ifs understanding recent trends in income inequality alissa goodman institute for fiscal studies
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IFS
Understanding recent trends in income inequality
Alissa Goodman
Institute for Fiscal Studies
Overview
• Recent changes in income inequality very different to the 1980s
• Remarkable stability across much of the distribution
• Inequality still high, if not rising much
Measuring income inequality
• Follows Government’s low income statistics:
– Current income from all sources
– Summed across all household members
– Net of direct taxes, including benefits
– Equivalised for family size and composition
The Income Distribution: 2002/03
0.0
0.5
1.0
1.5
2.0
0 100 200 300 400 500 600 700 800 900 1,000 1,100
£ per week, 2002/03 prices
Nu
mb
er o
f in
div
idu
als
(mil
lio
ns)
Mean, £396
Median, £323
How unequal are we?
2002/03
Share of top 1% 8.0%Share of top 10% 27.7%Share of bottom 10% 2.8%90/10 ratio 4.0Gini coefficient 0.34
The Gini Coefficient, 1961-2001
0.20
0.25
0.30
0.35
0.40
61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 9193
-94
95-9
697
-98
99-0
020
01-0
2
Gin
i C
oef
fici
ent
Drivers of rising inequality in 1980s:
• Labour market outcomes• Participation: falling amongst low-skill men
• Wages: increasing returns to education
• Institutional change: e.g.union decline
• Demographic change• increasing numbers of single adult households
• Fiscal policy changes• Overall impact regressive through 1980s
How were the 1990s different?
• Growth in income inequality slower
Inequality growth was slower
90
100
110
120
13019
80
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Year
Ind
ex,
100
=st
art
of
dec
ade
1980s
Gini coefficient
Inequality growth was slower
90
100
110
120
13019
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Year
Ind
ex,
100
=st
art
of
dec
ade
1980s 1990s
Gini coefficient
How were the 1990s different?
• Growth in income inequality slower
• Growth in income inequality localised– Remarkable stability across most of the population
Inequality growth was localised
90
100
110
120
13019
80
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Year
Ind
ex,
100
=st
art
of
dec
ade
1980s
90/10 ratio
Inequality growth was localised
90
100
110
120
13019
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Year
Ind
ex,
100
=st
art
of
dec
ade
1980s 1990s
90/10 ratio
Inequality growth was localised
90
100
110
120
130
140
15019
80
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Year
Ind
ex,
100
=st
art
of
dec
ade
10th 25th 50th 75th 90th
Income growth: 1980s
Inequality growth was localised
90
100
110
120
130
140
15019
80
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Year
Ind
ex,
100
=st
art
of
dec
ade
10th 25th 50th 75th 90th
Income growth: 1980s
Inequality growth was localised
90
100
110
120
130
140
15019
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
Ind
ex,
100
=st
art
of
dec
ade
10th 25th 50th 75th 90th
Income growth: 1990s
How were the 1990s different?
• Growth in income inequality slower
• Concentrated in small parts of the distribution– Remarkable stability across most of the
population
• Increased inequality driven by top and bottom
Inequality growth was localised
-2
-1
0
1
2
3
4
510 20 30 40 50 60 70 80 90
Percentile point
An
nu
al p
erce
nta
ge
chan
ge
in i
nco
me
1996- 2002
Inequality growth was localised
-2
-1
0
1
2
3
4
510 20 30 40 50 60 70 80 90
Percentile point
An
nu
al p
erce
nta
ge
chan
ge
in i
nco
me
1996/7- 2001/02
Inequality growth was localised
-2
-1
0
1
2
3
4
510 20 30 40 50 60 70 80 90
Percentile point
An
nu
al p
erce
nta
ge
chan
ge
in i
nco
me
1996/7- 2001/02
Inequality growth was localised
-2
-1
0
1
2
3
4
510 20 30 40 50 60 70 80 90
Percentile point
An
nu
al p
erce
nta
ge
chan
ge
in i
nco
me
1996/7- 2001/02
Inequality growth was localised
-2
-1
0
1
2
3
4
510 20 30 40 50 60 70 80 90
Percentile point
An
nu
al p
erce
nta
ge
chan
ge
in i
nco
me
1979- 1990
How were the 1990s different?
• Growth in income inequality slower
• Concentrated in small parts of the distribution– Remarkable stability across most of the population
• Increased inequality driven by top and bottom
• Low income groups kept pace
Low incomes kept pace
-2
-1
0
1
2
3
4
510 20 30 40 50 60 70 80 90
Percentile point
An
nu
al p
erce
nta
ge
chan
ge
in i
nco
me
How were the 1990s different?
• Growth in income inequality slower
• Concentrated in small parts of the distribution– Remarkable stability across most of the population
• Increased inequality driven by top and bottom
• Low income groups kept pace
• Consumption inequality did not grow
What changed?
• Labour market outcomes• Increases in participation: some recovery among low-skilled
• Wages: stable returns to education as supply of educated workers has grown
• (Institutional change: minimum wage)
Earnings inequality
90
95
100
105
110
1996/971997/981998/991999/002000/012001/022002/03
Gin
i c
oe
ffic
ien
t In
de
x,
10
0
=1
99
6/9
7
Net income Earnings
What changed?
• Labour market outcomes• Participation: some recovery among low-skilled
• Wages: stable returns to education as supply of educated workers has grown
• (Institutional change: minimum wage)
• Fiscal policy changes• Overall impact progressive since 1999
Fiscal policy since 1997
0.32
0.33
0.34
0.35
0.36
0.37
1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03
Gin
i C
oef
fici
ent
Actual Gini
Fiscal policy since 1997
0.32
0.33
0.34
0.35
0.36
0.37
1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03
Gin
i C
oef
fici
ent
Actual Gini
'No-policy change' Gini
Gross income inequality
0.32
0.36
0.40
0.44
0.48
0.52
1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03
Gin
i C
oe
ffic
ien
t
Net income simulated Gross income
Conclusions
• Top and bottom incomes drove inequality growth over 1990s
• Most of the distribution if anything, equalised
• Longer-term context: inequality at 1950s levels
• Future: child poverty targets imply more redistribution
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