Accounting for Changes in Income Inequality: Decomposition Analyses for the UK, 1978–2008
| Date | 01 June 2016 |
| Published date | 01 June 2016 |
| DOI | http://doi.org/10.1111/obes.12113 |
289
©2015 TheAuthors. OxfordBulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
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OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 78, 3 (2016) 0305–9049
doi: 10.1111/obes.12113
Accounting for Changes in Income Inequality:
Decomposition Analyses for the UK, 1978–2008*
Mike Brewer† and Liam Wren-Lewis‡
†Institute for Social and Economic Research, University of Essex, Wivenhoe Park,
Colchester, Essex, CO4 3SQ UK (e-mail: mbrewer@essex.ac.uk)
‡Paris School of Economics, 48 Boulevard Jourdan, 75014 Paris, France
(email: liam.wren-lewis@parisschoolofeconomics.eu)
Abstract
We analyse income inequality in the UK from 1978 to 2009 in order to understand why
income inequality rose very rapidly from 1978 to 1991 but then remained broadly un-
changed. We find that inequality in earnings among employees has risen fairly steadily
since 1978, but other factors that caused income inequality to rise before 1991 have since
gone into reverse. Inequality in investment and pension income has fallen since 1991, as
has inequality between those with and without employment. Furthermore, certain house-
hold types – notably the elderly and those with young children – which had relatively low
incomes in the period to 1991 have seen their incomes converge with others.
I. Introduction
It is widely known that income inequality in the UK is much higher than it was 40 years
ago (Hills et al., 2010; Belfield et al., 2014). Between the late 1960s and the present day,
income inequality in the UK has risen from that of a relatively average developed country,
with a Gini coefficient of 0.23, to being among the most unequal countries in the OECD,
with a Gini coefficient over 0.3 (see Figure 1; OECD, 2011).1However, the rise over this
JEL Classification numbers: H23, H53, I32
*This article draws on and develops separate work commissioned by the National Equality Panel(whose report
is in Hills et al., 2010; our material is in Brewer, Muriel and Wren-Lewis, 2009) and the Resolution Foundation,
for whose support and input we are very grateful. Brewer also acknowledges support from the ESRC Centre for
the Microeconomic Analysis of Public Policy at IFS and from the ESRC Research Centre on Micro-Social Change
at ISER, University of Essex. This work builds on past collaboration withAlastair Muriel. We would also like to
thank James Banks, Richard Blundell, Paul Clarke, Frank Cowell,Richard Dickens, Paul Gregg, John Hills, Stephen
Jenkins, Paul Johnson, Olena Kaminska, Steve Machin, Peter Matejic, Luke Sibieta and seminar participants at the
Institute for Fiscal Studies, Paris School of Economics and Universitat Aut`onoma de Barcelona for comments and
suggestions. Cormac O’Dea providedinvaluable help with the FamilyExpenditure Sur veydata. The Family Resources
Survey and Households BelowAverage Income series were collected by the Department for Work and Pensions, and
distributed by the Economic and Social Data Service; the Family Expenditure Survey data were collected by the
Office for National Statistics and distributed by the Economic and Social Data Service. None of these organisations
is responsible for our analysis or interpretations. Crown Copyrightmaterial is reproduced with the per mission of the
Controller of HMSO and the Queen’sPrinter for Scotland.
1We refer throughout to the UK, but our data excludeNor thern Ireland.
290 Bulletin
0.2
0.22
0.24
0.26
0.28
0.3
0.32
1978 1983 1988 1993-94 1998-99 2003-04 2008-09
Gini
coefficient
Gini for income Gini for f/t earnings
Figure 1. Household income inequality in Great Britain: the Gini coefficient, 1978 to 2008–09
Note: The income concept is disposable household income, before housing costs have been deducted.
Source: Authors’calculations using the sample described below from Family Expenditure Survey and Family
Resources Survey, various years, as described in Appendix D. The bottom and top 1% of both distributions
have been trimmed. Only full-time employees are included in the measure of earnings inequality.
period has not been even. Instead, on many measures income inequality rose very quickly
during the 1980s, and has changed little since 1991. This is more puzzling given the fact
that wage and earnings inequality rose fairly steadily over the period, at least until 2000
(Machin and van Reenen, 2007; Blundell and Etheridge, 2010).
