The haves and have nots

April 4, 1997

The general election campaign is unlikely to include discussion of poverty or the gap between rich and poor. Tony Atkinson wonders why

Inequality is a major election issue. Even if Labour is cautious about tackling it, others are insisting that inequality form part of the political agenda. The Church and pressure groups are highlighting the fact that Britain is now a highly unequal society and faces a severe problem of poverty.

It is therefore surprising that the Government has not made more of the recent figures published in Economic Trends, which show that the rise in income inequality appears to have come to an end in the 1990s. There has even been a slight decrease in measured inequality. The share of the top 20 per cent in total disposable income, adjusted for family size, fell by two percentage points. As I argued in my presidential address to the Royal Economic Society, the 1980s were an episode of increasing inequality but cannot be extrapolated into a permanent upward trend.

But we should still worry about income inequality for at least two reasons. The first is that it remains high in the United Kingdom; the big increase of the 1980s has not been reversed. The second is that this inequality threatens to have long-run consequences in the form of increased inequality in future generations.

That income inequality is much higher than in the 1970s has been well documented by government statisticians. The series published by the Department of Social Security shows that the share of the bottom 20 per cent in total disposable income fell by a quarter between 1979 and 1991-92, while that of the top 20 per cent rose substantially. The proportion of the population living on incomes below half the average - the European Union poverty line - went up from 9 per cent in 1979 to more than 20 per cent in the 1990s.

One response is to say that this is a worldwide phenomenon. It is true that income inequality has increased in the United States - although significantly less than in Britain - and in certain European countries such as Sweden (starting from a lower base). But there are other major European countries that have not experienced an episode of sharply increasing inequality. Britain stands out as the European Union country where poverty has increased in a sustained way.

Of course, real incomes have increased, which means that the criterion by which poverty is judged has increased too. If we apply the same standard in terms of 1979 purchasing power, then the number in income poverty has remained much the same: five million in 1979 and 5.5 million in 1993-94. But, as Amartya Sen has argued, income is a means to an end. We have to ask what a specified level of income implies in terms of the capacity of people to function. Today's Pounds 65 a week may buy the same goods and services as did the poverty line in 1979, but it may not allow people to participate in today's society in the same way.

Think of someone wanting to compete for a job. Fifty years ago, a person needed a presentable suit to apply for a clerical position. By the 1970s it would have become a handicap not to have had a telephone so that employers could call you for interview. Today you need access to a word processor and possibly a mobile phone.

Low income causes exclusion and raises the risk that the next generation will be excluded too. Just as tall parents tend to have children who are above average in height, so well-off parents tend to have children who are better off than the average.

One important dimension is investment in education. It has long been recognised that parental circumstances affect the ability to finance education and the cost of doing so. This has become a more serious issue with the reduction of state support, and will be intensified if the costs of higher education are transferred still further to students and their families.

But this question should be seen in its wider economic context, including the increased real cost of borrowing and the job market insecurity faced by many parents. In the 1970s real rates of interest were negative: the loan to be repaid fell in value by more than the interest due. In contrast, people can now expect to pay a significant real rate of interest. Moreover, access to borrowing is harder when parents have low earnings or when they (or the lenders) perceive their job prospects to be uncertain.

Those who have gained from the increased inequality of the 1980s will also be able to pass on advantage in the form of material wealth: financial assets and real property. Inheritance has received little attention from economists in recent years, but should now be an active subject of research. Ten years ago, John Kay and Mervyn King argued that even top company executives could not expect to accumulate really substantial wealth. But, as they noted, the situation would change if lower rates of income tax persisted, as has happened. And the accumulation potential of top executives has been transformed by the rise in their remuneration. Kay and King were talking about senior executive board members earning about eight times average earnings, whereas today it could be 50 times. We do not know much about the saving behaviour of these people, but if they accumulate large holdings of shares and real property (for example, farms), then this will lead to an increased role for inheritance in the next generation. Their heirs will enjoy a start in life that will not be shared by the children of those laid off in company downsizings.

Tony Atkinson is warden of Nuffield College, Oxford, and president of the Royal Economic Society. He is writing in a personal capacity.

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