Two Decades of Income Inequality in Britain: The Role of Wages, Household Earnings and Redistribution

Abstract

We study earnings and income inequality in Britain over the past two decades, including the period of relatively 'inclusive' growth from 1997 to 2004, and the Great Recession. We focus on the middle 90%, where trends have contrasted strongly with the 'new inequality' at the very top. Household earnings inequality has risen, driven by male earnings-although a 'catch-up' of female earnings did hold down individual earnings inequality and reduce within-household inequality. Nevertheless, net household income inequality fell due to deliberate increases in redistribution, the tax and transfer system's insurance role during the Great Recession, falling household worklessness, and rising pensioner incomes.

Underemployment and the Lack of Wage Pressure in the UK

“…Faced with uncertain returns to capital investment, firms may have preferred more workers post-recession that higher paid workers. Our results are consistent with the findings of Belfield et al (2017) who recently reported that there has been a dramatic rise in the proportion of low-wage men who are working part-time. Their analysis is based on the UK's Family Resources Survey (FRS).…”

Survey Under-Coverage of Top Incomes and Estimation of Inequality: What is the Role of the UK’s SPI Adjustment?

“…For example, Brewer and Wren-Lewis state that they 'trim the top and bottom 1% of households in each year; in doing so, we remove all of the very high and very low income households whose reported incomes are adjusted by government statisticians before the micro data are made available ' (2016: 297). 16 An even more radical approach is taken by Belfield et al (2017) who trim the top 5% and the bottom 5%. Trimming removes most high-leverage outlier observations that account for potentially spurious volatility in inequality trends.…”

Building a More Equal Scotland: Designing Scotland’s Poverty and Inequality Commission

“…53 In addition, during the 2000s, the expansion in provision of social security for low-income families through tax credits played a significant role in mitigating increases in market income. 54 This interaction between economic and institutional factors helps to explain why technological change during the period from the 1950s to the late 1970s did not increase inequality, whereas in more recent times technological change has coincided with increasing inequality. During the decades following the Second World War, much greater prevalence of implicit -and sometimes explicit -social contracts protected workers' share of the profit against the introduction and use of new technologies.…”

“…61 The increase in earnings inequality has -since the late 1990s -been offset by increases in redistribution to lowincome families, particularly via child and working tax credits, as well as falling rates of worklessness, and by the growth in pensioner incomes. 62 This is outlined in Chart 5. …”