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IFS Understanding recent trends in income inequality Alissa Goodman Institute for Fiscal Studies

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Overview Recent changes in income inequality very different to the 1980s Remarkable stability across much of the distribution Inequality still high, if not rising much

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Measuring income inequality Follows Governments low income statistics: –Current income from all sources –Summed across all household members –Net of direct taxes, including benefits –Equivalised for family size and composition

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The Income Distribution: 2002/03

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How unequal are we? 2002/03 Share of top 1% 8.0% Share of top 10% 27.7% Share of bottom 10% 2.8% 90/10 ratio 4.0 Gini coefficient 0.34

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The Gini Coefficient, 1961-2001

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Drivers of rising inequality in 1980s: Labour market outcomes Participation: falling amongst low-skill men Wages: increasing returns to education Institutional change: e.g.union decline Demographic change increasing numbers of single adult households Fiscal policy changes Overall impact regressive through 1980s

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How were the 1990s different? Growth in income inequality slower

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Inequality growth was slower Gini coefficient

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Inequality growth was slower Gini coefficient

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How were the 1990s different? Growth in income inequality slower Growth in income inequality localised –Remarkable stability across most of the population

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Inequality growth was localised 90/10 ratio

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Inequality growth was localised 90/10 ratio

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Inequality growth was localised Income growth: 1980s

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Inequality growth was localised Income growth: 1980s

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Inequality growth was localised Income growth: 1990s

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How were the 1990s different? Growth in income inequality slower Concentrated in small parts of the distribution –Remarkable stability across most of the population Increased inequality driven by top and bottom

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Inequality growth was localised 1996- 2002

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Inequality growth was localised 1996/7- 2001/02

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Inequality growth was localised 1996/7- 2001/02

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Inequality growth was localised 1996/7- 2001/02

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Inequality growth was localised 1979- 1990

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How were the 1990s different? Growth in income inequality slower Concentrated in small parts of the distribution –Remarkable stability across most of the population Increased inequality driven by top and bottom Low income groups kept pace

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Low incomes kept pace

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How were the 1990s different? Growth in income inequality slower Concentrated in small parts of the distribution –Remarkable stability across most of the population Increased inequality driven by top and bottom Low income groups kept pace Consumption inequality did not grow

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What changed? Labour market outcomes Increases in participation: some recovery among low-skilled Wages: stable returns to education as supply of educated workers has grown (Institutional change: minimum wage)

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Earnings inequality

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What changed? Labour market outcomes Participation: some recovery among low-skilled Wages: stable returns to education as supply of educated workers has grown (Institutional change: minimum wage) Fiscal policy changes Overall impact progressive since 1999

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Fiscal policy since 1997

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Gross income inequality

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Conclusions Top and bottom incomes drove inequality growth over 1990s Most of the distribution if anything, equalised Longer-term context: inequality at 1950s levels Future: child poverty targets imply more redistribution

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Distribution of income and wealth Define income Market income= wages/salaries/profit/rent Gross income= market income + transfers Disposable income= gross.

Distribution of income and wealth Define income Market income= wages/salaries/profit/rent Gross income= market income + transfers Disposable income= gross.

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