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Wealth and Income Inequality in Britain

The issue of inequality has come into increasing focus over recent years. The impact of the COVID-19 pandemic raises further concerns that these inequalities may be exacerbated further. Here we provide an overview of some of the key patterns in current levels of wealth and income inequality in Britain. They show, for example, the markedly higher degree of inequality in wealth relative to income, the importance of property wealth and private pension wealth in determining levels of wealth, and the considerable variation in average wealth levels of households by age and location.

According to the 6th round of the Wealth and Assets Survey the aggregate wealth of British households was £14.63 trillion in April 2016 to March 2018. This compares with £12.57 trillion in the previous survey which ran from April 2014 to March 2016. This amounts to a 16.3 per cent nominal increase. In real terms, after adjusting for consumer price inflation, the increase was 13.1 per cent. Furthermore, when compared with the first round of the survey in July 2006 to June 2008, there has been a nominal increase in the aggregate wealth of British households of 74 per cent and a real increase of 41 per cent.

What is wealth?

An important question to ask when reflecting on the growth and distribution of wealth across households is what wealth comprises. In fact, it comprises one of four components:

  • Net Financial wealth – the value of financial assets (savings and financial investments) less any financial liabilities (loans and arrears)
  • Physical wealth – the value of household contents, possessions, valuables and vehicles
  • Private pension wealth – the value of private pensions, such as occupational pensions and personal pensions
  • Net property wealth – the value of any property owned (including other land/properties owned abroad) less the value of any loans or mortgages secured on these properties.

Figure 1 shows the evolution of aggregate wealth over the last two surveys (at constant 2016-18 prices) by the four component parts. Two components dominate the aggregate wealth of British households: property wealth (35 per cent) and private pension wealth (41-42 per cent). Financial wealth is the third largest component (14 per cent), while property wealth is the smallest component (9 to 10 per cent). (Click here for a PowerPoint of the chart.)

Trends in the average wealth of households

To help contextualise the size of wealth and begin to think about its distribution, rather than look at aggregate household wealth we can instead look at the average wealth of British households.

Figure 2 shows the average wealth (at constant 2016-18 prices) as measured by the mean (aggregate divided by the number of households) and the median (the middle household). The mean wealth of households is seen to be greater than their median wealth. In April 2016 to March 2018, average wealth as measured by the mean was £564,300 (an increase of 40.3 per cent over July 2006 to June 2008), whilst the average wealth of each household as measured by the median was £286,600 (an increase of 28.5 per cent over July 2006 to June 2008). (Click here for a PowerPoint of the chart.)

The higher mean value of wealth relative to the median value shows that the distribution of wealth is unequal. Therefore, the mean-to-median ratio is an indicator of inequality. In April 2016 to March 2018 the mean-to-median ratio was 1.97, up from 1.94 in April 2014 to March 2016 and 1.77 in July 2008 to June 2010, and 1.8 in the first survey in July 2006 to June 2008. This metric is therefore consistent with a more unequal distribution of wealth having arisen since the second survey in July 2008 to June 2010, a period during which the UK and global economy was been buffeted by the effects of the financial crisis and the associated economic downturn.

Trends in the average income of households

Figure 3 shows the mean and median values of disposable income (adjusted for the number and age of individuals comprising each household). Mean disposable income of UK households in financial year ending (FYE) 2018 was £35,928, a 0.5 per cent real decrease over FYE 2017, whilst median wealth (middle household) was £29,598 in FYE 2018, a 1.5 per cent real increase over FYE 2017. (Click here for a PowerPoint of the chart.)

The higher mean value of disposable income relative to the median value is indicative of inequality in disposable income. In FYE 2018 the mean-to-median ratio for disposable income was 1.21, down from 1.24 in FYE 2017 and a peak of 1.27 in FYE 2014, but higher than the 1.10 in 1978. The longer-term growth in the inequality of income helps to exacerbate existing wealth inequalities.

Comparing the inequality of income and wealth

Figure 4 shows starkly the current inequality in wealth as compared to that in income. It does so by plotting their respective Lorenz curves. The curves show the proportion of overall wealth or income attributable to a given proportion of households. For example, 50 per cent of households have close to 28 per cent of total disposable income and a mere 8.5 per cent of aggregate wealth. (Click here for a PowerPoint of the chart.)

The inequality shown by the Lorenz curves is especially startling when we look at the top and bottom deciles. The bottom decile has just 2.9 per cent of income and only 0.07 per cent of wealth. Meanwhile the top 10 per cent of households have 28.5 per cent of income, almost the same as the first 50 percent of households, and some 44.6 per cent of wealth, with the previous 90 per cent of households having 55.4 per cent of wealth.

