Living standards, poverty and inequality 2016 · Income inequality Andrew Hood Living standards, poverty and inequality 2016

Chris Belfield Jonathan Cribb Andrew Hood Robert Joyce 19 July 2016

Living standards, poverty and inequality 2016

Income inequality Andrew Hood

Living standards, poverty and inequality 2016

Living standards, poverty and inequality 2016 © Institute for Fiscal Studies

The UK income distribution in 2014–15

0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Net

hou

seho

ld in

com

e (£

per

yea

r, 20

14–1

5 pr

ices

)

Percentile point

Childless couple: £24,600 p.a.

Source: Figure 3.1 of Living Standards, Poverty and Inequality: 2016



0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Net

hou

seho

ld in

com

e (£

per

yea

r, 20

14–1

5 pr

ices

)

Percentile point

Childless couple: £24,600 p.a.


Single adult: £15,800 p.a.

Couple with 2 young children: £33,000 p.a.



0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Net

hou

seho

ld in

com

e (£

per

yea

r, 20

14–1

5 pr

ices

)

Percentile point

Median: £24,600 p.a.

Expressed as equivalent living standards for a childless couple




0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Net

hou

seho

ld in

com

e (£

per

yea

r, 20

14–1

5 pr

ices

)

Percentile point


10th percentile: £12,700 p.a.





0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Net

hou

seho

ld in

com

e (£

per

yea

r, 20

14–1

5 pr

ices

)

Percentile point








0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Net

hou

seho

ld in

com

e (£

per

yea

r, 20

14–1

5 pr

ices

)

Percentile point








0

20,000

40,000

60,000

80,000

10 20 30 40 50 60 70 80 90

Net

hou

seho

ld in

com

e (£

per

yea

r, 20

14–1

5 pr

ices

)

Percentile point

Private pensions, savings and investments

State pensions

Benefits

Employment

Sources of net income across the distribution: 2014–15


40% employment, 45% benefits

80% employment, 1% benefits


Inequality broadly unchanged in 2014–15

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Chan

ge fr

om 2

013–

14 to

201

4–15

(%

)

Percentile point

Note: Shaded area represents 95% confidence intervals

Real income growth by percentile point in 2014–15 (UK, BHC)



Inequality is lower than before the recession...

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cum

ulat

ive

inco

me

chan

ge

Percentile point

2007–08 to 2014–15



...and has not risen during the recovery

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cum

ulat

ive

inco

me

chan

ge

Percentile point

2007–08 to 2014–15

2011–12 to 2014–15



Why has inequality not increased during the recovery?

1. Remarkably strong employment growth


Change in % of non-pensioners living in a workless household around last three recessions (GB)

-2

-1

0

1

2

3

4

5

6

7

-4 -3 -2 -1 0 1 2 3 4 5 6 7 Years since pre-recession peak in GDP

-2

-1

0

1

2

3

4

5

6

7

-4 -3 -2 -1 0 1 2 3 4 5 6 7

Chan

ge in

non

-pen

sion

ers

in w

orkl

ess

hous

ehol

ds (p

pts)

Years since pre-recession peak in GDP

1979

1989

2007–08





‒ Mainly boosted the incomes of low-income households

2. Weak individual earnings growth

‒ Strong earnings growth would have led high-income households to pull away, though less so than in the past

‒ Average gross employee earnings unchanged in real terms between 2011–12 and 2014–15

3. Stronger earnings growth for low earners


Inequality in weekly individual earnings fell...

-4%

-2%

0%

2%

4%

6%

8%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cum

ulat

ive

earn

ings

cha

nge

Percentile point

Real weekly earnings growth by percentile point: 2011–12 to 2014–15 (UK)

Strong growth for low weekly earners



Change in hours worked by hourly wage decile (UK)

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Lowest wage

2 3 4 5 6 7 8 9 Highest wage

Cum

ulat

ive

chan

ge in

ave

rage

hou

rs

Percentile point

2007–08 to 2011–12

2011–12 to 2014–15

“Bounce-back” in hours for those with low hourly pay

...driven by a recovery in hours for low-paid workers





‒ Both falling household worklessness and ‘added workers’ have mainly boosted the incomes of low-income households

2. Weak individual earnings growth

‒ Average gross employee earnings unchanged in real terms between 2011–12 and 2014–15

‒ Strong earnings growth would have led high-income households to pull away, though less so than in the past

3. Stronger earnings growth for low earners

‒ Explained by a recovery in hours worked among those with low hourly pay


0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Gin

i co

eff

icie

nt

Gini coefficient

Long-run inequality: 1961 to 2014–15 (GB)



2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

90

:10

ra

tio

Gin

i co

eff

icie

nt

Gini coefficient

90:10 ratio

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

90

:10

ra

tio

Gin

i co

eff

icie

nt

Source: Figures 3.6 and 3.7 of Living Standards, Poverty and Inequality: 2016



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

1

2

3

4

5

6

7

8

9

10

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Top

1% s

hare

90:1

0 ra

tio

90:10 ratio

Top 1% share

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

1

2

3

4

5

6

7

8

9

10

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Top

1% s

hare

90:1

0 ra

tio




Conclusions

• Income inequality across most of the distribution still lower than before the recession

‒ Recovery has seen weak earnings growth and strong employment growth, preventing rise in income inequality

• Over the long run the top 1% have pulled away

‒ But inequality across most of the distribution lower than 25 years ago

• Effect of earnings and employment changes on inequality are complex

‒ Combined with macroeconomic uncertainty, makes it almost impossible to predict future trends in inequality

Living standards, poverty and inequality 2016 · Income inequality Andrew Hood Living standards, poverty and inequality 2016

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