Inequality in the UK

pareto-coeffThe inverted Pareto – Lorenz coefficient is a measure of inequality.

Note there are gaps in the series. The measure of inequality was highest in 1910 at 2.9

This measure of inequality fell sharply after the war before increasing from 180.

After the post war period, there was a sharp fall in income inequality. This was driven by

  • Welfare state
  • Higher income taxes on high earners
  • Period of full employment
  • Rising wages for working class.
  • Erosion of class privileges
  • Improvement in universal education

From mid 1970s to late 1990s, there was a sharp reversal in income inequality, especially the top 1% saw a marked increase in share of overall income. This was because:

  • Growth of financial sector and growth in wages for high earners
  • Privatisation and deregulation, especially deregulation of financial sector
  • Growth in asset prices (houses) which increased wealth inequality
  • Decline of manufacturing industry and rise in long term unemployment
  • growth in wage inequality
  • cut in higher rates of income tax
Inequality in UK

source: Paris School of Economics

Inequality Since 1997

Relative Poverty

Since 1997, according to an IFS report, the level of relative poverty has fallen during labour’s term in office. However, in 2006-07, there was the first increase in relative poverty since 1997.

The number of people living in relative poverty (defined as income 60% of median average incomes) stands at 12.8 million (after housing costs) This is approximately 21% of the population, down from 25% in 1997 (poverty and inequality in the UK 2007)

Factors that may have contributed to increased inequality in the UK in recent years

1. An increase in the number of people on benefits. Despite falling unemployment the number of people receiving state benefits is still around 5 million. There have been an increasing number of people on state benefits such as sickness and incapacity benefits. Arguably there is disguised unemployment. This means that many people have lower incomes.

2. Rising property values have reduced disposable incomes for many young people
. Rising property values have made renting more expensive. Therefore, an increasing % of incomes has been spent on housing costs. There has also been an undeniable increase in wealth inequality, which often leads to income inequality.

3. There has been an increase in part time  / temporary work. This work is not protected by trades unions and tends to be low paid.

4. The minimum wage is limited in its ability to reduce inequality. Many of those who benefit from the NMW are second income earners or students who are not particularly poor.

5. Increase in regressive indirect taxes.
Taxes on alcohol, petrol and cigarettes have increased faster than inflation. Therefore, they have been taking a higher % of people’s disposable income. This has particularly affected groups such as the single unemployed.

6. Inflation for pensioners has been higher than the CPI rate. This is because pensioners spend a higher % of income on goods like council tax, fuel and food; these goods have been increasing faster than inflation, leaving pensioners relatively poorer.

 Fuel Poverty

Fuel poverty occurs when households have to spend more than 10% of their income on maintaining home at a reasonable temperature.


Fuel Poverty

OECD Report

An OECD report suggested, according to the gini coefficient, inequality had grown in the UK quicker than anywhere else.

In Britain, the gap in earnings between the richest and poorest in the working-age population has risen from eight to one in 1985 to 12 to one in 2008.

Workers in the top tenth now earn an average £55,000 a year, compared with £4,700 for the poorest 10 per cent.

Using a measurement which works out how well income is distributed throughout society, known as the Gini coefficient, inequality has risen faster in Britain than in any other country since 1975.

The reason for this increase is mainly down to the fact that the share of total income taken by the richest 1 per cent has doubled, from 7.1 per cent in 1970 to 14.3 per cent in 2005. Within this group, the super-rich 0.1 per cent of top earns took some 5 per cent of total pre-tax income.

Welfare State

However, the OECD also pointed out that UK government spending on health and education had the impact of helping to reduce effective inequality.

Wealth Inequality

The wealthiest 10 per cent of households were 4.3 times wealthier than the bottom 50 per cent of households combined