The Lorenz curves allow for the calculation of the Gini coefficient. It measures the area between the Lorenz curve and the 45 degree line consistent with zero inequality relative to the total area below the 45 degree line. Therefore, the Gini coefficient can take a value of between 0% (no inequality) and 100% (total inequality – where one person has all the wealth). Unsurprisingly whilst the Gini coefficient for disposable income in the UK in FYE 2018 was 34.7 per cent, that for aggregate wealth in Great Britain in April 2016 to March 2018 was significantly higher at 63.3 per cent.

The Gini coefficient for disposable income has risen from 25.5 per cent in 1977 to a peak in FYE 2008 of 38.6 per cent. It has therefore eased during the 2010s, but is nonetheless 13 percentage points higher today than it was four decades ago. Meanwhile, the Gini coefficient for wealth at the time of the first survey from July 2006 to June 2008 was 61 per cent. It has been unchanged at 63 percent over the last three surveys.

Inequality in wealth by component, location and age

It is important to recognise the inequalities in the components of wealth. This has particular importance when we are trying to understand how wealth varies by household characteristics, such as age and location.

Figure 5 shows that the highest Gini coefficient is for net financial wealth. This stood at 91 per cent in April 2016 to March 2018. This extremely high figure shows the very high levels of inequatity in net financial wealth. This reflects the fact that some households find themselves with negative net financial wealth, such that their debts exceed their assets, whilst, on the other hand, some households can have large sums in financial investments. (Click here for a PowerPoint of the chart.)

We saw at the outset that the largest two components of wealth are property wealth and private pension wealth. The Gini coefficients of these two have in recent times moved in opposite directions by roughly similar magnitudes. This means that their effects on the overall Gini coefficient have offset one another. Perhaps for many people the rise in Gini coeffcient for property from 62 per cent in July 2006 to June 2008 to 66 per cent in April 2016 to March 2018 is the inequality measure that resonates most. This is reflected in regional disparities in wealth.

Figure 6 shows the geographical disparity of median household wealth across Britain. The regions with the highest median wealth are the South East, South West, London and the East of England. They have the highest contributions from net property wealth (40.4 per cent, 35.6 per cent, 41.7 per cent and 37.2 per cent respectively). The region with the lowest median total wealth, the North East, has the least total wealth in net property wealth (24.8 per cent). (Click here for a PowerPoint of the chart.)

Property wealth and private pension wealth also contribute to disparities in wealth by the age of the head of the household, also known as the household reference person or HRP. In April 2016 to March 2018 the mean wealth where the HRP is 25-34 was £125,700, rising to £859,200 where the HRP is 55-64 and then falling to £692,300 when the HRP is 65 or over. This is consistent with households accruing wealth over time and the using wealth to help fund retirement.

Where the age of the HRP is 55-64, mean property wealth in April 2016 to March 2018 was £255,800 compared to £53,700 where the HRP is 25-34. Meanwhile, where the age of the HRP is 55-64, mean private pension wealth was £449,100 compared to just £32,300 where the HRP is 25-34. In respect of property wealth, the deterioration in the affordability of owner-occupied housing over many years will impact especially hard on younger households. This will therefore tend to exacerbate inter-generational wealth inequality.

Whilst this briefing provides an overview of recent patterns in income and wealth inequality in Britain, the articles and press releases below consider the impact that the COVID-19 pandemic may have on inequalities.

Articles and Press Releases

ONS Bulletins

Questions

  1. In what ways can we use statistics to help measure and inform our analysis of inequality?
  2. In what ways can income inequality impact on wealth inequality?
  3. How can wealth inequality impact on income inequality?
  4. What might explain why wealth inequality is greater than income inequality?
  5. Explain how Lorenz curves help to generate Gini coefficients.
  6. Why would we expect the wealth of households with a younger household reference person (HRP) to be lower than that of a household with an older HRP? Would we expect this average to rise over all age ranges?
  7. If you were advising a government on policies to reduce income and wealth inequalities what sort of measures might you suggest?
  8. What is the difference between original income and disposable income?
  9. What is the difference between disposable income and equivalised disposable income?
  10. What role does the housing market play in affecting wealth inequality?
  11. Why is net financial wealth so unequally distributed?
  12. What is meant by health inequality? Of what significance is this for income and wealth inequality?
  13. What is meant by social mobility? Of what significance is this for income and wealth inequality?
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Competition Laws Relaxed to Assist Supermarkets in Response to the Coronavirus

As the Coronavirus pandemic continues to escalate in the UK, the government has been forced to introduce a range of drastic measures, including severe restrictions on movement of people to ensure social distancing. Supermarkets have also been forced to act as they experienced panic buying and struggled to keep up with supply. They responded by starting to impose limits on the number of certain items an individual consumer could purchase and by reducing the range of products they made available. In addition, supermarkets contacted the government to suggest that competition law should be relaxed to allow the rival chains to coordinate their response to the ongoing situation.

