in income inequality since 1990

Source: IFS Inequality, Living Standards and Poverty Spreadsheet.

The very top raced away

Why then have headline measures such as the Gini coefficient1The Gini ranges between 0 and 1 where 0 represents complete equality and 1 represents complete inequality (one person has all the income). not fallen? The answer lies in looking at what has been going on within the top 10%, something that is not captured by just looking at the 90th and 10th percentiles. In fact, we need to go much deeper than that: most people in the top 10% haven’t seen particularly fast income growth. Even most of the highest-income 1% of individuals – those whose gross income more than £125,000, who are often a rhetorical target –have not seen their share of total income grow over the past two decades.

Looking at pre-tax income at the individual level, our analysis shows that since the turn of the century, there has been an increase in income shares only for the richest 0.3% of adults, an exclusive group with incomes above £250,000. Between 2004–05 and 2007–08, this group saw its income share rise from 7.7% to 9.5%. Although the Global Financial Crisis led to a reduction in this group’s income share, it was able to recover its position by 2015–16, when this group of 0.3% of individuals received 9.4% of all the income. This has been sufficient to offset a reduction in inequality among most of the population to leave the Gini coefficient roughly unchanged. The income share of the rest of the top 1% – a group widely talked about in policy discussions – is lower than it was in 1999–2000. This increase in income shares for the very top has been offset by a fall in the share of the ‘middle class’ – those in the top 30% but not the top 5%, who have incomes between £23,000 and £60,000 – whose income share is now 4 percentage points lower than it was in the late 1990s. The income share of this quarter of the adult population has fallen from 44% to 40%.

Fig 2: The top 0.3% has seen its income share increase since 2000, while the 'middle class's fell

Note: All years are financial years, so 1996 is 1996–97. Chart shows change in overall share of taxable income since 1996–97. No data available for 2008–09. Source: TBI calculations. Total amount of income for each group from Survey of Personal Incomes, various years. Total amount of household income from World Inequality Database. Size of adult population from ONS mid-year population estimates.

This pattern of income growth is very different to that which occurred during the 1980s, when there was an explosion of income inequality right across the income distribution. In that decade, the richer you were, the higher your income growth.

Figure 3: Income growth by percentile, 1979-1990 and 1990-2017/18

Source: IFS Living Standards, Poverty and Inequality spreadsheet.

Why has inequality stabilised since 1990?

What has been different over the last 30 years? Four key trends have helped to reduce inequality across the bulk of the population even as the very top has continued to race away:

  • The amount of pre-tax income inequality that is reduced by taxes and benefits grew from 1990 to 2011–12 as benefit entitlements for low-income families with children and pensioners were increased. In 1990, taxes and benefits reduced pre-tax income inequality by only a quarter. This increased to 35% by 2011–12, but cuts to benefits for non-pensioners have caused redistribution to decline more recently. Inequality after taxes and benefits is now only 30% lower than it is before.
    Chart showing redistribution
     
  • Higher employment rates have reduced the number of non-pensioners living in a household where no-one works. 15.5% of working-age adults lived in a workless household in 1996–97, but this had fallen to 11.3% in 2017–18. For children, this change was even more dramatic: 21.3% had no working parent living with them in 1996–17, but this had fallen to 11.5% by 2017–18.
    Chart showing fewer non-pensionsers in workless households
     
  • The introduction of the National Minimum Wage in 1999 and subsequent increases have reduced hourly wage inequality. The hourly earnings of someone at the 10th percentile has increased by 42% in real terms since 1997, but only 22% at the 90th percentile.
    Chart showing national minimum wage boosted wages at the bottom
     
  • Pensioner incomes have increased more quickly than those of non-pensioners: as pensioners are still a low-income group, this has reduced inequality. The median pensioner’s income in 2017–18 was 90% of that of the overall median, up from 75% in 1997–98.
    Chart showing pensioners have got richer
     

Each of these trends can at least in part be put down to successful policy reforms over a number of years. The 1997-2010 Labour government’s tax and benefit reforms were highly redistributive, increasing benefit entitlements for low-income families with children and pensioners. Welfare to work programmes have been successful in reducing the number of people on out-of-work benefits. The minimum wage has increased earnings at the bottom seemingly without any adverse employment effects. And the coming to maturity of earnings-related state pension schemes and expansion of private pensions have led to more recent cohorts of pensioners having higher incomes than their predecessors.

Are recent trends likely to continue?

Although policy has been successful at keeping a lid on inequality at almost all income levels, it is important not to be complacent. First, these reforms failed to reverse the big increase in inequality seen in the 1980s and to stop those at the very top racing away. Second, even if income inequality hasn’t increased, there is still concern about other dimensions of inequality. In particular, increases in asset values caused by low interest rates have raised concern about wealth inequality and made it hard for those who start off with nothing to save enough for retirement, something that we’ll be looking at in a later blog. 

Third, looking forward, the forces that have prevented inequality rising seem unlikely to continue. Future pensioners likely to have lower entitlements to state and private pensions than those who are currently retired. The UK’s minimum wage is already one of the highest in the OECD. Employment rates are now at record levels, so scope for further reductions in inequality through further reducing worklessness seems limited. And an ageing population will put more and more pressure on the public finances over time, reducing the capacity for big giveaways to poorer households to overcome inequality.

It’s clear, then, that new approaches will be needed to combat inequality over the coming years. Policies that have kept a lid on rising inequality among the bulk of the population are running out of steam. Meanwhile, to prevent the very richest grabbing an ever-greater share of the pie, effective measures are likely to include institutional reforms such as the government's new rules on pay transparency and possibly further reforms to corporate governance. In the rest of this blog series, we’ll be looking at other forms of inequality and thinking about ways of combating those that have risen in recent years.