Inequality illusion

by Stewart Lansley

Most people think they are relatively poorer than they actually are, with the best off being more likely to think they are actually in the middle of the income hierarchy. The poor have the best estimates of their relative position.

In a study of middle income Britain conducted by YouGov for the TUC, a representative sample of the population's income range was asked: 'If everyone's income was arranged in order from lowest to highest, where do you think your income would be on this scale?' (Lansley, 2009). They were offered the choice of 'Towards the bottom', 'Below the middle', 'In the middle', 'Above the middle' or 'Towards the top'. The results are shown in Table 1. All participants have been divided into five income bands (quintiles) on the basis of their actual income. Each group represents a fifth of the population. Their actual position is then compared with their perceived position.

Table 1 Comparing people's actual and perceived position in the income hierarchy

Actual income position
 First quintile
%
Second quintile
%
Middle quintile
%
Fourth quintile
%
Top quintile
%
All
%
Perceived position: 'Where do you think your income would be?''The poor''The lower
middle'
'Middle income
Britain'
'The upper
middle'
'The affluent
and the rich'
 
Towards the bottom56472612628
Below the middle243345381832
In the middle121322383625
Above the middle43493110
Towards the top100272
Don't know343123

Source: Middle Income Britain Survey for the TUC, YouGov, January 2009 (Lansley, 2009)

The final column of Table 1 shows that, on average, respondents tend to understate their true position in the income hierarchy – they think they are relatively poorer than they actually are. Thus, while 25 per cent place themselves in 'the middle', as many as 60 per cent place themselves 'below the middle' or 'towards the bottom'. Only 12 per cent place themselves 'above the middle' or 'towards the top' of the income hierarchy.

This tendency to understate is strongest among those with the highest incomes. The group that does the best in placing themselves are those in the poorest quintile – with 56 per cent saying they are 'towards the bottom'. The proportion of each group that accurately positions itself then steadily falls with just over a fifth of median income households placing themselves 'in the middle' while only 7 per cent of the richest fifth of households place themselves 'towards the top'. As many as 60 per cent of the 'affluent and the rich' group place themselves in or below the middle or towards the bottom of the income hierarchy.

Those in the bottom half of the income distribution thus have a much better grasp of the reality of their place in the social hierarchy than those towards the top of the distribution. 

There are a number of possible explanations for these findings. First, studies have found widespread misunderstanding of the extent of pay, income and wealth gaps (Pahl et al., 2007). A Fabian study for the Joseph Rowntree Foundation published in 2008, for example, found that most participants in their focus groups placed themselves subjectively in the 'middle' of the income spectrum, despite the fact that they were from the full range of socio-economic backgrounds (Barnfield and Horton, 2009). There was, indeed, 'a great deal of surprise expressed about the fact that a salary of £42,900 represented the 90th percentile.' One participant expressed genuine shock, believing that a quarter of the population earned over this figure (Barnfield and Horton, 2009).

Again, it is those on the highest earnings who appear to be particularly out of touch with reality, especially when it comes to their own pay. A survey by British Social Attitudes found that under a half of those with earnings that put them in the top ten per cent identified themselves as top earners. They were much more inclined to place themselves towards the middle.

Second, different income groups tend to have different reference points. Those on lower incomes may be more likely to compare themselves, their work experience and life chances with those close to their own class and social groupings, making them more realistic in their judgement of their social positioning. There is some evidence that middle and lower earners are content as long as they feel better off than their parents (Pahl et al., 2007). Perhaps more insulated from the work and pay experience of others on low and middle incomes, there is also evidence that the wealthy are more likely to compare themselves not with those below them but with those even richer than themselves, and thus to feel that they are not paid enough. As one survey of bankers and lawyers on earnings of over £150,000 found: 'They wanted to compare themselves with richer people, inventing a society in which they are a step or two down from the top. Comparing themselves upwards not downwards, they considered themselves normal, when they are anything but.' (Toynbee and Walker, 2008, p. 24)

Third, it seems to suit the better off to think they are worse off than they actually are. Downplaying their relative advantage by placing themselves nearer the average may bring a degree of psychological denial, a form of defence against charges that they should be making a greater contribution to help those with much lower living standards than themselves.

Finally, social and economic misplacement is part of a much wider phenomenon, a characteristic not just of the better off but of leading opinion formers as well. In effect, the most affluent sections of society are being subtly redefined – by commentators as well as by themselves – as a group that sits nearer the middle than the top. The Conservative MP, Alan Duncan, somewhat gave it away when he described – in 2009 – an MP's salary of £64,000 as 'rations'.

Indeed, the term 'middle Britain' has come to be commonly used, not least by the political, media and marketing classes, to describe a group that mostly embraces the professional middle classes (see The 'squeezed middle' and the 'poor'). In 2008, for example, a number of newspapers ran campaigns on behalf of what they portrayed as the 'victimised middle', a group increasingly 'struggling to make ends meet'. In a three-part series, the Daily Telegraph (Woods, 2008) bemoaned the growing problems facing what they dubbed the 'coping classes': a hard-working, responsible group that, despite earning more than their parents, 'all feel so damned poor'. 

