Sunday, July 06, 2014
Inequality: always with us but less than it was
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Inequality is always with us and it never loses its power to provoke debate. This year, of course, we have had a bestselling book on it, Thomas Piketty’s Capital in the 21st Century.

The politics of inequality will feature in the run-up to the next election. Though official estimates suggest a 50p top of income tax will raise no additional net revenue compared with 45p, Labour is pledged to reintroduce it if re-elected.

The default position of the comfortably off, whether they are Church of England bishops, Bank of England governors, academics or think-tank researchers, is that “something must be done”.

Often, of course, that something would end up damaging those on low incomes, whether it is requiring all employers to pay a co-called living wage, or paying over-generous benefits that trap people on welfare.

I quite liked the formulation used by Tony Blair and Gordon Brown, which was that governments should strive to improve equality of opportunity but accept that inequality of outcomes are inevitable. Such inequalities can be and are reduced by the tax and benefits system but take that too far and you destroy incentives and growth.

Enough preamble, what do the numbers tell us about inequality? Let me bring in some evidence. Hottest off the press is an analysis by the Office for National Statistics of wage trends in recent decades; UK Wages Over the Past Four Decades.

Though there is probably too much of an obsession with the top 1% and 0.1% in this debate, it shows that the top 1% of earners (strictly speaking those at the 99th percentile) earned 11 times as much per hour as the bottom 1% (those at the 1st percentile) in 2013. That sounds quite a lot but it is down from almost 13 times in 1998. The minimum wage has supported people on low wages, while higher earners have suffered the biggest drop in incomes since 2011.

Exhibit 2, also from the ONS, is a report The Effects of Taxes and Benefits on Household Income, published a few days ago. The ONS has a measure called equivalised income, which is income adjusted for both inflation and the size of household.

The striking result in this report was that since 2007-8 – when the crisis first hit – the richest 20% of households have seen a drop of 5.2% in this measure of real incomes. The poorest 20%, in contrast, have seen a rise of 3.5%.

I should say in the interests of completeness that the poorest fifth of households have done well largely thanks to the pensioners among them, whose real incomes have risen by 14% since the crisis (pensioners in general have seen a 7.9% rise). But, because benefits were initially better protected than wages, the smallest fall in real incomes among non-retired households – 2% since 2007-8 – was among this bottom 2%. Inequality has fallen as a result of the crisis.

This is also the message from another piece of official analysis, called Households Below Average Income, published a few days ago. It found that income inequality in 2012-13 was little changed from 2011-12, but again was well down on where it was. It takes two income measures; before and after housing costs. The former showed inequality down to where it was in the mid-2000s, the latter preferred measure down to mid-1990s’ levels.

As the Institute for Fiscal Studies put it, describing the squeeze on earnings and the fact that benefits were protected: “Benefits account for a relatively large share of household income towards the bottom, whereas earnings account for a relatively large share further up. After almost two decades in which inequality had changed little, this was enough to return it to its lowest level since 1996-7.”

That last IFS point is worth noting. We should not celebrate overmuch if it takes a massive financial crisis and huge recession to produce a drop in inequality, which may be reversed as the recovery proceeds.

What we should note, instead, is that contrary to most people’s impression, income inequality in Britain, on ONS data, has been remarkably flat for almost a quarter of a century. Among retired households, it peaked in 1991 and has been declining gently since. Among non-retired households it has been broadly stable.

Income inequality has moved around in the past. It fell in the 1960s and 1970s, rose under Margaret Thatcher in the 1980s but since then it has largely been a case of much ado about nothing.

You do not, by the way, have to take my word on this, or that of the ONS. Professor Tony Atkinson of Oxford University, Piketty’s great collaborator, noted in his chartbook of economic inequality, published in March, that while income inequality in Britain is higher than it was in 1980. “most of the increase took place in the 1980s”.

There have been significant income increases over time for all households. On ONS data real incomes for the top 20% were 2.53 times their level in 1977, while for the bottom 20% the multiple was 1.86. People move in and out of these groups, of course, but the top 20% mainly pulled ahead in the 1980s.

What about wealth inequality? Wealth is less evenly distributed than income. The latest ONS data shows that the top fifth of households own 44% of Britain’s wealth, while the bottom 20% have 7%.

However, the distribution of wealth is, like the distribution of income, stable. Again, not just my words or those of the ONS, but also Atkinson: “Downward trend in top wealth shares from 1923 to end of 1980s; now levelled off.”

There is a debate about whether the distribution of wealth should be properly measured by a survey, as the ONS does, or by data from estates. But both show a broadly stable pattern. Britain, taking the evidence together, has a more even distribution of wealth than most countries, including those normally thought of as more equal such as Sweden.

This is because of the nature of wealth in Britain, the vast bulk of which is in property and private pensions, rather than “capital” or financial wealth. That, by the way, is the fundamental flaw of Piketty’s book, that it confuses wealth and capital.

That is for another day. The big picture in Britain is that inequality is with us and always will be. But it has gone down, if only temporarily, in the past few years, and has been broadly stable for more than two decades. Not that you would know it.