Resolution Foundation

Against inequality-pessimism

Why it’s reasonable to believe we can narrow income gaps

Britain’s stagnation era has not only diminished expectations about our future growth potential, it has created inequality-pessimism — a sense that it will prove extremely hard to shift the distribution of income in the country.

The unspoken assumption among much of the UK’s senior policy-community, whose education and early careers were forged in the shadow of the long-1980s in which every measure of inequality exploded, is that today’s income distribution is a fact of life, part of our national story and — like the weather — something we often moan about but ultimately need to accept.

This in part reflects the reality that high levels of income inequality — Britain is the most unequal large European economy — have, according to some of the headline statistics, remained broadly stable for over a generation. The scale of these gaps matters in a very real sense: they are part of the reason that low income households in the UK are 27% poorer than their French and German counterparts. And their duration reinforces the impression that they are here to stay.

Yet beneath this apparent stability have been all manner of twists and shifts. These are interesting in themselves, contradict some popular narratives and more importantly, as the Resolution Foundation and LSE’s new Ending Stagnation report argues, help us to think afresh about how to close some of Britain’s yawning gaps.

The New Labour era saw rising incomes across the board while inequality broadly flatlined. The basic story was a rise in pre-tax (or ‘market’) income inequality offset by progressive tax and benefits measures. Key measures pushed earnings in a progressive direction, such as the rise in employment and, crucially, the introduction of the minimum wage. But set against this was slow-burn social change: Britain completed its journey from being a 20th century nation where the highest male earners were significantly less likely to have a working partner than their working-class peers, to being a 21st society where they were far more likely to do so. Meanwhile, the very rich pulled ahead from the upper-middle of society (and everyone one else) while rising housing costs dragged down disposable incomes. Pushing firmly against these forces were major increases in redistributive state support in the form of the ambitious tax credit system that greatly increased the living standards of millions of low-and-modest income families. All told, the result was steadily rising incomes and major reductions in poverty — but flat inequality.

The starkly different 2010s — with its stagnant productivity, slow income growth and long austerity — also saw stability in headline inequality but for different reasons. There was a fall in market income inequality (around 2 percentage points in the Gini) due to weaker post-crash pay performance for many professionals, rising employment concentrated on the bottom half of the income distribution, and more aggressive increases in the wage floor. Indeed, if we exclude the very highest earners there has been something of a silent compression in the shape of the UK’s 21st century pay distribution (which started pre-2010 but accelerated after it). When we compare fairly high pay to low pay — the so called 90:10 ratio — it reveals that wage inequality has been falling steadily since the mid-1990s and has now reached the level it was at over forty years ago when Mrs Thatcher came to power.

These equalising forces have, however, been fully offset since 2010 by deep cuts to the welfare state which have reduced the incomes of the poorest fifth of the country by just under £3,000 a year generating a big rise in destitution. As with the Labour years, though, countervailing factors largely balanced out in terms of measures of inequality.

If we want to chart a course to a more equal Britain in the decades ahead we need to learn from these different episodes and eras — building on some elements and jettisoning others. Steady, but judicious, advances in the wage floor should be maintained as the UK continues its journey towards having one of the highest minimum wages in the world. The gains in the employment rate also need to be consolidated and built on — here, though, we need to recognise that further progress demands a different approach with targeted support for three groups. For parents with young children, the journey to a universal childcare system needs to be completed with direct funding of provision and the progressive disentanglement of support from Universal Credit, improving work incentives and simplifying a horribly bureaucratic system. When it comes to those with ill-health, improved support needs to be twinned with stronger rights for the long-term sick to return to their workplace, learning from our approach to maternity. And when it comes to older workers, reforms to the private pensions’ regime could make it easier to re-enter employment after a spell out, while also strengthening incentives to work longer.

Work-quality, and its link to working hours, need to be at the heart of any new agenda on inequality. Low earners have for several decades been reporting rising levels of work-intensity and falling job-satisfaction. Poor quality employment, not surprisingly, is a major barrier to part-timers working more hours (a recurrent theme in qualitative research) as well as a generator of ill-health. Spreading ‘good work’ will mean raising minimum standards so low earners gain access to more of the things that high earners take for granted — including predictability over hours and decent sick pay — as well as pioneering new sectoral institutions to tackle concentrated problems in some sectors.

Over the longer term higher and fairer pay will require improved workforce skills especially for those not pursuing an academic track. Almost a third of our young people are not undertaking any education by age 18 — compared to just one in five in France and Germany. The UK’s longstanding and large-scale failure on this front is reflected in the fact that the lowest skilled workers are paid less — far less — relative to those with degrees than is the case in peer countries. In the UK those who peak at GCSE (or equivalent) qualifications take home just two-fifths of the earnings of their more-qualified peers — in France or Germany it is three-fifths. Britain’s casual willingness to squander so much young talent is one of its ugliest features and results in low pay, blighted careers and a more unequal country.

Tilting the UK’s distribution of earnings in a more progressive direction won’t, however, suffice. To really lean against overall income inequality, we also need to rewire the social security system. Just as we have an obligation to pensioners, we also have a responsibility to the 11 million people of working age for whom earnings make up less than half of their income, often due to disability or caring responsibilities. As things stand, faster growth and improved earnings would leave them (further) behind. If in the decades ahead we want growth to lift everyone then, ultimately, working-age entitlements need to rise in line with wages. This argument has been won in countries such as New Zealand and Germany and here, too, with respect to pensions — recall, not long ago the pensions earnings link was seen as highly contentious; today, few question it. Sooner or later we need to move to the same approach for all benefits, as well as repairing the gaping holes in today’s safety net like the two-child limit.

The tax system, too, must be smarter, work harder and raise more. For decades it has incentivised the affluent and rich to take their (effective) income as capital gains, encouraged (inequality-increasing) self-employment, and preserved a system of property taxation that, with each passing year, becomes ever more ludicrously iniquitous. Add to this our asinine schedule of marginal effective tax rates which sees parents on £50k-£60k, or indeed high earners on £100k, facing punitively high effective rates we wouldn’t dream of placing on millionaires. Any government with a reforming pulse needs to take all this on.

The world-weary, glass half empty, response is to sympathise but say, alas, these problems are too hard to shift: we have neither the political resolve nor state capacity to change all this. Low quality work is hard-wired into the British jobs model, we’ve failed to create attractive non-academic vocational paths for generations, tax reform is a graveyard, and the resources simply aren’t available to lift benefits. There is a degree of truth to each point. But put them together and it amounts to a counsel of lazy fatalism posing as sage insight.

If your glass is half full, then, overtime, these shifts don’t seem so out of reach. Some build directly on success over recent decades. Others — like improved vocational learning — are issues that a broad swath of opinion can be mobilised behind. And, yes, there will, of course, be a cost — but this shouldn’t be overstated. Over half of the cost of uprating working-age benefits in line with earnings would be met by moving pensions to the same ‘double-lock’ approach. Other nations — including Anglo-Saxon economies like Australia and Canada — succeed with lower levels of inequality than us.

None of this is to say it will be easy. But a high employment, high wage floor, higher skill economy that twins decent jobs with a revitalised welfare system offering a rising social minimum, isn’t an impossibilist dream for 2030s Britain. Progress will come from steady attritional gains rather than transforming ourselves into an entirely different economy. We don’t need to become Stockholm-on-Thames — just a better, fairer, version of ourselves.