Greater Income Inequality Demands A New View Of Recent UK Economic Performance

”Economics doesn”t address enough of the questions that concern ordinary people. Why do some people earn in a week what others take a year to earn? Why is wealth so concentrated? And why has poverty increased in the UK? But dramatically rising inequality means that these issues can no longer be avoided.” That is the message of Professor Tony Atkinson, Warden of Nuffield College, Oxford, in his Presidential Address to the Royal Economic Society, published in the latest issue of the Economic Journal.

Atkinson documents how in the 1980s income inequality in the UK worsened far more than in other comparable countries, including the United States. The changes in income distribution, he contends, are large enough to change completely our view of national economic performance. Atkinson stresses the need to look at the whole range of factors underlying the rise in inequality:

  • Rising earnings dispersion: the real (inflation-adjusted) earnings of low paid&##160;workers rose by only 11% between 1979 and 1995, compared with a 50%&##160;increase for the higher paid.
  • Fewer families have incomes from work: in 1975, only one family in five had no earnings; but it is now one in three.
  • The rise in real interest rates and in share prices, the distributional implications of which are rarely discussed.
  • Government tax and benefit policy, notably the way in which those living on state benefits have fallen behind the rest of the population.

In seeking to explain increased inequality, economists have concentrated on the role of technological change and globalisation in raising the demand for skilled labour. Atkinson argues for taking a wider view: the supply side of the labour market is important, as is the capital market, and government policy itself has to be part of the explanation why the UK has seen a larger rise in inequality than other countries.

With reduced state support for education and increased costs of borrowing, young people investing in education become more dependent on their families. There is then a vicious cycle. Atkinson emphasises the conclusion of the OECD: ”Economic inequality in general hampers education and training reform.” Abolishing low pay and poverty today, he argues, is an investment in the future.

”Bringing Income Distribution in from the Cold” by A.B. Atkinson is published in the March 1997 issue of the Economic Journal. Atkinson is Warden of Nuffield College, Oxford and President of the Royal Economic Society.

Tony Atkinson

01865-278520 | tony.atkinson@nuf.ox.ac.uk