Can household debt influence income inequality? Evidence from Britain: 1966–2016
| Published date | 01 February 2020 |
| Author | James DG Wood |
| DOI | 10.1177/1369148119888830 |
| Date | 01 February 2020 |
| Subject Matter | Original Articles |
https://doi.org/10.1177/1369148119888830
The British Journal of Politics and
International Relations
2020, Vol. 22(1) 24 –46
© The Author(s) 2019
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DOI: 10.1177/1369148119888830
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Can household debt influence
income inequality? Evidence
from Britain: 1966–2016
James DG Wood1,2
Abstract
The various processes of financialisation widen inequalities by increasing incomes for financial
sector employees and shareholders, as well as affluent households who hold the concentrated
ownership of financial assets. Although interest payments provide a flow of revenue from indebted
households to financial institutions, the distributional consequences of such debt-based systems
of financialisation remain an under-explored research area. As the financialisation of the British
economy has been driven by the widespread adoption of private debt, this econometric analysis
examined the effects of changes in household debt on income inequality in Britain between 1966
and 2016. These results demonstrate household debt increases the share of income captured at
the top of the income distribution, while increasing inequality between the top and the middle
of the income scale. Therefore, the mundane decision to take on household debt has significant
distributional consequences, specifically entrenching pre-existing disparate social relations
between affluent and less-affluent households in Britain.
Keywords
Britain, debt, finance, financialisation, income distribution, inequality
The negative social, economic and political consequences associated with the rise of the
various guises of inequality have led it to become the defining issue of Britain’s modern
political economy (Green and Lavery, 2015; Dorling, 2015; Joyce and Xu, 2019).
Although technological change (e.g. Machin and Van Reenen, 2008), globalisation (e.g.
Martins, 2011) and labour market flexibility (e.g. Roccu, 2016) have been considered the
foremost broad drivers of inequality in advanced economies, much of Britain’s inequality
has been specifically attributed to the growth of its financial sector (Bell and Van Reenen,
2010). Britain’s financial sector returned to prominence in the 1980s due to the inter-
related processes of financialisation, which can broadly be conceptualised as the shift
towards the shareholder value model of corporate governance, finance-led regimes of
accumulation, as well as the increased public engagement with financial services (van der
1Department of Politics and International Studies, University of Cambridge, Cambridge, UK
2British and Comparative Political Economy Specialist Group, Political Studies Association, London, UK
Corresponding author:
James DG Wood, Department of Politics and International Studies, University of Cambridge, Trinity Hall,
Cambridge CB2 1TJ, UK.
Email: jdw82@cam.ac.uk
888830BPI0010.1177/1369148119888830The British Journal of Politics and International RelationsWood
research-article2019
Original Article
Wood 25
Zwan, 2014). Financialisation contributes to inequality by increasing incomes for finan-
cial sector workers, particularly managers and executives, in relation to non-financial
sector workers, as well as by driving returns on investments for affluent households who
hold the concentrated ownership of financial assets (Roberts and Kwon, 2017). Although
several studies have examined the effects of ‘high finance’ on driving inequality (e.g.
Flaherty, 2015; Hyde et al., 2017; Nikoloski, 2013; Roine et al., 2009; Zalewski and
Whalen, 2010), relatively few have focused on the distributional consequences of the
more mundane relationship between households and the financial sector in Britain, which
is where this article makes an empirical contribution.
Private debt is one of the major drivers of financialisation and it is the most widely
diffused mechanism directly connecting households to the financial sector (Langley,
2008; Montgomerie, 2007). Household debt is also a significant mediating intersection
between different forms of inequality: consumer credit can temporarily reduce inequali-
ties of present consumption (Rajan, 2010); student loans can mitigate inequalities of
opportunity by providing access to higher education; and workers routinely leverage their
incomes to access mortgage debt to reduce the perceived wealth inequalities between
those who own their homes and those who do not (Montgomerie and Büdenbender, 2015).
As interest payments on private debt provide a revenue stream for the financial sector,
rather than mitigating inequalities, household debt may actually further entrench pre-
existing inequalities by augmenting incomes for those financial sector workers and asset
holders at the upper end of the distribution (Lapavitsas, 2013; Soederberg, 2014).
However, the ability of household debt to contribute to economic inequality is an under-
explored research area, especially in specific national-level analyses of the distributional
effects of financialisation. To address this important issue, this article examines whether,
and to what extent, increases in household debt may contribute to increases in inequality
in Britain.
This research question is evaluated using a quantitative econometric analysis of the
real volume of household debt and four measures of inequality using an error correction
model to assess the long-run relationship between the variables. Previous studies (e.g. De
Haan and Sturm, 2017; Godechot, 2016; IMF, 2015) have performed pooled analyses of
multiple advanced economies and report mixed effects of household debt on inequality
across the sample. However, such analyses fail to account for the specific national-level
processes of financialisation, which are strongly related to inequality outcomes in Britain
and the United States (Roberts and Kwon, 2017). Therefore, Britain was selected as a
single ‘most-likely’ case study to examine this relationship as it is one of the two Anglo-
American archetypes of debt-driven financialisation and there is prima facie evidence
Britain has high levels of both private household debt and inequality (Hay, 2013b; OECD,
2019). Although many quantitative analyses of financialisation focus on the period of the
1980s onwards, 1966 was selected as the starting year of this analysis, as financial dereg-
ulation measures were implemented incrementally from the 1960s onwards in Britain
(e.g. Green, 2016).
The results of this analysis demonstrate the expansion of household debt in Britain
between 1966 and 2016 increased the income share captured by the top 5% of the distri-
bution, while also increasing the level of inequality between the top and the middle of
the income scale. These results provide additional empirical evidence to support the
argument put forward by the financialisation literature by showing how rising private
household indebtedness contributes to increasing inequality, reproducing disparate
social relations between affluent and less-affluent households in Britain. As previous
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