Inequality in the UK

Is inequality increasing in the UK?

According to last week’s report on pay distribution by the European Foundation for the Improvement of Living and Working Conditions (Eurofound), the UK has the most unequal wages in the EU. Furthermore, the level of inequality has risen since the early 2000s.

It looked at full-time equivalent pay, compared using Purchasing Power Parity, across the EU. The results show that the UK has one of the most polarised pay distributions (my emphasis):

[T]he most interesting aspect of Figure 1 for the purposes of this report is the way each bar has been broken down by Member State. This makes it possible to see how the distribution of wages in each Member State contributes to overall EU wage distribution. The bottom 20% is to a large extent dominated by eastern European Member States, which have only a very limited presence in mid to high wage levels. Still, it is interesting to see that Germany and the UK have a significant presence in the bottom 20% despite their high income levels. The UK is remarkable for its polarisation: it accounts for a very significant portion (nearly half) of the top 1% of wage earners in the EU, and yet it also has a substantial presence in the bottom two quintiles (it is important to remember that wages here are expressed in PPP).

Screen Shot 2015-05-26 at 12.39.40

The UK has a lot of workers towards the bottom of the pay scale but is also over-represented among the EU’s top 1 percent of earners.

The next chart looks at the distribution of EU wages rather than the distribution of people.

Figure 2 is identical to Figure 1 except in one crucial respect: instead of representing the proportion of workers in each €100 interval for the whole of the EU, each bar represents the proportion of total wages earned by workers in each €100 interval. So, for instance, the workers earning between a PPP of €1,200 and €1,300 per month account for around 2% of the total wage mass of the EU. The most striking feature of Figure 2 is the enormous increase in the size of the bar representing the wages earned by the top 1%, which accounts for nearly 7% of the total. This is roughly the same amount that accrues to the bottom 20% of the distribution, as is also shown in Figure 2.

Screen Shot 2015-05-26 at 12.49.29

Here, the UK’s skewed wage distribution becomes even clearer. The EU’s top 1 percent account of 7 percent of its total wages. The UK’s share of the top 1 percent accounts for “nearly 4% of the total EU wage mass, despite comprising only 0.4% of all EU wage earners”.

The extent to which EU pay inequality is skewed by the UK is shown in the next two charts. These use a Theil index to measure pay inequality, which enables inequality within countries to be measured separately from inequalities between countries. Some of the overall EU pay inequality is due to having different pay levels in different countries, even after allowing for purchasing power parity. The Theil index enables these differences to be separated from within country differences.

The first chart shows overall pay inequality over the last decade falling from 2004, then rising again after the recession until it is almost back to where it was.

Screen Shot 2015-05-26 at 13.07.27

Now look at what happens to the same chart when the UK is excluded.

Screen Shot 2015-05-26 at 14.33.45

Without the UK, EU pay inequality shows a long fall then a very slight increase in 2010 but it is still well below its 2014 level. The UK’s high level of wage inequality and large shifts in the earnings of its top 1 percent are enough to change the figures for the EU as a whole. Britain’s polarised pay is skewing the numbers for the entire continent.

That said, it is important to be clear that these charts refer to full-time equivalent pay levels not to incomes. The figures only include employees and do not allow for the distribution of work – either hours of work or periods of unemployment. When these are added in, the UK’s relative position doesn’t look quite as bad.

Screen Shot 2015-05-26 at 15.46.51

Based on full-time equivalent pay, the dark blue lines, the UK has the highest Gini score and therefore the most unequal distribution.

But not everyone works full-time or has regular hours. As you would expect, monthly earnings (the mid-blue line) show greater income inequality in all countries because this measure builds in the effect of the uneven distribution of working hours.

Yearly earnings (the light blue line) include those unemployed for some or all of the year. This increases the level of inequality again but this time some countries overtake the UK. This is because Britain has relatively low unemployment and, although its pay levels might be polarised, the amount of work is more evenly distributed than in many other EU countries. Based on yearly earnings, Greece, Ireland and Spain are more unequal than the UK.

Finally, household disposable income, the white line, includes income from capital, allows for the distribution of work within families and includes the effects of taxes and benefits. Once this is taken into account, a number of countries (Greece, Spain, Portugal Latvia and Lithuania) are more unequal than the UK.

The Gini coefficient of household income is the measure used by the OECD for comparing inequality in different countries and tracking changes over time. The change in inequality of household income in the UK shows a different pattern from that of pay levels. It has remained fairly flat since the early 200s and fell after the recession. The UK’s big jump in inequality came during the Thatcher years then levelled off afterwards.

CFirDrEWIAAZrGl (Chart by Ben Chu, based on OECD data.)

When compared to the recent past and to other EU countries, then, the UK’s pay levels show much higher levels of inequality that its household incomes.

Why might this be? As ever, I’d be interested to hear what people think as my knowledge of European tax and welfare systems is fairly rudimentary but it does suggest that the UK’s tax and benefit system is mitigating some of its pay inequality. For example, the fall in household income inequality since 2000 coincided with the rise in in-work benefits.