WM Morrison, the forth largest supermarket retailer in the UK, was one of the key players lobbying for this change. Their chief executive, David Potts, argued that “There will be legislation that works perfectly in peacetime and not so well in wartime.”

The supermarket industry is in fact a market where the UK competition authorities have expressed considerable concerns in the past regarding a lack of competition (see for example the 2008 market investigation and the recent decision to block the merger between Sainsbury’s and Asda). The supermarkets also previously made similar demands for a relaxation of competition law in the event of a no-deal Brexit.

Despite this, the government has agreed to temporarily relax elements of competition law to help supermarkets respond to the Coronavirus crisis with the Environment Secretary, George Eustice, stating that:

By relaxing elements of competition laws temporarily, our retailers can work together on their contingency plans and share the resources they need with each other during these unprecedented circumstances.

In moves supported by the Competition and Markets Authority, laws enabling them to do so will soon be passed through Parliament. Supermarkets will be allowed to:

  • share data with each other on stock levels
  • cooperate to keep shops open
  • share distribution depots and delivery vans
  • pool staff with one another to help meet demand.

It is also expected that the Groceries Code Adjudicator will take a pragmatic approach to rules previously in place to prevent the big supermarket chains abusing their power over suppliers. These rules previously prevented supermarkets from stopping orders from a given supplier without reasonable warning. However, it is now accepted that they may need to do so in order to focus on supplying a restricted range of essential products.

Such relaxation of competition laws has been rare, with previous examples being measures taken in 2006 for the maintenance and repair of warships and in 2012 during the fuel crisis. In contrast, typically competition law is extremely hot on preventing agreements between firms. This is due to the fact that they distort competition and prevent the considerable benefits that can arise for consumers when firms compete to offer the best deals.

In the extreme situation the UK is currently in, the government’s stance appears to be that there are sufficient other benefits from restricting competition between supermarkets and allowing some degree of cooperation. It is then important that the form of cooperation between the supermarkets is restricted to narrow areas that will help to ensure the continuity of supply. In particular, it would be worrying if the supermarkets started discussing the prices they charge. Already food prices may rise due to increased demand and a potential shortage of supply. Furthermore, many consumers will see their income reduced. Therefore, it is important that coordination between supermarkets doesn’t result in further increases in prices.

It is therefore reassuring that the Government made clear that the relaxation of competition law:

will be a specific, temporary relaxation to enable retailers to work together for the sole purpose of feeding the nation during these unprecedented circumstances. It will not allow any activity that does not meet this requirement.

The Competition and Markets Authority has also stressed that they will not:

tolerate unscrupulous businesses exploiting the crisis as a ‘cover’ for non-essential collusion. This includes exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation.

Once the current crisis is over, it will also be important that the competition authority closely monitors the supermarket sector to ensure that cooperation between the supermarkets ends and normal competitive conduct is resumed.

Articles

Questions

  1. Outline the effects agreements between firms to raiser prices have on economic welfare.
  2. What are the pros and cons of allowing cooperation between the supermarkets in response to the Coronavirus crisis?
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A Keynesian ‘shock and awe’ boost from the Budget

With promises by the newly elected Conservative government to increase investment expenditure on health, education, innovation and infrastructure, it was expected that Rishi Sunak’s first Budget would be strongly expansionary. In fact, it turned out to be two Budgets in one – both giving a massive fiscal boost.

An emergency Budget

The first part of the Budget was a short-term emergency response to the explosive spread of the coronavirus. An extra £12 billion is to be spent on the NHS and other public services. Whether this will be anything like enough to cope with the effects of the pandemic as businesses fail and people lose their jobs remains to be seen. (See the blog A global supply-side shock: the impact of the coronavirus (COVID-19) outbreak.)

A key issue is just how quickly the money can be spent. How quickly can you train health professionals or produce more ventilators or provide extra hospital beds?

This emergency part of the Budget was co-ordinated with the Bank of England’s decision to cut Bank Rate from 0.75% to 0.25%.

This combined fiscal and monetary response to the crisis was further enhanced by the agreement of central banks on 15 March to boost world liquidity by increasing the supply of US dollars through large-scale quantitative easing. The US central bank, the Federal Reserve, also cut its main federal funds rate by one percentage point from 1–1.25% to 0–0.25%.

