Twenty‐five years of income inequality in Britain: the role of wages, household earnings and redistribution

Abstract

AbstractWe study earnings and income inequality in Britain over the 25 years prior to the COVID‐19 pandemic. We focus on the middle 90 per cent of the income distribution, within which the gap between top and bottom in 2019–20 was essentially the same, after taxes and transfers, as a quarter‐century earlier. This has led to a narrative of ‘stable inequality’, which we argue misses important nuances and key lessons from the UK's experience. In particular, there have been periods in which household earnings inequalities were changing considerably but tax and transfer policy was offsetting its effects on income inequality – in different directions at different times, reflecting sharp changes of policy approach. Means‐tested transfers played a crucial role in containing inequality during the ‘inclusive growth’ period of the 1990s and early 2000s, as well as the Great Recession. During the 2010s, the minimum wage emerged as the government's primary policy tool for boosting incomes, but this happened almost simultaneously with cutbacks to means‐tested transfers, meaning that household earnings inequalities fell considerably and yet net income inequality rose.