Why you should all care about inequality

Afternoon all.

Well, it’s been a blast, but all good things come to an end. Next Monday will see two major handovers: Donald Trump takes over in the White House, and, at RF Towers, we will welcome Ruth Curtice to be our new Chief Executive.

Obviously what I’ll miss the most is these Friday emails, and I’d like to do a big shout-out to the regular team behind Top of the Charts: Rob, Emma, Camron and Imogen, and also to Tom for his help on my valedictory TOTC which, in a move that will shock no-one that knows me, focuses on inequality.

Have a great weekend,

Mike

Interim Chief Executive
Resolution Foundation

When working with numbers, it’s always important to remember the difference between what truly counts, and what you happen to count. Adopt a long view too, and take special care when jumping between figures capturing different but similar-sounding things. This is true in spades when it comes to inequality. On the headline measure of income inequality the recent record in Britain has been flat as a pancake. That’s a statistical reality that can give rise to unfortunate mis-readings.

Went high, stayed high

The first, and crudest, misreading jumps from the flat headline figure to the assumption that there is nothing going on with the gap between rich and poor, and the conclusion that people who are worried about inequality are just muddle-headed. The chart below explains why this is wrong: income inequality soared in the 1980s, and it has never come back down.

The measure here is the Gini coefficient, which goes from 0 (an imagined land where everyone has exactly the same) to 1 (where one person has everything), and the rise of about 0.1 is a substantial one, enough to turn the UK from being internationally-mid-table (inequality-wise) in the mid-1970s to what it remains: one of the most unequal nations in Europe. And if inequality is a bad thing, then it’s the level that matters, not whether it’s rising or falling: if it was worth worrying about a generation ago, and it hasn’t shifted since, then it remains a problem today.

Are we squeezing the middle? Not when it comes to household income

A more nuanced take on inequality, recently given an arresting airing by John Burn-Murdoch in the Financial Times, is that flat headline inequality covers up interesting and perhaps offsetting movements under the surface. When people think they’re conscious of rising inequality, they might have real worries, just different ones from inequality per se. As John argues, “the squeezed middle” are caught in a pincer between recent gains at the bottom end, and the continuing running away of the top.

So is there anything in this for the UK? Well, when we’re looking at pay, perhaps. Big rises in the minimum wage have produced a material slide between the middle and bottom-end of hourly wage rates over the last generation, as the chart below illustrates. Indeed, the National Living Wage is designed to do this – since 2016 it has been ratcheted up towards median hourly pay. Squeezed differentials can make middle-earners a bit resentful, as The Economist argued last year, and my colleague Nye found out when confronted with a grumpy HGV driver on a radio call-in.

But even if we limit our attention to pay, it is crucial to ask exactly what we want to measure. Look at weekly earnings (the dotted lines), rather than hourly pay, as the chart below also does, and there is much less of a squeeze on the middle from the bottom. Basic hourly rates might be higher, but if there are more people doing short hours, which changes the picture: instead of seeing differentials drop from the late 1990s, they now hold up until the mid-2010s.

The bigger point, however, is that there is much more to household income than pay, including pensions, benefits (particularly at the bottom end), and income from investments (particularly at the top). And if we’re concerned with disposable income, as we should be if we’re interested in living standards, then we must factor in taxes, mortgage interest and rents, and the way that families pool their resources.

For a clear contrast with pay, let’s focus on the disposable incomes of working-age households. As the next chart shows, there is very little to support the “squeezed middle” account: despite a few bumps up and down, the ratio of the middle to the bottom is almost exactly where it was in the mid-1990s.

There is also no sense that the gap between the middle and top (the 90:50 ratio) has grown. At the very top end (99th centile), the richest families pulled a bit further ahead in the 15 years before the financial crisis, but not since (although with the caveat that this income measure misses out on capital gains, which look like they have become a more important way in which the super rich take their income). In sum, there is nothing on the income front to suggest our “high but stable” inequality headline is awry.

The Generation Game

But even if income inequality is “high but stable,” there may be important reasons why it might be felt increasingly keenly. Inequality is all about where people stand in relation to one another. If, for example, we register big gaps in living standards within our own town or among our contemporaries, then our sense of unfairness may be sharpened, irrespective of what is happening to income differentials nationwide.

Conversely, resentments flare up if members of one group can see they face a collective disadvantage with another. In Britain, equity between generations is a huge issue. In days gone past, not only did each generation enjoy wage progression as it aged, but each could expect to walk a higher path than their predecessors. Compare, for example, in the chart below, the 1961-65 birth cohort with that born in 1951-55: at every given age, its members were earning more. But this progress breaks down for those born from the 1980s onwards. While there has been a little bit of catch-up in the most recent years, albeit nothing like what Millennials have seen in the US, the story of generational slowdown in the UK remains a potent one.

Wealth gaps have been surging

Of course, not everyone’s concept of their standard of living or financial position is based on their “disposable income after housing costs”. Wealth (savings, pensions and property) and debt matter too. Wealth is roughly twice as unequally distributed as income. It follows that when wealth becomes relatively more significant compared to income, and more consumption is funded from it, then living standards will diverge. This is exactly what has happened over the last half century, with the ratio of private wealth to national income having doubled from about 3:1 in the 1970s to about 6:1 today.

This has led to widening wealth gaps (until, perhaps, very recently), as the next chart shows. The gap between the top end and middle Britain was always at least a £1 million since the series began in 2006. But over the next 14 years it surged by about two-thirds to reach £1.65 million by 2020. It may have fallen back in the most recent years, as higher interest rates depress the value of big pensions and other assets, but even in 2024 we estimate the gap at £1.27 million, 17 per cent more than it was in 2006, 37 times more than typical household income, and unimaginably more than it would have been in the smaller wealth era of the more distant past.

British incomes in three chapters: slanted growth, shared growth, vanishing growth

One critical factor governing how keenly inequality is felt is how far – or not – everyone is getting better-off in absolute terms. Our final chart shows average annual growth in disposable income across the income range for working-age families over three periods. First, during the ‘Thatcher years’, income growth was very strong at the top, fair-to-middling lower down, and then outright negative at the bottom. Then during the nineties and noughties up to the financial crisis, the UK came close to shared growth, with income growth averaging 2 per cent a year across almost the whole range. Finally, the austerity-Brexit-pandemic years, gave us income stagnation (the apparently healthy growth at the bottom reflects the temporary cost of living support in our final year of data, 2022-23).

In sum, inequality is a big deal, even if it isn’t rising on the headline measure. There are, of course, always other things going on under the surface, some of which are prone to make that inequality feel more unfair. Moreover, when people across the income range are not enjoying the same sort of incremental advances in pay and living standards that they used to be the norm, they may be more inclined to suspect that anyone who is outdoing the stagnant average is doing so at their expense. All of which goes to show, as our Economy 2030 Inquiry concluded, that if we really want to make Britain feel better, we need to get inequality down as well as getting growth up.