This article investigates these recent changes in inequality in household disposable
income, which haveremained relatively understudied compared with inequality in earnings
or wages. We address the question ‘why did income inequality in the UK rise very rapidly
from 1978 to 1991 but then remain flat thereafter?’, and we seek to distinguish between
two broad hypotheses: was it the case that those factors which drove the rise in income
inequality between 1978 and 1991 were specific to that period? Or was it that the factors
behind the pre-1991 rise in inequality have continued, but have been offset by new factors
pulling inequality downwards?2
To answer these questions, we construct annual, cross-sectional microdata with consis-
tent measures of income and household characteristics spanning 1978–2008/09, and we
use three complementary techniques, with each giving a different insight into the under-
lying forces driving changes in inequality. Our first decomposition, following Shorrocks
(1982), identifies the contribution played by different income sources (such as earnings
from employment, investmentincome, and cash benefits paid by the state). Our second de-
composition uses the regression-based methods in Fields (2003) andYun (2006) to identify
2Weuse 2008/09 as our final year as we wish to focus our analysis on long-term trends, rather than the impact of a
very sharp contraction. For information on the impact of the great recession on inequality, see for example, Jenkins
et al. (2012) and DWP (2014a).
©2015 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and JohnWiley & Sons Ltd.
Decomposing UK income inequality 291
the contribution of household characteristics (such as age, education, and sex). Finally,
following Shorrocks (1984), we implement a decomposition that allowsus to identify more
clearly the role played by sub-groups defined by specific household characteristics.
Our approach is consistent with Cowell and Fiorio (2011), who argue that additional
insights are gained by using an a priori decomposition approach (which includes our
decompositions by income source and by subgroup) alongside an ‘explanatory models’
approach (which includes our regression-based decompositions). Moreover, decomposing
changes in income inequality by both income source and household characteristics in-
creases the range of influences that we can detect. One drawback is that we cannot use a
single measure of inequality throughout. However, we also show that the time profile of
income inequality in the UK is very similar across a range of measures. More importantly,
much of our analysis is in terms of inequality ‘shares’ – the share of total inequality ex-
plained by different income sources, or by different household characteristics – measures
that are valid for any inequality measure that is symmetric, continuous and equal to zero
iff all incomes are equal (Shorrocks, 1982).
We show that a number of factors that pushed up income inequality in the 1980s
(as shown in, for example, Jenkins, 1995) have disappeared or reversed their influence
since then, including income from investments and private pensions. This is consistent
with Atkinson’s (1997) argument that movements in income inequality are better thought
of as a sequence of ‘episodes’ than in terms of ‘trends’. However, while some of the
factors pushing up income inequality in the 1980s have disappeared, others havecontinued,
with employment and self-employment income becoming consistently more unequally
distributed among the economically active. Indeed, and unlike those studies of US income
inequality (which we discuss in detail in our concluding section), we find that female
earnings in the UK continued to push up income inequality in both the 1990s and 2000s,
despite rising female employment. Instead, the factors pushing down income inequality in
the UK since 1991 are a fall in the number of unemployed, an increase in the redistributive
impact of employmenttaxes, and a rise in the relative incomes of pensioners and households
with children under five. As all of our methods allow us to decompose changes between
any pair of years, the results presented in this paper also allow an understanding of what
factors contributed to the changes in inequality over anysub-period from 1979 to 2008–09.
Our work can be seen, in part, as updating and extending Jenkins (1995), who de-
composed changes in household disposable income inequality in the UK between 1971
and 1986. Jenkins found that changes in inequality during this period were the result of a
multiplicity of factors, some temporary and others part of ongoing trends. For example,
changes in wage inequality were central throughout but weakened over time, with rising
unemployment important in the early 80s and a rise in self-employment income influential
later on.3While other studies have also decomposed changes in the UK income inequality
in 1980s, no similarly detailed decomposition exists for later periods. Subsequent UK stud-
ies have considered particular aspects of the changes in the income distribution since the
early 1990s. For example, Brewer and Wren-Lewis (2011) assessed the causes of changes
in the level of household incomes in the UK, and Clark and Leicester (2004), Adam and
3p. 79 of Brewer et al. (2009), an earlier version of this work, gives a detailed comparison of our results for
1971–86 with those in Jenkins (1995).
©2015 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and JohnWiley & Sons Ltd.
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