Sunday, July 23, 2017
Inequality is down - but people don't notice when real wages are falling
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.

After a week in which we have been offered a joyous glimpse into what some of the BBC’s highest paid on-air presenters and stars earn – and I know all the arguments about whether or not they could earn more in the commercial sector – it is a good time to look again at inequality.

Inequality has raced up the political agenda even though for the past quarter of a century or so it has either been falling or at worst flat, as a useful new report form the Institute for Fiscal Studies pointed out a few days ago.

The IFS report, Living standards, poverty and inequality in the UK: 2017, noted that income inequality fell significantly during the crisis and recession, particularly between 2007-8 and 2011-12, and has not increased since.

Incomes for people at the 10th percentile – in other words those at the top of the poorest 10% of the population – are up 7.7% since 2007-8, while those in the middle (the 50th percentile) are up 3.7%, and those at the 90th percentile, people better off than 90% of the population, have fallen by 0.6%.

As a result, and depending how it is measured, income inequality is either quite a lot lower than it was in the late 1980s, or is roughly the same as it was 25 years ago. The 90:10 ratio shows a distinct fall in inequality, while another widely-used measure, the Gini coefficient, shows the flatter picture. Neither show rising inequality.

The difference between the two is that the Gini, a traditional measure of inequality, takes into account the top 1%’s rising share of income. Though the figures for earnings in this group are open to dispute, in the 1960s and 1970s, the top 1% accounted for between 3% and 5% of income, rising to 8% by 2000 and nearly 9% on the eve of the crisis, before dropping back to 7% as the crisis hit, and then subsequently recovering some of its lost ground.

The 90:10 ratio, meanwhile, has fallen particularly sharply in London since the financial crisis. The capital’s streets are no longer as paved with gold as they were.

So why, if inequality is flat or falling, is it such a hot button issue? And how do you prevent public concerns over inequality from creating the climate for economically-damaging, incentive-destroying tax changes, such as those proposed by Labour in the recent election?

On the first point, we live in an age of, as well as fake news, a climate of disbelief. Any number of reports from the IFS or other respected bodies would not convince some people that inequality is not rising, to the extent that they think about or understand these things at all.

To those that do, there is the important contrast between levels and rates of changes. Yes, on one important definition inequality has fallen significantly, But the level of inequality, the gap between rich and poor, remains significant, and small steps that have reduced it are seen as just that.

In London for example, where inequality has fallen very sharply, it remains higher than in any other part of Britain.

The richer people are too, the steeper the slope gets. The IFS points out that a household with a net income of £946 a week does better than 90% of the population and has an income of nearly twice the median (£481 a week), and nearly four times that of somebody at the top of the bottom 10%. But 90th percentile man or woman would need to earn at least two and a half times as much to make it into the top 1% of incomes. Those top 1%, the conspicuously rich, help frame the debate on inequality more than any statistic.

Incidentally, there is often a confusion between income and wealth inequality, Britain’s income inequality is higher than most other members of the OECD, the advanced countries’ group. But wealth inequality, based on ownership of assets, is lower in Britain than in many other countries, including France and Germany. The explanation lies with traditionally higher levels of home ownership and occupational pensions in Britain, though both are now in decline.

This speaks to another aspect of the inequality debate, that between the generations. Median incomes for the over-60s are up by 10% since 2007-8. Those for the 22-30 age group are down by 4% over the same period. If there has been a sharper increase in intergenerational inequality than that in recent years, it is hard to think when.

The key point about why income inequality is such an issue despite the numbers, however, is that we are in an era of severely constrained growth in household incomes and falling real wages. When prosperity is scattered all around, people will believe that a rising tide lifts all boats.

Lord Mandelson could and did get away with saying that New Labour was “intensely relaxed about people getting filthy rich – as long as they pay their taxes”. When incomes are rising people may care about what their colleagues and others in their immediate circle earn, but they do not worry overmuch about how others, even BBC presenters, are doing.

When incomes are squeezed, in contrast, people do care. It is of small comfort to learn that the real wage pie is being shared slightly more fairly than it was in the past.

Falling real wages are not the norm in Britain. For a run of wage weakness of the kind we are now experiencing, you have to go back to the 1860s, and what Mark Carney recently described as the first “lost decade” since then.
Falling real wages, and the associated weakness of productivity, frame attitudes to inequality and just about everything else. There is, unfortunately, no easy way out of the torpor. Businesses have enough uncertainties on their plate to want to keep a lid on pay. Despite record employment, the vast majority of employees are unwilling to push things on pay. 1998-2007, when average earnings rose by 4.25% a year alongside low inflation, looks like a distant land of milk and honey.

Then, despite a rise in inequality in the run-up to the financial crisis, most people were indeed intensely relaxed about the filthy rich. Now, despite a fall in inequality, they are not. How that is resolved is both a challenge and a worry.