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Income inequality in the United Kingdom

A first glance at income distribution in the UK

  • Income inequality refers to the difference in how income is distributed among individuals in society. Income is defined as household disposable income in a particular year. It consists of earnings, self-employment and capital income and public cash transfers; income taxes and social security contributions paid by households are deducted. The income of the household is attributed to each of its members, with an adjustment to reflect differences in needs for households of different sizes.
  • Income inequality among individuals may be measured by different indicators. One of the most used indicators of inequality is the Gini coefficient, which is based on the comparison of cumulative proportions of the population against cumulative proportions of income they receive, and it ranges between 0 in the case of perfect equality and 1 in the case of perfect inequality.
  • Income inequality in the UK is the sixth largest in the OECD, in terms of the Gini coefficient, and has been well above the OECD average in the last three decades. In 2012 , the average income of the top 10% was 10.5 times higher than that of the bottom 10%, up from a ratio of 7 to 1 in the mid-1980s and 9 to 1 in the mid-1990s. This compares to an OECD average of 9.6 to 1 in 2013.
  • The OECD defines the poverty line as half the median household income of the total population. A household is considered poor by the OECD if its disposable income is below the poverty line. For a household of four people the poverty line in the UK stands approximately at 17000 UK pounds a year. Income poverty in the UK, concerns around 10.5% of the population, a rate close to the OECD average of 11%.
  • Between 2007 and 2012 the average household disposable income in the UK fell by accumulated 8.6%, less at the bottom tenth of the distribution (6%) and more at the top tenth (11%).

Why is income inequality important for the United Kingdom?

The UK economy has been effective in creating jobs in the recovery from the Great Recession. Unemployment is low relative to other countries and total employment is at an all-time high. However, many of the new jobs are selfemployed and part-time jobs.

Non-standard workers (employees in temporary and parttime contracts and self-employed) earn considerably less than standard workers (employees in full-time jobs). In the UK, the annual earnings of self-employed workers are 50% lower than of standard workers. Temporary workers earn 20% less per hour than their standard counterparts, while this reaches 30% less for part-time workers.

Part-time jobs and self-employed work do not improve the chances of getting a permanent full-time job compared to being unemployed. In fact, in the UK, the self employed are less likely of moving into a standard job than the unemployed.

Non-standard work increases inequality and poverty. In the UK, despite the strong poverty-reducing effect that the tax-benefit system has on households with non-standard workers, the poverty rate for households relying solely on non-standard work is 20%. That is 5 1/2 times higher than for households relying on standard work.

The tax and benefit system discourages the transition from part-time to full-time work in the UK as over two thirds of additional earnings would be taken away by higher taxes and reduced benefits, in particular income tax, housing and family benefits. Self-employed workers face considerably different fiscal treatment. Although they are not eligible for statutory sick pay, they pay considerable lower social insurance contributions.

Taxes and benefits reduce income inequality among the working-age population by a quarter in the UK. This is in line with the OECD average, but below other European countries such as France (33%), Germany (29%) or the Nordic countries (33%).

Changes in taxes and benefits have reduced household income on average in the UK since 2007. Main losers were unemployed low-earning families without children and higher-earning families. Middle-earnings families benefited from the rise of the income tax basic allowance. While in other countries income tax changes played an important role, in the UK fiscal consolidation was driven mainly by changes in benefits.

The appreciation of property prices well above inflation has been a key factor leading to higher median wealth in the UK compared to other OECD countries.

The increase in female employment participation and narrowing of the gender wage gap had a strong equalising effect on the distribution of household income in the UK. Had the proportion of households with working women and the gender wage gap remained the same as 20 years ago, inequality would have been almost 5 Gini points higher, i.e. approaching 0.40.

What can policy makers in the United Kingdom do?

To tackle inequality and promote opportunities for all, countries should adopt a comprehensive policy package, centred around four main areas: Promoting greater participation of women into the labour market, fostering employment opportunities and goodquality jobs; strengthening quality education and skills development and adaptation during the working life; and a better design of tax and benefits systems for efficient redistribution. In the United Kingdom, this would include initiatives such as:

  • Improve work incentives for part-time workers, particularly women. Reform of childcare elements of working tax credit by increasing refund rate, reducing taper rate or introducing a disregard for second earners in couples.
  • Increase the value of free childcare by increasing flexibility for users and reduce the cost by increasing flexibility of provision.
  • Close monitoring of implementation, distributive and labour market incentive effects of the universal credit reform, designed to simplify the means-tested benefit system.
  • Reduce youth labour market problems by investing in qualification, reduce school dropouts. Improve career guidance and encourage the combination of work and study.
  • Increase taxes on wealth rather than labour. For example, update property valuations of the council tax to support public finances, improve equity and dampen large swings in house prices.

