Is inequality on the rise?

Income inequality has risen sharply since the 1970s in most advanced economies around the world, and has been blamed for increasingly polarised politics.

While growth powered ahead in the second half of the 20th century, and resumed more fitfully after the 2008-09 financial crisis, there have been major winners and losers from the wealth generated.

Sir Angus Deaton, the Nobel prize-winning economist who is leading a five-year review of inequality with the leading Institute for Fiscal Studies thinktank, said: “There is this feeling that contemporary capitalism is not working for everybody.

“There’s a sense that London is gobbling up everything and there are cities that are doing OK, but there are large parts of the country where that’s not the case at all.”

There are a host of causes, including fiscal policy, technology, globalisation, deregulation, education, emasculation of trade unions and austerity.

What about globally?

During the 19th and for much of the 20th century, inequality between countries rose dramatically as the world’s most advanced economies pulled ahead from poorer nations.

According to the International Monetary Fund, the balance has been redressed more recently, reflecting strong growth in many developing nations, particularly China and India.

The UK ranks among the most unequal nations in Europe, but is more equal than the US, the most divided wealthy nation in the world. According to one ranking system (the Gini coefficient – see below) South Africa is the most unequal country in the world. Scandinavian countries tend to have the lowest levels of inequality. According to the World Bank, Ukraine is the least unequal.

Branko Milanovic, one of the world’s leading experts in inequality, has found that the rise of globalisation has fuelled a boom in inequality in advanced nations. The biggest winners have been the richest 1% of people on the planet.

How do we measure it?

The headline measurement of inequality is the Gini coefficient, also known as the Gini index. Named after Corrado Gini, the Italian statistician who developed the method during the early 20th century, the index gives a score from 0 to 100 to measure the distribution of a nation’s income or wealth. A score of 0 would represent total equality while 100 would represent total inequality, where one person has everything.

The UK’s Gini score has remained in the mid-30s since the early 1990s, after peaking at 35.1 at the turn of the millennium.

In that respect, the government can argue that inequality is not rising, as it remains roughly around the same level. However, that isn’t to say that inequality is not high. In the early 1960s, the Gini score stood at around 26 and stayed there until the late 1970s.

What about other measurements?

Some analysts argue that the Gini index can be misleading, obscuring the true extent of inequality. Robert Joyce, the deputy director at the IFS, said: “The Gini is masking different things going on, like the fact that the top 1% is still pulling away from everyone else.”

There are other methods, such as the Palma ratio, which gives the ratio of the income held by the richest 10% of individuals to that of the poorest 40% , and the 90:10 ratio, which looks at the incomes of those 90% up the earnings ladder compared with those only 10% of the way up. They broadly mirror the trend seen in the Gini; rising rapidly since the start of the 1980s, then remaining largely unchanged over the past 10 years.

Looking beyond the headline measurements could tell a different story. Analysis by the IFS has shown the share of income going to the top 1% of richest households has nearly tripled in the past four decades, from 3% in the late 1970s to about 8% today.

Average chief executive pay in the FTSE 100 in 2017 was 145 times higher than that of the average worker, up from just 47 times in 1998. The lowest earning working households earn little more after inflation than they did in the mid-1990s.

Against a backdrop of austerity and weaker economic growth since the financial crisis, academics suggest public perceptions of inequality have increased despite a relatively unchanged Gini score.

Economists like analogies. One telling the impact of inequality goes like this: when the traffic comes to a standstill on a motorway, people often become irate when the lane next to their own pulls ahead, leaving them trapped. This appears to have increasingly become the feeling for many in society over the past decade as economic growth has raised the living standards of few, rather than many.

“The trigger for people becoming more aware of inequality was the crisis and the slowdown in real growth,” says Milanovic. “It wasn’t a topic on its own that came up just as people saw Bill Gates or Jeff Bezos being rich. It came as incomes hadn’t risen as they’d been expecting they might be. And then somebody else really at the top was taking all the gains.”

Average wages in Britain, adjusted for inflation, remain below the level seen before the financial crisis. But big pay rises are starting to return for people paid more than £1m a year.

Are there other types of inequality?

For the most part when we think about inequality we think about income or wealth. But there are divisions beyond material standards of living, such as in health, education and social mobility, as well as between gender, race, age, geography and social groups.

Deaton says changes to education policy, including the expansion of university access, may have had an impact on inequality.

“You get an elite who think they did it all on their own and they deserve their position, and the people who didn’t pass exams and feel left behind. First they think the system is rigged which is a reasonable thing to think and then also partway blame themselves,” he says.

“We’ve created this meritocratic aristocracy and people who didn’t make it are pissed off.”

