3. How has UK income inequality changed over time?

There are a number of different ways in which inequality of household income can be presented and summarised. Among them, the Gini coefficient is one of the most widely used measures. This takes values between 0 and 100, with higher values representing an increase in the level of inequality. A value of 0 indicates complete equality in the distribution of household income, implying that all households have the same equivalised income. A value of 100 indicates complete inequality, implying that 1 household has all the income, and the others have no income.

The Gini coefficients for original income (income before any taxes and benefits), gross income (after cash benefits are added), disposable income (after cash benefits are added and direct taxes subtracted) and post -tax income (after cash benefits are added and both direct and indirect taxes are subtracted) for all households are represented in Figure 1.

Figure 1: Gini Coefficients for different income measures, 1977 to 2014/15 UK Source: Office for National Statistics Notes: 2014/15 data is not yet available for Equivalised Post Tax Income. Download this chart Figure 1: Gini Coefficients for different income measures, 1977 to 2014/15 Image .csv .xls

Throughout the 1980s, income inequality increased across all 4 measures of income, though the pattern of growth differed according to the measure of income. The Gini coefficient for equivalised original income grew throughout the decade. However, inequality of gross income, disposable income and post- tax income were relatively stable during the first part of the 1980s. There was then a sharp increase in the Gini coefficients for these income measures in the second half of the decade. This was due to a change in the impact of taxes and benefits, which will be explained in more detail later in the article.

The figures for the 1990s show a different story. Inequality of original income was flat initially, before a slight increase towards the middle of the decade. For the remainder of the 1990s, the Gini coefficient for original income was fairly stable, indicating that the level of income inequality was relatively unchanged. In contrast, inequality of disposable income reduced slowly from 1990 until the mid-1990s, although it did not fully reverse the rise seen in the previous decade. In the late 1990s, inequality of gross, disposable and post-tax income rose slightly once again but flattened off by the end of the period.

Between 2001/02 and 2004/05, income inequality fell for all of the inequality measures other than equivalised original income, which remained relatively flat. Over this period there was a slight fall in inequality of original income, due to faster growth in income from earnings and self-employment income at the bottom end of the income distribution. Policy changes, such as increases in the national minimum wage, tax credit payments and National Insurance contributions, also contributed to slightly larger reductions in inequality of disposable and post-tax income.

Between 2004/05 and 2006/07, there was a slight increase in inequality, owing to increased inequality of original income. This was partly because of the faster growth rate of wages, salaries and investment income in the upper part of the distribution compared with the lower part of the distribution. The Gini coefficient for original income continued to rise until 2008/09. Since then, the overall pattern has been one of little change until 2013/14, where the return to real growth in average incomes was accompanied by a fall in inequality of original income.

Since 2006/07, the Gini coefficients for gross, disposable and post-tax income have all decreased, reflecting a fall in income inequality on these measures and resulting in some of the lowest levels of income inequality observed since the late 1980s.

The characteristics of the Gini coefficient make it particularly useful for making comparisons over time, between countries and before or after taxes and benefits. However, no indicator is completely without limitations and one drawback of the Gini is that, as a single summary indicator, it cannot distinguish between different-shaped income distributions. For that reason, it is useful to look at this index alongside other measures of inequality. One such measure is the S80/S20 ratio, which is the ratio of the total income received by the 20% of households with the highest income to that received by the 20% of households with the lowest income. Another related measure is the P90/P10 ratio. This is the ratio of the income of the household at the bottom of the top decile to that of the household at the top of the bottom decile.

A relatively recently developed inequality measure, the Palma ratio, takes the ratio of the income share of the richest 10% of households to that of the poorest 40% of households. The idea behind using the Palma ratio is that the middle 50% of households are likely to have a relatively stable share of income over time, and hence isolating them, should not lead to a substantial loss of information (Cobham and Sumner, 2013). Together these measures provide further evidence on how incomes are shared across households and how this is changing over time.

Figure 2: Change in Gini coefficient, S80/S20 ratio, P90/P10 ratio and Palma ratio for equivalised disposable income, 1977 to 2014/15 UK Source: Office for National Statistics Download this chart Figure 2: Change in Gini coefficient, S80/S20 ratio, P90/P10 ratio and Palma ratio for equivalised disposable income, 1977 to 2014/15 Image .csv .xls

Figure 2 shows that income inequality trends in the UK since 1977 have been very similar on all 4 measures. Some year-on-year movements may reflect survey volatility; however, it can be seen that inequality of disposable income increased in the late 1980s and, to a lesser extent, during the late 1990s during periods of faster growth in income from employment, and fell in the early 1990s during a period of slower growth in employment income.

Since the turn of the millennium, changes in income inequality have been relatively small compared with previous decades, though overall there has been a fall in inequality on all the measures.

In the early 2000s, income inequality fell. This was in part owing to faster growth in income from earnings and self-employment at the bottom end of the income distribution. Policy changes, such as increases in the national minimum wage, tax credit payments and National Insurance contributions in 2003/04, are also likely to have had an impact.

The most recent peak in income inequality was in 2006/07 or 2007/08, depending on the measure used. Since then the broad trend has been one of gradual decline in levels of inequality on each of the measures.