What are the causes of inequality of income and wealth in the UK? To see more of our products visit our website at Tony Darby, Head of Economics and Business Studies, Rugby School

“Britain is an unequal country, more so than many other industrial countries and more so than a generation ago.” – The National Equality Panel, January The richest 10% of the population are more than 100 times as wealthy as the poorest 10%. This top decile has a household wealth of over £850,000 compared to less than £8,000 for those in the bottom decile. Wealth includes assets such as houses, pensions and share portfolios. Britain is an unequal country The richest tenth now have 31% of total income whereas the poorest tenth have just over 1% of total income in Great Britain.

In a free market for labour there will be differences in income between different occupations due to a lack of homogeneity of labour. Graduates are generally paid more than non- graduates within a workplace. This is partly explained by the marginal revenue product of labour, reflecting skills, education and work experience. Education and skills On average a graduate will earn £160,000 more than a non-graduate over a lifetime.

Differences in income may be because of labour immobility. Doctors and dentists only accept new recruits into their professions after a long training period. An increase in demand in these professions cannot easily be matched with a quick change in supply, leading to pay differences between various occupations. In the longer term differences in earnings between groups will attract new entrants to those professions which are most highly paid. Some differences in pay may be explained by geographical immobility of labour. Immobility 1 This is especially due to the large cost of living differences in the UK which makes movement to more expensive areas less attractive. For example, average house prices in London in spring 2011 were £352,000 compared to £103,000 in the north-east of England.

Compensating differentials could be another reason for the differences in income between jobs. This is where workers may expect more compensation for working in jobs which are more dangerous or dirty, or involve shift work or time away from home. This theory of earnings suggest that the workings of the free market within the labour market naturally lead to income and asset inequalities. What it doesn’t explain is why these inequalities are greater in the UK than in many similar countries. Immobility 2

One possible explanation is that there is discrimination in the workplace, even though the Equal Pay Act of 1970 was introduced to ensure that workers were paid the same amount for providing equivalent value to an organisation. A significant pay gap between men and women still exists, with female employees currently receiving 39% less per hour than men. Discrimination can be noted amongst disabled workers, where disabled men earn 11% less than non-disabled men, whilst there is a 22% gap for women. Discrimination can also be on racial grounds. The Equality and Human Rights Commission found that black graduates faced a pay penalty of up to 24% compared to white equivalent workers. Discrimination Clearly differences in pay can not be entirely explained by differences in supply and demand of labour.

The government uses the tax, benefit and minimum wage system to reduce inequalities of income within the UK. Welfare payments are one of the biggest areas of public expenditure. These include housing benefits, single parent benefits, unemployment benefits and family tax credits which are designed to top-up income. The Welfare Reform Bill which started to pass through parliament in June 2011, and puts a cap on benefits of £26,000 per year, may lead to a widening of inequalities. Government policy: welfare payments The increase in VAT in January 2011 from 17.5% to 20% may have regressive effects. Whilst making the majority of goods more expensive for everyone, poorer members of society will find it more difficult now to purchase goods.

This was first introduced by a Labour Government in In October 2011 the minimum wage for those over 21 years of age will be £6.08 per hour. The NMW has increased by nearly 65% since its introduction and has been much higher than price inflation or earnings growth. It has been suggested that the NMW might increase inequalities as it could potentially lead to increased unemployment in some low paid sectors. However the Low Pay Commission Report of 2011 says that the evidence available suggests that minimum wages do not appear to have cut employment to any significant degree. The National Minimum Wage But, the Department of Work and Pensions has shown how there has been a real decrease of about 12% in the value of their incomes for the poorest 10% in the UK, whilst there has been a real increase of approximately 37% for the top 10% over the ten years to

Vast inequalities of income and wealth exist within the UK and these have increased over recent years. Many of these differences are due to the normal functioning of the free market, reflecting differences in levels of skills, education and talent. However, years after laws were introduced to ensure equal pay for those doing the same job, pay differentials still exist between gender and ethnic groups. Conclusions But, there is a welfare state that limits some of the inequalities that exist within the UK. Currently recent policies have made income disparities worse. It is likely that these differences will become larger in future years.