“The test of our progress is not whether we

add more to the abundance of those who have much;

it is whether we provide enough for those who have too little.”

 

― Franklin D. Roosevelt

 

Oxfam has just published a new report on inequality. And it has some shocking statistics:

  • the richest 2,153 people in the world own as much as the bottom 4.6 billion;
  • their wealth is growing at an average of 7.4% per annum – far faster than the economy, and therefore than everybody else; and
  • between 2011 and 2017, average wages in the G7 countries have risen by 3% while dividends paid to shareholders rose by 31%;

But in the UK, many people believe that inequality is not an issue for us, so The 99% Organisation has decided to dig into the facts.

And what the facts show is that, in the UK, rising inequality is a factor in driving mass impoverishment, but it is not principally income inequality that is the problem; and sound policy must also tackle productivity growth.

Rising Inequality is a Factor Driving Mass Impoverishment

Perhaps the place to start is mass impoverishment – the process by which a large segment of the population finds itself getting poorer even as the economy grows. As the chart below, showing data from the Office for National Statistics (ONS), indicates, the UK has suffered from mass impoverishment since 2010.

The blue line shows the trends in real (inflation-adjusted) GDP per capita – you can think of this as being the ‘size of the pie’ which, if all the products and services produced in the UK were equally shared, each person would receive. The red line shows the trends in real median earnings – and you can think of this as representing the slice which a person in the middle of the earnings distribution actually receives. So, the graph shows that the pie is bigger than it was in 2010, but the typical slice is smaller. In a nutshell, that is what mass impoverishment means.

As the Institute for Fiscal Studies commented,

“On current forecasts average earnings will be no higher in 2022 than they were in 2007. Fifteen years without a pay rise. I’m rather lost for superlatives. This is completely unprecedented.”

So mass impoverishment is a serious issue, but is that the same as inequality? Could you not have a situation in which ‘everyone is in it together’ and all getting poorer? No, not if the pie is growing. The money goes to somebody; and if the overall pie is growing and some slices are shrinking then other slices must be growing faster than the pie.

The gap that has opened up since 2010 between the two lines in the chart is a measure of increasing inequality; without that gap – i.e. if median earnings had kept pace with GDP per capita, if the slices had grown in proportion to the pie – then median earnings would today be higher than they were in 2010.

So, clearly, we should not ignore rising inequality in the UK. But that does not mean that inequality is the only problem. And in particular, not income inequality.

It is Not Income Inequality That We Should Worry About

One of the main reasons that people believe that the UK does not have a problem of inequality is that it does not have an obvious problem of income inequality. The same ONS data suggest that, in recent years, purely in terms of earned income, everyone has been in it together.

This picture seems to indicate a society which is coming together: up to a point, the poorer you are, the faster your income has been growing. The ratio of pay at the top to pay at the bottom has been narrowing. What’s not to like?

One problem with this picture is that it is partial: it includes only earnings – wages and salaries. Seriously wealthy people do not get much of their wealth in this way – it would be tax-inefficient to do so – but in the form of dividends and capital gains. According to HMRC data analysed by The Guardian,

“Income from property, interest, dividends and other investment income – sometimes called unearned income, as most of it does not come directly from work – rose by more than 40% between 2010-11 and 2015-16, the most recent year for which HMRC figures are available.

However, the gains were massively concentrated among the top 10% of Britons, whose unearned income doubled from an average of £19,000 each to more than £38,000 – well above the average household income of around £25,000 in 2015-16.”

Unearned income, being related to wealth rather than wages, is bound to be very highly skewed as wealth inequality is always higher than wage inequality. More than 90% of unearned income goes to 6-7% of the population and other HMRC data shows that the average investment income of the highest-earning 10% of trusts nearly doubled between 2010-11 and 2015-16, from £108,000 to almost £200,000 – again boosted by rising dividends.

So the gap between the two lines is driven, not by earnings inequality, but by inequality in unearned income which in turn is driven by wealth inequality. And wealth inequality shows a much clearer picture.

In summary, if you depend on working for your money, you have been getting poorer; if you depend on returns from your capital, you have been getting richer. Work has become the route into poverty, not out of it.

Policy Should also Tackle Lower Productivity Growth

To better understand what has driven mass impoverishment in the UK, we can use the data in the first chart to compare:

  • the way in which median income has in fact changed since 2010;
  • the way it would have changed had we experienced the actual post-2010 economic growth, but with pre-2010 levels of inequality; and
  • the way it would have changed had we experienced pre-2010 levels of growth and inequality.

The results are shown below.

Actual median earnings have fallen by 4% since 2010. If earnings had kept pace with growth in GDP per capita (i.e. actual growth but with fixed inequality), they would have risen by 6%. And if we had had the same growth rate as from 1997-2010 (a very low benchmark, since that period included the Global Financial Crisis and Great Recession which followed it) they would have risen by 9%.

With sound management of the economy, we should probably have expected median wages to be between 10% and 20% higher today than they were in 2010. That is between 14% and 24% higher than they are today.

As the chart above shows, rising inequality is the largest factor, but the lower productivity growth is also critical. We need both to grow the pie and to share it more fairly.

Policy formulation is complex, but there are only fundamentally four types of policy. Each policy either grows the pie or it doesn’t; and it either shares the benefits of that growth fairly or it doesn’t. That gives us four types of policy:

  • Type I: captured growth policies,
  • Type II: shared growth policies,
  • Type III: vulture policies and
  • Type IV: balancing policies.

This simple framework tells you how we got into the mess we are in, and how we can get out.

We got into this mess because we have had far too many captured growth policies and vulture policies, and far too few shared growth policies and balancing policies.

And we can get out if we focus as much as possible on Shared Growth policies. and recognise that where we adopt captured growth policies, they need to be balanced. And of course if we stop introducing vulture policies.

It is not even difficult to come up with a suitable portfolio of policies: the Final Report of The Commission on Economic Justice has done a good job of producing such a portfolio – to give just one example – so no politician should claim that lack of policy options is the problem.

We really just need to take 5 simple steps to address mass impoverishment in the UK.

If this matters to you, please do sign up and join the 99% Organisation.