Yet while the Daily Telegraph chose to describe the 'coping classes' as typical of middle Britain, the examples they quoted (priced out of private education, being pulled into the higher rate tax band, etc.) were all of families sitting towards the top of the income distribution. They were, in fact, referring to the high earning professional middle classes, a group the paper claimed was suffering most from economic and social change.

The evidence, however, is that it is the top income groups who have benefited most – in work, pay, housing, education and pensions – from the economic and social repositioning of the last two to three decades. In contrast, it is the bottom half of the income hierarchy that has been steadily falling behind the professional middle classes and the rich in both income and opportunity stakes. Between 1979 and 2008, it was the richest groups in society that gained most from growing average prosperity. In the twenty years to 2000, the richest 1 per cent saw their share of net income double to 10 per cent while the share of the top 10 per cent rose from 26 to 34 per cent (Atkinson and Salverda, 2003; Paxton and Dixon, 2004).

In the USA there is a similar level of unawareness of the nature and extent of inequality. A study by two psychologists, Dan Ariely of Duke University and Michael Norton of Harvard Business School (to be published in 2011 in Perspectives on Psychological Science) first asked a random sample of 5,500 Americans what they thought the nation's actual wealth distribution looks like: how much is owned by the wealthiest 20 per cent of the population, the next-wealthiest 20 per cent, and so on. The researchers then asked people what, in an ideal world, they would like the nation's wealth distribution to be.

Ariely and Norton found that Americans think they live in a far more equal country than they in fact do. On average, those surveyed estimated that the wealthiest fifth of Americans own 59 per cent of the nation's wealth; in reality they own around 84 per cent. The respondents further estimated that the poorest fifth owns 3.7 per cent, when in reality they own 0.1 per cent.

The same sample group was then shown three pie charts representing three different wealth distributions. In one pie chart each fifth got the same share, another showed (unlabelled) the distribution in the USA and a third pie chart (again unlabelled) showed the distribution of wealth in Sweden. When asked which of the distributions they preferred, nine-tenths said they preferred the Swedish distribution, a figure that only varies slightly between rich and poor. 'People dramatically underestimated the extent of wealth inequality in the U.S.' says Ariely. 'And they wanted it to be even more equal.' Ariely and Norton also conducted a small follow-up survey of economists and found that though their estimates were better than average, they also got it wrong.

In the UK, a similar level of ignorance among most UK citizens of the full extent of inequality may help to explain why, at least until the onset of the recession, the growing income and wealth gap was not a dominant political issue. One study conducted in 2006 found that, despite the widening gap, 'people's overall quiescence appeared remarkable' (Pahl et al., 2007, p. 1). There was little in the way of a rational and well-informed public debate about the widening of pay differentials, about fair rewards and the role of merit in the growing wealth and income gap.

Although the advent of the credit crunch has changed public attitudes at least towards the very rich, confusion and misunderstanding remains widespread. Most people, but especially the most affluent, cannot place themselves with much accuracy in the income hierarchy. Some of our most senior political figures and media commentators cannot distinguish between middle Britain and the professional middle classes. There is limited understanding of the real winners and losers from social and economic change of the last three decades. As long as such misunderstanding persists, it will continue to be difficult to have an informed and rational debate on the policy choices focusing on the question of Britain's growing income and opportunity gaps and policies to help the poorest groups.

References

Atkinson, A. and Salverda, W. (2003) 'Top Incomes in the Netherlands and the UK over the Twentieth Century' (mimeo), Oxford, Nuffield College.
Barnfield, L. and Horton, T. (2009) Understanding Attitudes to Tackling Economic Inequality, York, Joseph Rowntree Foundation.
Lansley, S. (2009) Life in the Middle: The Untold Story of Britain's Average Earners, TUC Touchstone Pamphlet No. 6, London, Trades Union Congress.
Norton, M.I. and Ariely, D. (forthcoming) 'Building a Better America: One Wealth Quintile at a Time', Perspectives on Psychological Science.
Pahl, R., Rose, D. and Spencer, L. (2007) Inequality and Quiescence: A Continuing Conundrum, ISER Working Paper No. 2007-22, Colchester, University of Essex.
Paxton, W. and Dixon, M. (2004) The State of the Nation: An Audit of Social Injustice, London, Institute of Public Policy Research, p. 24.
Toynbee, P. and Walker, D. (2008) Unjust Rewards: Exposing Greed and Inequality in Britain Today, London, Granta, p. 24.
Woods, J. (2008) 'The Coping Classes', Daily Telegraph, 29 January 2008, available from http://www.telegraph.co.uk/news/features/3635427/The-Coping-Classes-Part-1-Why-do-we-all-feel-so-damn-poor.html (accessed 17 January 2011).

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