The planned Budget

The second part of the Budget is to raise government investment by 9% in real terms over the next four years, bringing overall government expenditure to 41% of GDP, financed largely by extra borrowing. As the IFS observes, “That is above its pre-crisis level and bigger than at any point between the mid 1980s and the start of the financial crisis.”

But despite this rise in the proportion of government spending to GDP, in other respects the spending plans are less expansionary than they may appear. Increases in current spending on health, education and defence had already been promised. This leaves other departments, such as social security, facing cuts, or at least no increase. And when compared with 2010/11 levels, if you exclude health, government current spending per head of the population will around 14% lower, or 19% lower once you account for spending that replaces EU funding.

The Chancellor’s hope is that, by focusing on investment, there will be a supply-side effect as well as a demand-side boost. If increases in aggregate demand are balanced by increases in aggregate supply, such a policy would not be inflationary in the long run. But in the light of the considerable uncertainty of the effects of the coronavirus, the plans may well require significant adjustment in the Autumn Budget – or earlier.

Articles

Podcasts and Videos

Official documentation

Questions

  1. To what extent is this Budget ‘Keynesian’?
  2. Is the extra government expenditure likely to crowd out private expenditure? Explain.
  3. Demonstrate the desired long-term economic effect of the infrastructure policy using either an AD/AS diagram or a DAD/DAS diagram.
  4. How is the coronavirus pandemic likely to affect potential GDP in (a) the short run (b) the long run?
  5. Why is public-sector debt likely to soar over the next four years while annual government debt interest payments are likely to continue their gentle decline?
  6. What is missing from the Budget that you feel ought to have been included? Explain why.
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How will immigration controls affect labour supply and wages?

The government has announced outlines of the new system of immigration controls from January 2021 when the Brexit transition period is scheduled to finish. It plans to introduce an Australian-style points-based system. This will apply to all EU and Non-EU citizens. The aim is to attract skilled workers, while preventing non-skilled or low-skilled workers from entering the UK for employment.

But even skilled workers will need to meet three criteria in order to obtain a work visa: (i) having the offer of a job paying a minimum of £25,600 per annum, except in designated jobs where there is a shortage of labour; (ii) being able to speak English; (iii) having qualifications equivalent to A levels.

To apply for a work visa, applicants must have at least 70 points according to the following table:


In certain jobs where there is a shortage of labour, designated by the Migration Advisory Committee (MAC), immigrants will be able to earn a lower income, provided it is above £20,480 per annum. They will earn 20 points for such jobs, which can offset not meeting the £25,600 threshold. Such jobs could include those in healthcare and farming. There will also be temporary visas for seasonal workers, such as fruit pickers.

The government argues that the new system will encourage employers to substitute technology for labour, with greater investment in equipment and computers. This would increase labour productivity and wages without reducing employment.

This is illustrated in the diagram, which illustrates a low-paid job which will be impacted by the restrictions. If there is a rise in productivity through technological change, the marginal revenue product of labour curve shifts upwards from MRPL1 to MRPL2 and offsets the leftward shift in labour supply (caused by the decline in immigration) from ACL1 to ACL2 and the marginal cost of labour from MCL1 to MCL2. Employment is where the marginal cost of labour equals the marginal revenue product of labour. This remains at Q1. Wages are given by the supply curve of labour and rise from W1 to W1. (Click here for a PowerPoint of the diagram.)

Even if the upward shift in the MRPL curve is not sufficient to offset the leftward shift in the labour supply curve, wages will still rise, but there will be a fall in employment.

In higher-paid skilled jobs where people meet the points requirement, there will be little effect on wages and employment, except where people are generally discouraged by a points system, even if they have the points themselves.

The government also argues that there is a large pool of UK residents who can take up jobs that would otherwise have been filled by immigrants. The Home Secretary referred to the 8.48 million people who are economically inactive who could fill jobs no longer filled by immigrants. However, as the data show, most of these people are not available for work. Some 2.3 million are students, 1.9 million are carers at home looking after relatives, 2.1 million are long-term sick and 1.1 million are retired. Only 1.9 million (22.1% of the economically inactive) would like a job and not all these would be able to take up one (e.g. the long-term sick).

One the biggest problems concerns low-paid sectors where it is very difficult to substitute capital for labour through use of technology. Examples include social care, health care, the leisure and hospitality industry and certain jobs in farming. There could be severe shortages of labour in such industries. It remains to be seen whether such industries will be given exemptions or more relaxed conditions by the government in line with advice from the Migration Advisory Committee.

