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The Facts On Income Inequality In The UK Might Surprise You

19/07/2017 08:51
Tim E White via Getty Images

Since the financial crisis, average household incomes in the UK have stagnated. Over the last eight years of official data, average income grew by just 4% - extremely slow by historical standards.

The lack of a feel-good factor is not hard to understand. But one should be careful not to confuse this with what's been happening to inequality: the gap between those on high and low incomes. On that, the truth of the matter over the past few years may surprise you.

Based on new research from the Institute for Fiscal Studies, we look in detail at two important issues regarding income inequality: how has overall income inequality changed in recent years, and second, how important are regional inequalities?

Recent trends in inequality: the national picture

Income inequality across most of the population is lower than 10 years ago. During the recession itself, the incomes of low-income households were boosted by increases in the generosity of state benefits and tax credits, while big falls in the real earnings of workers that followed the crisis tended to hit higher income households more. Since then, income inequality has been held down by a combination of strong growth in employment - boosting the incomes of low-income households - and weak growth in earnings - stopping high-income households pulling away. On most measures, inequality is actually around the same level as in 1990. That does mean that lots of inequality remains, and that we are much more unequal than we were before the sharp rise in inequality in the 1980s - that broader perspective, perhaps, is the really key point. But income inequality has not got any more dramatic over the past decade. The story has instead been one of historically weak growth in living standards across the board.

What about the very top? Is the story different if we focus just on the top 1%? The top 1% of households did continue to pull further and further away from the rest right up until the financial crisis hit in 2007. But since then, although reliable data on their incomes is rather harder to obtain, there is no evidence that they have been insulated from the falls in income seen elsewhere. If you look at the earnings of some of the highest-paid workers -those who earn more than 99% of employees they have actually fallen further than the earnings of the average worker.

Income inequality between regions: how important is it?

There are important differences in average income across the regions and nations of Britain: average (median) income in the richest region (the South East) is 25% higher than in the poorest region (the West Midlands). Poverty, too, is concentrated: the tenth most deprived local authorities contain one in four poor children. But it is worth putting that alongside the broader context of inequality in the UK. Most of our inequality is within, not between, regions: the gap between the rich and poor within regions is much bigger than the gap between average incomes in different regions.

And it is the fall in inequality in one region - London - that is perhaps the most remarkable change in inequality in recent years.

During the mid-2000s a relatively well-off family in London (with an income higher than 90% of Londoners) had an income five and a half times as high as a poor family in London (with an income higher than only 10% of Londoners). The equivalent gap in the UK as a whole was around four. But since 2007 inequality in London has fallen dramatically, driven in part by even larger falls in earnings than seen in the rest of the country (down 10% since the recession on average) and even faster growth in the employment rate (up five percentage points over the same period). Income inequality in London is still higher than in the rest of the country - but more similar than it used to be.

So income inequality has fallen across the country recently, having fallen furthest in London, and income gaps between regions - while substantial - are responsible for only a small portion of inequality in the UK. There are good reasons to expect some of this to change. There are now big cuts to working-age benefits coming in, while earnings are forecast to grow in real terms. In combination that would be likely to result in income inequality rising. But let's get our facts straight about what has already happened.

Andrew Hood and Jonathan Cribb are senior economic analysts at IFS

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