Screen Shot 2015-01-15 at 19.23.39

The counter-argument, of course, is that it is in-work benefits that have allowed low wage employment to persist and they therefore fuel the income inequality they were set up to alleviate. These are also the benefits most likely to be cut in the Chancellor’s attempt to find £12 billion welfare cuts.

If the benefits which reduce the effects of pay polarisation are about to disappear, inequality in the UK might be set for another sharp rise.

Update: This chart suggests the UK’s tax and benefits system does more to alleviate poverty for households with non-standard work (part-time, temporary and self-employed) than those of most other OECD countries.

Screen Shot 2015-05-27 at 09.55.51

Source: In It Together: Why Less Inequality Benefits All, OECD, 21 May 2015.

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6 Responses to Inequality in the UK

  1. Interesting as always. Just on the final point that impending welfare cuts might lead to a sharp rise in household income inequality …

    As the IFS noted in their analysis yesterday http://www.ifs.org.uk/publications/7762 when looking at ‘unprotected’ welfare spending – “three quarters of entitlements to the benefits in the chart go to families in the bottom half of the income distribution, of which more than half go to families with children”

    The other side of that coin though is that a quarter of the £125 billion unprotected spending goes to families in the upper half of the income distribution.

    So as a matter of simple arithmetic and with all other things being equal, by ensuring the cuts fell on households with above average household income it would be entirely possible to cut welfare spending AND household income inequality at the same time.

    This would of course ignore the fact that some families in the upper half of the household income distribution are people who would otherwise be rather poor on this measure, particularly in London where the average housing benefit award is over £7000 a year, or for low-earning families with children, where even with both parents working 30 hours at minimum wage a three-child family can be entitled to £20,000 a year in tax credits (including childcare costs). There is some irony in the fact that cutting these payments – and in some cases plunging people into at least relative poverty – would actually reduce household income inequality …

  2. Danny A says:

    I would have thought that taking into account all sources of income would make the inequality situation worse, with rents interest and dividends only received by the wealthiest. Are benefits then a more significant factor than other sources of non-wage income?
    I might imagine that if you included non-disposable incomes (asset accumulation) the inequality is far worse?

  3. Sorry – but the Gini coefficient is unfit for purpose. Actually it is much worse than this – it dumbs down inequality – hides how bad it is.

    The Gini coefficient is a confidence trick to hide the ever widening gap between a countries privileged richest families and the millions of poor families. This is demonstrable fact and not mere opinion.

    I decided to conduct testing and analysis of the Gini after our UK government had been saying that inequality has got better under them (they had ONS backing). However, the rich had been increasing their incomes by compound rises up to 30% year on year and the poor now use food banks in record numbers. So how has inequality got better, how could this be true?

    I sent my findings on to the Office for National Statistics in the form of a video presentation which explains in detail how the Gini is unfit for purpose. Indeed, why it was also misleading and deception. The ONS were unable to address my points – indeed they were most evasive. Perhaps the maths were too difficult for these ‘experts’. Why would they not want to know if the information they were providing was false?

    If you cannot spare the time to look at the video, please at least just glance at the income distribution chart below that I produced as part of it. How can (an ideal?) country with only a 6:1 ratio of income distribution (6 x richest income to poorest) – with a much more even spread – be the same inequality as the UK? I made this chart so people bad at maths (there seems too many) can see it is rubbish for comparing inequality within a country and useless for comparing one country to another. The UK income distribution is much worse than this – just how can it be the same inequality?

    Here is the video which explains in simple terms that your teenage son or daughter could understand:

    Like other measures e.g. S80/S20, the Gini uses frequency distribution to fool people. I use the analogy of measuring inequality with a rubber band, the inequality in a country always gets ever wider – but the measure still reads the same. An example of stretch, during 2012 FTSE director’s got a 27% rise and millions of people on minimum wage got 1.8% (£100,000’s per annum vs. just over £200).

    Last week I sent a complaint to the UK National Statistician – who happens to have been the CEO of the ONS that I originally wrote to who was recently promoted. I am expecting more evasion.

    We need fair wage legislation – a minimum living wage and a maximum to stop greed – which is now avarice, insatiable greed.

    Plato said the income of the highest paid in society should never amount to more than five times that of the lowest paid – perhaps with such diverse jobs this could be raised to ten times.

    BTW: Government say they squeeze the rich – this is how the rich are [not] squeezed:

  4. Chris Everett says:

    You say, “If the benefits which reduce the effects of pay polarisation are about to disappear, inequality in the UK might be set for another sharp rise.”

    However, the government can reduce the in work benefits without increasing inequality by raising the minimum wage over the life of the parliament to a level that is above that which qualifies for in work benefits. One very simple adjustment fixes both problems.

  5. Pingback: Where is the money? | (Fund) Raising Voices

  6. Reblogged this on Forwardeconomics and commented:
    #Inequality Analysis in the UK

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