More details will emerge of the points system in the coming months. It will be interesting to see how responsive the government will be to the concerns of employers and workers.

Videos

Articles

Questions

  1. Find out how the proposed points-based system for immigration differs from the current system that applies to non-EU citizens.
  2. What will be the likely impact of reducing immigration of unskilled and low-skilled people?
  3. What barriers are there to substituting capital for labour in the caring and leisure sectors?
  4. What would be the macroeconomic effects of a substantial reduction in immigration?
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A gift for the new decade: working less for more!

A lack of productivity growth has been a major problem for the UK economy over the past decade (click here for a PowerPoint of the chart). Is it possible that the new decade may see a pick-up in the growth in output per hour worked?

One possible solution to low productivity growth is to reduce working hours and even to move to a four-day week, but not to reduce total pay. If people work fewer hours, they may well be more productive in the hours they do work. In fact, not only may output per hour increase, but so too may output per worker, despite fewer hours being worked. What is more, the quality of output may increase with people being less tired and more motivated.

Several companies have experimented with a four-day week, including Microsoft in Japan, which employees 2300 workers. It found that, despite a 20% reduction in hours worked, output per hour worked increased by 40%, with total output thereby increasing. Workers were generally happier and more motivated and asked for fewer days off.

And it is not just a question of output: fewer hours can result in lower costs. The effect on costs will depend on the nature of new work patterns, including whether everyone has the same extra day off.

But a four-day week is only one way of cutting working hours for full-time employees. Another is to reduce the length of the working day. The argument is that people may work more efficiently if the standard working day is cut from eight to, say, five hours. As the first Thrive Global article article (linked below) states:

Just because you’re at your desk for eight hours doesn’t mean you’re being productive. Even the best employees probably only accomplish two to three hours of actual work. The five-hour day is about managing human energy more efficiently by working in bursts over a shorter period.

If people have more leisure time, this could provide a boost to the leisure and other industries. According to a Henley Business School study:

An extra day off could have a knock-on effect for the wider society. We found 54% of employees said they would spend their day shopping, meaning a potential boost for the high street, 43% would go to the cinema or theatre and 39% would eat out at restaurants.

What is more, many people would be likely to use the extra time productively, undertaking training, volunteering or other socially useful activities. Also family life is likely to improve, with people spending less time at work and commuting and having more time for their partners, children, other relatives and friends. In addition, people’s physical and mental health is likely to improve as they achieve a better work-life balance.

So, should firms be encouraged to reduce hours for full-time workers with no loss of pay? Many firms may need no encouragement at all if they can see from the example of others that it is in their interests. But many firms may find it difficult, especially if their suppliers and/or customers are sticking with ‘normal’ working hours and want to do business during those hours. But, over time, as more firms move in this direction, so it will become increasingly in the interests of others to follow suit.

In the meantime, should the government introduce incentives (such as tax breaks) or regulations to limit the working week? Indeed, it was part of the Labour manifesto for the December 2019 election that the country should, over time, move to a four-day week. Although this was a long-term goal, it would probably have involved the use of some incentives to encourage employers to move in that direction or the gradual introduction of limits on the number of hours or days per week that people could work in a particular job. It is unlikely that the new Conservative government will introduce any specific measures, but would probably not want to discourage firms from reducing working hours, especially if it is accompanied by increased output per worker.

But despite the gains, there are some problems with reduced working hours. Many small businesses, such as shops, restaurants and firms offering technical support, may not have the flexibility to offer reduced hours, or may find it hard to increase productivity when there is a specific amount of work that needs doing, such as serving customers.

Another problem concerns businesses where the output of individuals is not easy to measure because they are part of a team. Reducing hours or the working week may not make such people work harder if they can ‘get way with it’. Not everyone is likely to be motivated by fewer hours to work harder.

Then there is the problem if reduced hours don’t work in boosting productivity. It may then be very difficult to reintroduce longer hours.

But, despite these problems, there are many firms where substantial gains in productivity could be made by restructuring work in a way that reduces hours worked. We may see more and more examples as the decade progresses.

Podcast

Articles

Report

Questions

  1. Distinguish between different ways of measuring labour productivity.
  2. Give some examples (from the linked references) of employers which have tried introducing a four-day week or reduced hours for full-time workers. What has been the outcome in each case?
  3. In what ways may reducing working hours reduce a firm’s total costs?
  4. What are the advantages and disadvantages of the government imposing (at some point in the future) a maximum working week or a four-day week?
  5. What types of firm might struggle in introducing a four-day week or a substantially reduced number of hours for full-time employees?
  6. What external benefits and costs might arise from a shorter working week?