Methodology and conceptual issues

There are a number of conceptual issues to take into account when trying to define how rich or poor someone is relative to the rest of the population. To help you better understand our methodology, here are some of the questions we considered when building Compare your income

Where do the data come from?

Most of the data on the actual distribution of income are drawn from the OECD Income Distribution Database. This database is based on national sources (household surveys and administrative records) and on common definitions, classifications and data-treatments. The method of data collection used for the OECD Income Distribution Database aims to maximise international comparability as well as inter-temporal consistency of data. This is achieved by a common set of protocols and statistical conventions (e.g. on income concepts and components) to derive comparable estimates. Due to the increasing importance of income inequality and poverty issues in policy discussion, the database is now annually updated. The OECD is currently working on extending its database to a number of other key partner countries.

How is income defined and why do we consider net income?

The definition of income used here refers mainly to cash income - excluding components such as imputed rents - regularly received over the year. Net income is defined as total market income (i.e. gross earnings, self-employment income, capital income), plus the current transfers received, less the taxes and social security contributions paid. This is the income that people have available to buy goods and services, so it is a better measure of material living standards than pre-tax income or some measure of earnings alone.

Why is income measured at the level of the household?

The welfare of an individual in a household will depend not only upon their own income, but also on that of other household members. By measuring income at the household level, we are implicitly assuming that all individuals within the household are equally well off and therefore occupy the same position in the income distribution. In practice that might not be true, but it is the least arbitrary assumption that we can make based on the available data.

The OECD Income Distribution Database provides information on the equivalised disposable (i.e. net) income. 'Equivalising' means adjusting a household's income for its size, so that we can look at the income of all households on a comparable basis. The needs of a household grow with each additional member but - due to economies of scale in consumption- not in a proportional way. Needs for housing space, electricity, etc. will not be four times as high for a household with four members than for a single person. With the help of equivalence scales each household is assigned a value in proportion to its needs. The equivalence scale used in the OECD Income Distribution Database divides household income by the square root of the household size. This implies that, for instance, a household of four persons has needs twice as large as one composed of a single person.

To bring back data at the household level, we then multiply income statistics available in the OECD Income Distribution Database by the square root of the household size. For instance, in the case of a household consisting of a couple with two children, we multiply the income data from the OECD Income Distribution Database by two (i.e. square root of four).

How is the poverty line computed?

We compute the income needed to be considered non-poor as half the median income of households of the same size of the respondent's. The median income is the income that divides the income distribution into two equal groups, half having income above that amount, and half having income below that amount.

Data on median income come from the OECD Income Distribution Database

How are 'income diagrams' computed?

In order to further compare the perceived inequality in a society with the actual distribution of income, we divide the population into seven income classes. The 'lower-income' class (lowest bar) covers all individuals with a net income below 50% of median income of the total population. Therefore, the demarcation of the lowest group is equal to the definition of poverty used in this tool. The 'average-income' class covers all individuals with a net income between 50 and 150% of the median income and spans three bars: from 50 to 80% of the median income; from 80 to 110% of the median income; and from 110 to 150% of median income. Similarly, the 'higher-income' class identify all individuals with a net income above 150% of the median income and covers the three highest bars of the diagrams: from 150 to 200% of the median income; from 200 to 250% of the median income and above 250% of the median income.

Obviously, the demarcation of classes remains somewhat arbitrary. However, the demarcation of single groups is not the focus of our analysis. The intention of the definition of these income classes is basically the graphical illustration of the density function of incomes.

Drawing such income diagrams requires information on income at the percentile level, which is currently not available in the OECD Income Distribution Database. For most OECD countries, information on income percentiles have been provided to the OECD by national data providers, and is based on those national sources that are deemed to be most representative for each country. Such information is currently not available for four OECD countries: Chile, Japan, Korea and Turkey.

To which year do data refer?

The information available in the OECD Income Distribution Database is more up-to-date when compared to information available through many other statistical sources, but still reflects the long time-lags that characterise data collection in this field in most OECD countries. For most countries data on income and poverty shown in this tool refer to 2013 or 2012. To bring the figures up to date, we have adjusted them in line with changes in the consumer price index for all goods up to 2014.