Posted: 30 Jan. 2017 5 min. read

The surprising decline of inequality in the UK

Inequality in incomes is a hot topic across the industrial world. Although the global recovery is in its eighth year in most rich countries the gap between higher and low incomes has widened.

A conspicuous exception is the UK. I was surprised to learn that take-home incomes for those in the bottom 20% of incomes have risen faster than for those in the top 20% in the last ten years.

This runs contrary to the dominant narrative of rising inequality. Three little-noticed things have gone right in the UK.

First, the UK has been exceptionally successful in creating new jobs and increasing the female participation rate. The result has been a big decline in the proportion of households with no one in work.

Second, pensioner incomes have seen good growth as a result of rising income from private pensions and inflation-protected state benefits. Pensioners tend to have low incomes so their improved position has contributed significantly to reducing levels of inequality.

Third, the tax and benefit system has become more redistributive and has increasingly shifted income from higher to lower earners. Tax credits boosted in-work incomes for those on low pay and tax rises instituted since 2008 have borne disproportionately on higher income households.

So why do we hear so much about inequality and so little about the things that have gone right?

Sadly the flip side of these successes is new problems in other areas. The UK has a strong record on job creation, but a significant number of the new jobs have been in self-employment, part time, temporary or are relatively low paid. A job rich recovery has also been a low productivity recovery in which earnings have seen only modest growth. The middle fifth of UK households have seen real incomes rise by just 0.5% a year since the financial crisis.

Rising pensioner incomes have alleviated one of the most persistent sources of poverty, among older people. And the employment rate among working age women has risen from 42% in 1971 to 70% today. These profound changes have bolstered household incomes.

But a new source of concern is the way in which incomes for lower skilled workers, especially men, have come under pressure. Men are working fewer hours. Male employment rates have fallen since the 1970s and today almost a third of working age men are classed as economically inactive, a category which includes the unemployed, sick and disabled, early retirees as well as students.

More men are also working part time. This partly reflects changing preferences, with more sharing of child care in young families and older men staying on in work on reduced hours. But another aspect is the replacement of skilled, full time manual work, particularly in manufacturing, with unskilled temporary, or zero hours work in the service sector.

25 years ago I worked as a Special Adviser on social policy in government. At that time reducing high levels of worklessness – whether though unemployment, a lack of training or skills, illness or disability - was a central aim of policy. Things have gone well on this front. Today UK labour force participation is close to an all-time high and is above that in the US, a country with historically high employment rates.

The problem today is less one of worklessness and more to do with sluggish income growth for those in the middle or at the bottom. Inequality may have declined, but you get a sense of the problem if you consider that the real income of the average working age family today is lower than it was in 2007. One set of problems diminishes and others rises.

But we should not be downcast. The last quarter of a century shows that it is possible to alleviate seemingly intractable social ills. Pensioner poverty and worklessness are lesser problems than they were in the 1980s. Female workforce participation have risen sharply. The tax and benefit system are performing as they should in redistributing income and alleviating poverty.

The broad challenge today, one that is sharpened by Brexit, is to tackle the UK’s poor record on productivity. Within this it is the skills and prospects of lower paid, lower skilled workers, which are most in need to help.

PS - Two weeks ago we wrote about the rise of euro sceptic political parties in Europe. Michael Penn, the Chief Strategist and Economist at investment managers Cohen & Steers in New York, dropped us a line noting that popular support for the EU has actually risen in the last year. The Eurobarometer survey shows more voters across the EU think Europe is “heading in the right direction” though concern about the EU is rife in core members Germany, France and Italy. Still, this survey offers some much-needed good news for the EU. Michael also pointed out that EU voters had become very much more pessimistic about the direction the US is taking since the US election. The only European country in which voters have not become more pessimistic on the US is Russia.

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Ian Stewart

Ian Stewart

Partner and Chief UK Economist

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.