Levelling up by tackling rising income inequality in the UK

Thomas Piketty’s enthralling book ‘Capital in the Twenty-First Century’ shows that rising inequality is one of the biggest challenges of the 21st century.

Inequality is intrinsically undesirable due to its negative impact on human capital accumulation, financial inclusion, productivity, and economic growth. Rising inequality among individuals in an economy is a fundamental issue as it shows an increase in unequal and/or unjust distribution of resources and opportunities. Therefore, reducing inequality within and among countries is one of the Sustainable Development Goals (SDGs).

SDGs are the Global Goals adopted by the United Nations in 2015 to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity. Income inequality is quite high in the UK, and therefore, has become a central issue for both academia as well as policymakers.  

We will first evaluate the income inequality in the UK using the GINI coefficient, given its simplicity and popularity. The GINI coefficient (named after the statistician Corrado Gini) summarises the inequality between 0 and 100, where ‘100’ indicates perfect inequality, where one person has everything, and ‘0’ shows perfect equality. Overall, a higher number reflects a higher level of income inequality.

Evidence of growing inequality

The headline finding, based on data from the Institute for Fiscal Studies, is that income inequality in the UK (measured by the GINI coefficient) has increased on average by 0.6% per year between 1961 and 2019 (see Figure 1). Over the past 58 years, income inequality has increased from 26.1% in 1961 to 35.2% in 2019. In the UK, the average income inequality was 25.7% during the 1960s, 25.2% in the 1970s, 28.5% in the 1980s, 33.9% in the 1990s, 34.8% during 2000 and 2009, and 34.3% between 2010 and 2019.

Income inequality was lowest at 24% in both 1977 and 1978 and reached its peak of 35.8% in 2007. Overall, it has slightly increased from 33.7% in 2016 to 35.2% in 2019, and the Covid-19 pandemic may further increase the current disparities.    

Research carried out at the LSE shows that “the richest 1% of households in the UK earns around 150 times more than the poorest 1% of households”.  

According to Office for National Statistics estimates, the median household income was £29,900 in the UK in the financial year ending 2020, with poorest fifth earning £13,800, and the richest fifth making £62,400. There is clear evidence that the earnings of upper-income groups have significantly increased in the UK. The World Inequality Database shows that 13% of pre-tax national income went to the top 1% of adults with the highest income, while those in the lowest 40% also receive the same income share in 2019 (see Figure 2).

Where you grow up matters

In 2019, the lowest 50% only received 20% of pre-tax national income, while 36% of pre-tax national income went to top 10% earners. Importantly, the pre-tax income share of the bottom 50% dropped from 22% in 1980 to 20% in 2019, while the pre-tax income share of the top 10% increased from 30% in 1980 to 36% in 2019.  

The Social Mobility Commission’s ‘postcode lottery’ report highlights that where you grow up truly does matter. According to recent research by National Institute of Economic and Social Research, the UK today has very high spatial inequalities which have hampered economic growth.

Importantly, the latest official data provides evidence of a north-south divide in income and productivity in the UK. According to data analysed by ONS, London and the South East had the highest income and productivity in 2018. The analysis documents that household income was particularly high in central London areas, including Kensington, Camden, and Westminster.

Household income was found to be higher in the South, Cheshire, North Yorkshire, East Cumbria, Edinburgh, Aberdeen, and the east of Scotland. On the other hand, the lowest income areas were urban areas in the Midlands, North West, North East, and Yorkshire and the Humber.

On average, each person in the UK had a gross disposable household income (GDHI) per head of £21,109 to consume or save; while London had the highest GDHI per head of £29,362, and the North East had the lowest GDHI per head at £16,995.

It is well documented now that income inequality is higher in the UK than in all other G7 countries, except the United States, and is also greater than most European Union countries except Bulgaria. In 2018, the UK had a GINI coefficient of 35.1%.

Among the G7 economies, the GINI coefficient ranged from 30.1% in France to 41.1% in the US in 2018.  Income inequality is also high in the UK compared to most of the Organisation for Economic Co-operation and Development (OECD) countries except the US, Bulgaria, Mexico, Chile, and Costa Rica. Across all the OECD member states, the Slovak Republic had the lowest GINI coefficient of 23.6% in 2018, while Costa Rica had the highest GINI coefficient of 48%. 

Considering slow productivity in the UK since the Global Financial Crisis of 2008, coupled with Brexit and the Covid-19 pandemic, reducing inequality should be one of the key mechanisms to achieve inclusive growth and deliver SDGs. To counter the significant impact of the pandemic, the government has set out ‘build back better’ plans to increase investment in high-quality infrastructure, skills, and innovation to achieve higher economic growth.  

How can we genuinely 'level up'?

It is heartening to see that the UK government has pledged its commitment to tackle geographic disparities to level up across the whole of the UK with the aim that no community is left behind.

To genuinely level up, the policy should focus on reducing the gender wage pay gap (the median gender pay gap is 15.9% in the UK), innovation gap, raise real wages, improve regional and economy-wide productivity and growth along with the higher level of infrastructure investment.

To tackle long term inequality, Piketty suggests that governments should implement a basic income policy, a job guarantee system and inheritance for all. Furthermore, Piketty highlights that the minimum income should be extended to low-paid workers, young people, and students.

The current economic policies in the UK have certainly helped to achieve economic progress, but also created winners and losers. Therefore, it is time to rethink out of the box policy solutions for the good of society.