Earnings and Income Inequality in the UK – What’s been going on?

Research at IFS [1] has been digging below the surface and come up with some surprising results. Combining the pay of men and women who live together, inequality in total earnings across working households has risen. At the 10th percentile, household earnings rose by 20% between 1994–95 and 2014–15, while at the 90th percentile, household earnings rose by 32%. This is primarily because of the rise in male earnings inequality, since male earnings remain the largest income source for working households on average. Male earnings inequality driven, in large part, by falling hours of work for men on low hourly wages. More on this below.

But trends in inequality have been very different if we look at total net household incomes (including benefits and after taxes) across the whole population, rather than looking specifically at pay among working households: Despite rising earnings inequality among working households, inequality in total net household incomes (including benefits and after taxes) across the vast majority of the population is actually lower than 20 years ago. Key reasons for this include tax credits boosting the incomes of low earners, a catch-up of pensioners with the rest of the population, and falling rates of household worklessness. 

However, the top 1% have been different! Their share of net total household income increased from 6% in 1994-95 to 8% in 2014-15. 

What is so special about the trends in male earnings? Twenty years ago only 1 in 20 men aged 25 to 55 with low hourly wages worked part-time. Today 1 in 5 of this group work part-time: a four-fold increase. This is the result of a steady trend – not just the recent recession. Meanwhile the proportion of middle- and high- wage men working part-time remains extremely low, at less than 1 in 20. Hence, for men low hourly wages and low hours of work increasingly go together. This has become an important driver of inequality in their pay. 

In contrast, inequality in women’s weekly pay fell. At the 10th percentile, weekly earnings rose by 60% between 1994-95 and 2014-15; at the 90th percentile they rose by 29%. This is because the proportion of women working part-time has fallen, especially among those with low hourly wages (the opposite of the trend for men). 

Professor Sir Richard Blundell CBE FBA is Director of the ESRC Centre for the Microeconomic Analysis of Public Policy (CPP) at IFS. He received an Advanced Grant from the European Research Council in 2014 for €2.25 million to research ‘Microeconometrics of Consumer and Labour Supply Behaviour’.