Economics serving society

Income and earnings inequality in Great Britain: the Gini coefficient, 1978 to 2009

Mike Brewer (U. Essex, IFS) & Liam Wren-Lewis (PSE, INRA)

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The figure plots how two types of inequality have evolved in Great Britain. From 1978 to 1991, Household income* inequality (blue line) rose from that of a relatively average developed country, with a Gini coefficient** of 0.23, to being amongst the most unequal countries in the OECD, with a Gini coefficient over 0.3. Since 1991, it has stabilized around 0.3. Individual earnings inequality (green line) amongst full-time workers rose fairly steadily over the period. What explains the difference between these trends?

Mike Brewer and Liam Wren-Lewis investigated specifically the question “why did income inequality in the UK rise very rapidly but then remain flat thereafter?” (blue line), seeking to distinguish between two broad hypotheses: was it the case that those factors which drove the rise in income inequality between 1978 and 1991 were specific to that period? Or was it that the factors behind the pre-1991 rise in inequality have continued, but have been offset by new factors pulling inequality downwards? To answer these questions, they constructed annual, cross-sectional microdata with consistent measures of income and household characteristics spanning 1978 to 2008/09, and used three complementary decompositions techniques.

Prior to 1991, employment and self-employment income became more unequally distributed amongst the economically active. Additionaly, an increase in unemployment and investment inequality, combined with a reduction in taxes and benefits, worked to further push up overall household income inequality.
Since 1991, employment and self-employment income inequality continue to rise, but a number of factors have mitigated the effect of these changes on total income inequality. First, inequality between those with different employment statuses has fallen, primarily due to a fall in the number of unemployed. Second, employment taxes have played a larger role since 1991 in mitigating the increase in inequality of gross employment income than they did before 1991. Third, investment income has contributed less to total income inequality since 1991, largely due to the decline in its importance as an income source. Finally, a rise in the relative incomes of pensioners and households with children under five – both groups that benefited from reforms to welfare benefits and tax credits during the 1990s and (especially) 2000s – has pulled inequality down. Overall, since 1991 these four factors have almost entirely offset the impact on income inequality of the inequality-increasing changes in the distribution of earnings and self-employment income.

Going forward, one point of concern may be that at least two of these four factors are unlikely to continue pushing inequality down from 2008-09 onwards. Unemployment has rapidly increased since 2008 and in the medium term is unlikely to move below the low achieved during the 2000s. Meanwhile, recent changes to the benefit regime are likely to further increase inequality. Future movements in net earnings inequality are therefore likely to become central to the trend in income inequality.

* Household income includes wage earnings, self-employment income, capital income and tax & social transfers
** The Gini coefficient, ranging between 0 and 1, is the most commonly used measure of inequality