IFS
Living Standards and Inequality
Luke Sibieta
Institute for Fiscal Studies
13th March 2006
Headlines
• Average income
– Relatively slow growth in average income recent years
– Lone parents and single pensioners catching up
© Institute for Fiscal Studies, 2005
Headlines
• Average income
– Relatively slow growth in average income recent years
– Lone parents and single pensioners catching up
• Inequality
– Little change in inequality in the last year
– Overall level the same as in 1996/97
– ‘Underlying’ income inequality is not rising
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How incomes are calculated
•
•
•
•
•
Income as a measure of living standards
Net of all direct taxes and benefits
Measured at the household level
Adjusted for family size (equivalised)
Presented both before and after housing
costs
• Based on Family Resources Survey (FRS)
– All statistics subject to sampling error
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The Income Distribution in 2004/05
Number of individuals (millions)
2.0
Median, £349
Mean, £427
1.5
1.0
0.5
0.0
0
100
200
300
400
500
600
700
£ per week, 2004/05 prices
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800
900 1,000 1,100
£ per week, 2004/05 prices
Average income since 1996/97
450
400
350
300
250
1996/97
1998/99
2000/01
Mean
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2002/03
Median
2004/05
Average income growth
Labour: 1996/97-2004/05
Conservatives: 1979-1996/97
2002/03-2003/04
2003/04- 2004/05
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Mean
Median
2.4
2.2
Average income growth
Labour: 1996/97-2004/05
Conservatives: 1979-1996/97
2002/03-2003/04
2003/04- 2004/05
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Mean
Median
2.4
2.1
2.2
1.6
Average income growth
Labour: 1996/97-2004/05
Conservatives: 1979-1996/97
2002/03-2003/04
2003/04- 2004/05
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Mean
Median
2.4
2.1
2.2
1.6
-0.2
1.4
0.5
1.1
Relative to the Median
Lone parents and pensioners are
poorest, but catching up
1.4
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
Lone parents
Single
pensioners
Pensioner
couples
1996/97
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Couples with
children
2004/05
Singles without Couples without
children
children
Income inequality
• Popularly defined as ‘the gap between rich
and poor’
• No single agreed measure of inequality
• Important to look at a range of graphical and
summary measures
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Average annual income
growth (%)
Income changes by quintile group,
2003/04 – 2004/05
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Poorest
2
3
4
Income Quintile Group
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Richest
Average annual income
growth (%)
Income changes by quintile group,
1996/7 – 2004/05
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Poorest
2
3
4
Income Quintile Group
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Richest
Income changes by percentile
group: 1996/97 – 2004/05
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
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50
60
70
80
90
Income changes by percentile
group: 1996/97 – 2004/05
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
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50
60
70
80
90
Income changes by percentile
group: 1996/97 – 2004/05
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
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50
60
70
80
90
Income changes by percentile
group: 1996/97 – 2004/05
Average annual income gain (%)
5
4
3
2
1
0
10
20
30
40
-1
Percentile point
-2
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50
60
70
80
90
The Gini Coefficient:1979–2004/05
Gini Coefficient
0.4
0.3
Thatcher
Major
Blair
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-0
5
20
04
-0
3
20
02
-0
1
20
00
-9
9
19
98
-9
7
96
19
19
93
-9
4
91
19
89
19
87
19
85
19
83
19
81
19
19
79
0.2
Summary measures of income
inequality 1996/97 – 2004/05
Relative to 1996/97
1.2
1.15
1.1
1.05
1
0.95
1996/97
1997/98
1998/99
Gini
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1999/00
MLD
2000/01
2001/02
Atkinson
2002/03
90/10
2003/04
2004/05
What has happened to inequality?
• Inequality remains roughly the same as in
1996/97
• Rose then fell again on measures that take
into account all points in income scale
• But equalising except over bottom and top
extremes
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What has happened to the
“underlying” distribution of income?
• Inequality roughly unchanged when looking at
incomes after taxes and benefits
• But tax and benefit reforms have favoured
poorer households
• Suggests gross incomes (before tax and
benefits) are becoming more unequal?
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Change since 1996/97
Change in net and gross income
inequality 1996/97 – 2004/05
0.02
0.015
0.01
0.005
0
1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05
Net Income Gini
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Gross Income Gini
Net and gross income inequality
follow similar patterns
• Underlying incomes have not become more
unequal
• How can this be reconciled with redistributive
nature of tax and benefit reforms?
• Were tax and benefit changes necessary to
keep level of redistribution roughly constant?
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Conclusions
• Average income growth by 2.2% p.a. under Labour
– But slower growth in recent years
• Income inequality rising and then falling under Labour
– Little overall change
• The future
– Slower growth in public spending may limit scope for more
redistribution
– Inequality unlikely to return to pre-Thatcher levels any time
soon
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