Explaining trends in income inequality

Why has the trend in income inequality been relatively flat over the last two decades, even though earnings inequality has continued to increase? Essex University academics have sought to answer this question by 'decomposing' the data on recent trends – allowing them to identify the contribution from different factors such as income sources and household characteristics.

The study concludes that four key factors have mitigated the effect of growing earnings inequality: 

  • Inequality between those with different employment statuses has fallen since 1991, primarily due to a fall in the number of unemployed people.
  • Employment taxes have played a larger role, offsetting inequality in gross employment income.
  • Investment income has become less unequal, largely due to the decline in its importance, which itself may be explained by a fall in nominal interest rates.
  • A rise in the relative incomes of pensioners and of households with children under five has pulled inequality down.

Overall, these four factors have almost entirely offset the impact of rising inequality in earnings and self-employment income since 1991.

Looking ahead, the researchers highlight the fact that at least two of these four factors are unlikely to continue pushing inequality down from 2008-09 onwards. Unemployment has rapidly increased since 2008, and in the medium term is unlikely to move below the low achieved during the 2000s. Meanwhile, recent changes to the benefit regime are likely to increase inequality further.

Source: Mike Brewer and Liam Wren-Lewis, Accounting for Changes in Income Inequality: Decomposition Analyses for Great Britain, 1968–2009, Working Paper 2012-17, Institute for Social and Economic Research (University of Essex)
Link: Working paper