According to the Office for National Statistics, the top 10% of households by income earn 6.8 times more than those on the lowest rung, but the wealthiest 10% have 290 times more in total assets than those at the bottom of the pile.

The level of wealth in Britain – including property, cash savings, shares and pensions – has risen by 15% in the two years to June 2016 to a record £12.8tn. The vast stockpile is unevenly spread: the top 10% of households own almost half, while the poorest fifth’s overall wealth has declined in real terms.

Almost eight out of 10 British companies pay men more than women, while women are paid a fifth less than men on average. Workers of Pakistani or Bangladeshi heritage have the lowest average pay of any ethnic group, in the latter case earning 20.1% less than white British workers.

It goes without saying that inequality between regions – and generations – has been rising in the UK as well. The proportion of top 1% highest income taxpayers who live in London has grown by a fifth since the early 2000s.

What are the consequences of inequality?

While some degree of inequality might be inevitable in a market-based system, extreme divisions can have far-reaching consequences. Among the most visible in recent years is the polarisation of politics and the rise of populism in the UK and elsewhere around the developed world.

Brexit in the UK and the election of Donald Trump in the US, as well as growing support for new political movements in Europe from both ends of the political spectrum, have been linked to rising inequality.

Ted Howard, co-founder of the Democracy Collaborative, a leftwing research institute, says three people – Bill Gates, Jeff Bezos and Warren Buffett – own more wealth than bottom 160 million people in the US.

“It’s not just as an economic fairness issue but also a democratic issue. Can you hold together a democratic culture and state when the wealth holding patterns show no democracy at all? It’s a great threat,” he says.

Facebook Twitter Pinterest Old-school inequality Photograph: Jimmy Sime/Getty Images

Beyond political divisions the rise of inequality could result in negative economic outcomes.

Rightwing economists have argued that redistributing income is self-defeating, but the IMF believes societal divisions can destabilise growth and create the conditions for a sudden slowdown. Economies can be stifled when millions of people are held back from contributing to their full potential.

How do you reverse inequality?

Complete equality might be impossible to achieve. Some economists say an entirely equal society might be undesirable, arguing that a wholly homogenous world would lack diversity and dynamism. However, the most important question to therefore ask is whether inequality has risen too far, how to reverse it and how to prevent extremes from arising.

The prevailing logic of the past four decades has been that stronger economic growth serves as the greatest antidote to inequality. Increasing the size of the pie means everyone has a bigger slice. Peter Mandelson, the Labour peer, is famously quoted as saying in the 1990s that he was “intensely relaxed about people getting filthy rich as long as they pay their taxes” for this reason.

Attitudes towards tackling inequality may depend on your view of work and how it is valued. Does hard work deserve higher pay? Is banking more valuable than nursing? Are financial incentives the best way to draw the best out of people?

The main weapons for tackling inequality have been the tax and spending tools available to governments. Progressive taxation and welfare transfers are key, but are by no means the only way to combat the division of income and wealth in society.

In a sign of how fiscal policy can help, the top 20% of earners in the UK earn 12 times as much as the poorest 20% before redistribution through tax and benefits. After adding welfare transfers and deducting taxes, the gap falls to about five times. Boris Johnson has however promised large tax cuts that are likely to alter how this calculation looks in future.

Some economists and politicians have called for a universal basic income (UBI) to provide a safety net to prevent poverty, although such schemes could prove expensive, while others argue that more targeted spending on the most needy would be more effective. There are also calls to improve funding for education and services instead.

The French economist Thomas Piketty, a world expert on inequality, has called for a global wealth tax, while the Organisation for Economic Cooperation and Development has suggested using higher inheritance taxes to reverse the extreme concentration of wealth.

Wealth and inheritance taxes are politically sensitive and are often gamed through loopholes, made harder in an increasingly globalised world where capital can flow across borders and into tax havens. The mention of wealth taxes often leads to warnings that an economy could lose investment from the rich, who say they would flee overseas.

One alternative as Ed Miliband famously advocated is the idea of predistribution, which aims to make the economy hard-wired to produce less inequality.

Greater spending on health and education can lower the persistence of income inequality across generations, as well as drive up productivity rates, employment and earnings over the long run.

Some economists have suggested greater democratic ownership could prevent inequality from rising, alongside efforts to place more workers on boards and to use positive discrimination campaigns. Labour has called for the creation of shared-ownership funds that would give workers control of up to 10% of companies listed on the London Stock Exchange, giving them a greater say over corporate decision-making and income from company profits through dividends.

The government has started forcing companies to report their gender pay gaps and mooted the idea of mandatory ethnic pay gap reporting, in the hope that greater awareness of the issues force companies to address them. Some countries go further, forcing companies to publish workers’ pay levels.

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