Inequality has slightly increased but poverty seems to have sustainably declinedby Donald Hirsch / May 20, 2004 / Leave a comment
Are income inequality and poverty in Britain rising or falling? The answers today are less clear-cut than in the past. Until the mid-1970s, incomes were very gradually becoming more equal, a trend some economic historians trace back several centuries. In the Thatcher decade, the trend was reversed, making incomes less equal than at any time since the second world war. In the 1990s, the trend flattened. Under New Labour, there has been a small increase in inequality but the first sustained decline in poverty for a generation.
Long-term trends in some of the forces that determine income distribution are now far from clear. We need to understand these forces better – not least because, for the first time in a generation, there is a cross-party consensus that relative poverty matters.
What are the recent trends?
The basic maths of poverty and inequality is not difficult. Poverty rates most commonly measure the number of people living below a particular income level, relative to society’s norms (see “Measuring poverty,” below). Inequality is a measure of the distribution of income, which calculates how far the rich are above average as well as how far the poor are below it.
The story of how inequality has risen but poverty fallen since Labour came to power is eloquently set out by the Institute for Fiscal Studies in calculations shown in Graph 1. The bars indicate how fast incomes rose in real terms for people at different points in the distribution. For example, the income of a person at the 19th percentile (someone whose income is greater than 19 per cent of the population) has grown by an average of 3 per cent a year since 1996-97. The biggest rise was at the very top: those on the top 1 per cent of incomes did best, and have consistently done well in the past two decades, as City and top professional earnings have risen sharply. This development has fed inequality. But those placed about 20 per cent from the bottom of the distribution have also gained. These are typically people who have found employment during a period of jobs growth, and who have benefited from the new tax credits. Some have risen above the poverty line as a result, so poverty is falling. Their gains have also helped to reduce inequality, but this effect is offset by the fact that the very poorest 10…