Does the UK have a bigger gap between rich and poor than any other developed country? Neil Codd, Head of Economics, City of London School for Girls To see more of our products visit our website at www.anforme.co.uk 1 1 1 1

Does it matter? 1 Yes! The gap in the UK has widened since the 1970s and is now one of the widest in the developed world. C Higher levels of inequality can have negative impacts on social cohesion leading to a range of problems. C These include higher rates of violent crime and poor health, less social mobility and a more dysfunctional democratic system. C It may have even contributed to the financial crisis as people borrowed to keep their consumption levels closer to those getting richer. C 2 2 2 2

Does it matter? 2 No! Others argue that this gap is not worth worrying about. C Indeed redistributing income from rich to poor might negatively impact potentially more important indicators of well being and progress. C These include GDP growth, unemployment, GDP per capita, or even the GDP per capita of the poorest ten per cent of households. C 3 3 3 3

Measuring the gap: things to consider 1 What should we measure? C The two obvious options are income and wealth. C These can give very different results as for example, Sweden has a relatively small gap between the incomes of rich and poor but the wealth gap is large. C Therefore using income or wealth may be too simplistic and some measure of welfare might be more accurate. C Examples might include gaps in: health, educational achievement and employment opportunities. C 4 4 4 4

Measuring the gap: things to consider 2 Who should be included C It is necessary to define who counts as ‘rich’ and who as ‘poor’. C It makes sense to measure inequality by dividing the population into sub-groups according to how rich or poor (in terms of income, wealth or welfare) they are and making comparisons. C This still leaves uncertainty over the size of the groups. Should the ‘poor’ be defined as the bottom 1%, 5%, 20% or even 98%? C Making the sub-groups too large can mask important gaps between rich and poor; making them too small might give too much focus to the extremes of the rich-poor divide. C Another vital decision is whether individuals or households should be compared. C 5 5 5 5

Measuring the gap: things to consider 3 What should be done with the data collected? C Should we aggregate the data for each sub-group, or use median or mean averages? C Should the richest and poorest sub-groups be compared alone or should we look at the gaps between all sub-groups? C The most commonly quoted comparison between the top and bottom is the ratio of the earnings of the top 10% to that of the remaining 90% of households by means of the ‘Gini co-efficient’. C 6 6 6 6

How does the UK compare to the rest of the world? 1 We can look at the income gap between high income households and low income households. C The OECD published a report in May 2013 which shows the UK certainly has one of the biggest rich-poor income gaps. C Although the United States has the biggest gap between the top 10% and the bottom 10% of average incomes, and also the biggest gap after tax and transfers have been taken into account. C 7 7 7 7

How does the UK compare to the rest of the world? 2 We can also look at the wealth gap between high and low wealth households. C Here the UK is not the most unequal country when comparing the wealth of rich and poor. C According to a 2010 OECD report the USA is more unequal, but so too are countries such as Sweden, Finland and Germany. C In the UK the wealthiest 1% own 10% of the net worth of the country, but the American and Swedish top 1% own 31% and 18% respectively. C So on this measure the UK does not suffer from the biggest gap. C 8 8 8 8

How does the UK compare to the rest of the world? 3 We can also compare the income gap between rich and poor regions. C Measuring regions is problematic and open to manipulation because of the arbitrary borders between regions. C However, there is significant evidence that the UK does suffer from unusually high levels of regional inequality. C The Economist, using OECD figures for small regions in 2011 put Britain at the top of the regional income inequality league table. C In 2010 the mean income of the richest region was over nine times that of the poorest, whereas in the USA it was five times. C 9 9 9 9

London – income and wealth within regions London may have the biggest gap between rich and poor of any city in the developed world. C In terms of wealth inequality, a study by Professor Dorling in 2010 found that the net worth of the richest 10% of Londoners was 273 times that of the poorest 10%. C Yet in terms of income inequality Los Angeles and New York have a larger Gini co-efficient than London. C At a national level it seems that it is the USA that has the biggest income and wealth gaps in the developed world. C Although this does not mean that the quality of life between rich and poor is wider in the USA than the UK. C 10 10 10 10

Prospects of children – how unconquerable is the gap for the poor? In 2010 the OECD investigated this issue by measuring ‘intergenerational social mobility’. C The USA compares badly with the rest of the OECD members, yet so does the UK. C On one measure used the UK is worse than the USA since a father’s wage has a bigger influence on his son’s wage in the UK than in any other country analysed. C But in terms of educational attainment the UK does not fair so badly as the UK does not have as big a gap as the USA and six other European countries. C 11 11 11 11

Regional life expectancy - gap between rich and poor A second way to compare the impact of the rich-poor gap is to look at life expectancy. C Both the USA and the UK show a clear correlation between the income level of an area and life expectancy of its residents. C In the UK there is a 13.5 year difference between the male life expectancy in Kensington and Chelsea compared with the city of Glasgow. C However, it seems the gap is even wider in the USA. C The male life expectancy in McDowell West Virginia is 63.9 years (median income $39,500) but 81.7 years in Fairfax Virginia (median icome over $100,000). C 12 12 12 12

Conclusion: does the UK have a bigger gap between rich and poor than any other country? 1 This article has shown that the answer to this question depends on which data is used, and how we define ‘rich’, ‘poor’ and ‘bigger gap’. C Much of the evidence suggests that the USA has a bigger gap that the UK. C The USA has the larger gap between the highest and lowest income earners on the two most frequently quoted measures of income inequality and also has the largest gap in terms of wealth inequality. C However, the UK still has some of the largest observable gaps between rich and poor. C These are widening as London and the South East recover from the recession more quickly than the rest of the country. C However, the economic success of London is not evenly spread among its citizens, and in terms of wealth inequality it has the largest gap in the developed world. C 13 13 13 13

Conclusion: does the UK have a bigger gap between rich and poor than any other country? 2 The gap between rich and poor in the UK seems particularly insidious in the way that the social class a person is born into has more of an impact on their future earning potential than possibly the rest of the developed world. C This suggests that potentially productive children born into poor households are not having access to paths that take them to jobs requiring the best workers. C The gap between rich and poor in the UK does not show signs of closing and is unlikely to do so in the future without government help. C To close the gap right wing economists look to supply side reforms, welfare reform and reduced government intervention to promote private investment in poorer regions. C Some left wing economists look to redistribution through fiscal transfers. C Others such as Ed Milliband, also look to ‘predistribution’ which aims to raise the wages of the poorer workers by improving their skills and ensuring better labour protection. C 14 14 14 14