Setting fire to the safety net

Is inequality getting worse, better or staying pretty much the same? It’s one of those questions that comes up over and over again.

Jeremy Corbyn couldn’t have picked a worse time to claim that inequality is getting worse, just before an ONS report appeared which showed that it was at a 30 year low.

gini-768x504

Chart via Resolution Foundation.

As ever, though, it’s a bit more complicated than that. If you look purely at hourly pay, the rates people are paid for the work they do, then Jeremy Corbyn is right. The UK is the most unequal country in the EU and more unequal than it was a decade ago. The European Foundation for the Improvement of Living and Working Conditions (Eurofound) commented:

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.

But incomes are affected by factors other than hourly rates. This horrid but useful chart from the Eurofound report shows how, once you compare annual incomes and household incomes after tax, the UK falls to somewhere near the average in comparison to other EU countries.

Screen Shot 2015-05-26 at 15.46.51

There are two reasons for this. Firstly, with the 3rd highest employment rate in the EU, the UK distributes its employment more evenly than some other countries. A smaller proportion of households suffer from unemployment and long-term poverty. Secondly, the UK’s tax and benefits system is highly redistributive.

This means that it is possible to have relatively high levels of pay inequality and relatively low levels of household income inequality at the same time. Furthermore, it is possible for pay inequality to increase and household income inequality to reduce at the same time.

As this chart from a recent report by the IFS shows, the difference between the male hourly wage at the 90th and 10th percentiles of the income distribution has risen while that for household incomes after tax has fallen.

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Different aspects of inequality can rise and fall at the same time.

As this chart from the IFS report shows, the tax and benefit system prevented a huge rise in inequality among working households over the past 2o years. (Post-tax income here includes the effects of taxes and benefits.)

screen-shot-2017-01-23-at-17-04-26Pay rose much faster for those on higher incomes but redistribution through taxes and benefits evened out the rise in household incomes until it was almost uniform.

Over the same period, as the Resolution Foundation showed, the proportion of people receiving out-of-work benefits fell and the employment rates of those in the lowest income deciles increased.

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Source: Resolution Foundation


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Source: Resolution Foundation

As well as mitigating income inequality, the benefits system, through tax credits and other in-work benefits, was encouraging people back into employment. This, together with the minimum wage, meant that household incomes rose faster for those on lower incomes than for those on all but the very highest incomes. Therefore household income inequality fell at the same time as individual pay inequality rose.

It would be churlish not to acknowledge this as a tremendous achievement. Holding household income inequality steady at the same time as pay inequality was rising demonstrates the effectiveness the government’s tax, benefits and employment policies. A deindustrialising country with huge international financial centre in its bottom right hand corner was always going to be at risk of rocketing income disparity. What could have been a rapid and divisive rise in inequality was tempered by government policy. It’s unfashionable to say anything nice about him these days but Horrid Tony Blair must take at least some of the credit for this. As Polly Toynbee often said, he was more Labour than he liked to admit.

Looked at another way, though, this simply means that, as Chris Dillow says, we have grown used to a much higher level of inequality than we had in the 1980s. Cheering about it having fallen a little misses the point:

Even if inequality is now falling, the damage done by the previous rise in it still lingers. To paraphrase Joseph Schumpeter, if a man has been hit by a lorry you don’t restore him to health by reversing the lorry.

Furthermore, all that is standing between us and severe inequality is our finely balanced tax and benefits system. Start cutting in-work benefits, as the government is planning to do, while the wage squeeze continues, as it probably will, and the level of inequality is likely to rise sharply.

In its recent report on living standards, over the rest of this decade the Resolution Foundation forecasts a jump in inequality similar to that of the 1980s.

screen-shot-2017-02-05-at-16-13-32

Ken Clarke remarked last week that politicians have no idea how to tackle inequality:

I think everybody who believes in liberal economic policies – which is the great bulk of politicians of the last few years – have never quite solved the problem of how to distribute the benefits better so that the whole country can be seen to benefit. We’ve been trying for years.

Might it be a good idea to come up with some new ideas before removing the safety net that, for all its faults, has kept inequality at bay for the past quarter century?

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6 Responses to Setting fire to the safety net

  1. Right.
    So the Labour government’s tax and benefit policies ensured that disposable incomes of both rich and poor grew at the same approximate rate over the period charted.
    On the surface, all well and good but this ignores the massive inequality that subsisted in the first instance.
    A cynic might conclude that Blair and Brown’s acquiescence and reluctance to tackle the first instance inquality they inherited was tacit approval of the gross and unjustified inequality caused through Thatcher’s (Patrick Minford’s) economic policies.
    I am not convinced that the Blair and Bown years should be lauded.

  2. metatone says:

    Have to say that KC’s comments seem to be uncritically accepted, which I find a bit annoying when it seems rather plain that when we look at policies put in place, very little policy effort, time or money was put into “Hartlepool or wherever.”

  3. “Looked at another way, though, this simply means that, as Chris Dillow says, we have grown used to a much higher level of inequality than we had in the 1980s.”

    Rick, I may be wrong but I believe this quote should say 1970s, not 1980s. The latter decade (the decade in which Thatcher was in power) was the period over which the Gini coefficient had a steep upward gradient. It was relatively flat before then.

  4. Almar says:

    Some of the charts seem to cover those of working age, others all households. My very casual reading of the evidence suggests to me that much of the decline in income inequality since 2000 is due to the increase in the relative income of pensioners. It would be interesting to see the difference between including and excluding those in receipt of pensions in the charts in this blog.

    The recent US literature shows that the big increase in ratios of top to lower incomes has come from looking at the top 1% (or even 0.5%) versus others. If we are concerned with inequality in the UK, rather than just poverty, then we should also show the top 1% separately.

    Finally, my feeling is that at least part of the reason why people feel that inequality has increased is because of the deterioration in the provision of services which are particularly relied on by those lower down in the income distribution; e.g. Sure Start centres for those with young children or L.A. home help visits for those who are elderly and need assistance.

  5. Keith says:

    Blair or maybe it should be Brown stopped inequality getting worse and made efforts to boost social mobility by spending on sure start and secondary education etc Which is commendable. On the other hand compared to the post war period as a whole it is all small beer. There is an overall framework inherited from the post 1979 period that entrenches much more inequality than before. And social mobility if you want it requires more equality as all the evidence I believe shows that just being more equal helps the people at the bottom the most. Almar is right I also think that cuts to public spending have a very regressive effect as they harm the most dependent people, poorer pensioners and the disabled far more than other groups. The cuts to housing benefit and council tax benefit are entirely regressive and a strange set of policies for what is supposed to be a Democracy. These are the sort of policy changes more like those of France before the revolution of 1789.

  6. George Carty says:

    Surely most of the rise in inequality comes from the Home-Owner-Ist policies followed by Thatcher, Blair and Cameron? (Sale of council houses, abolition of rent controls, replacement of rates with council tax.)

    It isn’t capital proper that is responsible for persistent inequality, but private ownership of assets which cannot be competitively produced (land in prime locations, patents, copyrights, connections with government).

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