IFS Understanding recent trends in income inequality Alissa Goodman Institute for Fiscal Studies.

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



• 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


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


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


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




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





• Concentrated in small parts of the distribution– Remarkable stability across most of the

population

• Increased inequality driven by top and bottom


-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


-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


-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


-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


-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



• Concentrated in small parts of the distribution– Remarkable stability across most of the population


• 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



• Concentrated in small parts of the distribution– Remarkable stability across most of the population


• 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

IFS Understanding recent trends in income inequality Alissa Goodman Institute for Fiscal Studies.

Documents

inequality growth

s slide

income inequality slower

earnings inequality

gross income inequality

distribution inequality

pace slide

ratio slide