Jump to ContentJump to Main Navigation
Productivity and the Bonus Culture$

Andrew Smithers

Print publication date: 2019

Print ISBN-13: 9780198836117

Published to Oxford Scholarship Online: May 2019

DOI: 10.1093/oso/9780198836117.001.0001

Show Summary Details
Page of

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 18 February 2020

The Problem of Income Inequality

The Problem of Income Inequality

Chapter:
(p.42) 7 The Problem of Income Inequality
Source:
Productivity and the Bonus Culture
Author(s):

Andrew Smithers

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198836117.003.0007

Abstract and Keywords

Living standards change in line with GDP per head only if the distribution of incomes is unchanged. If incomes become less equally distributed the living standards of most people will fall even if GDP per head is stable. The Gini Coefficient is the most widely used indicator designed to measure the distribution of income. UK inequality, on this measure, has risen since 1977, stabilized since 1987, and fallen in recent years. In the US there has been a long-term increase in income inequality. Unless this US trend for increased income inequality halts, it is quite likely that even if GDP per head rises in the US, the living standard of the average voter will fall. The recent data suggest that changes in income inequality pose less of a threat to living standards in the UK then they do to those in the US.

Keywords:   living standards, GDP per head, Gini Coefficient, inequality, mean, median, political impact, average voter

Living standards will change in line with GDP per head only if the distribution of incomes is unchanged. If incomes become less equally distributed the living standards of most people will fall even if GDP per head is stable.

Figure 22 illustrates the changes that have occurred in the UK in the Gini Coefficient, the most widely used indicator designed to measure the distribution of household income.1 A rise in this coefficient denotes an increase in inequality of income. The figure shows that inequality, on this measure, has risen overall since 1977 but stabilized after 1987, falling in more recent years.

The Problem of Income Inequality

Figure 22. UK: Gini Coefficient (measure of household income inequality)

(p.43) Figure 23 illustrates the changes in the Gini Coefficient for the US. This shows a long-term increase in income inequality, though it is exaggerated in the figure owing to a change in 1993 in the way the data were calculated. However, the direction of change is clear, since the trend was rising both in the period 1967 to 1993 and from 1993 onwards.

The Problem of Income Inequality

Figure 23. US: Gini Coefficient (measure of household income inequality)

Another way of way of assessing the change in income inequality is to compare the mean—the average income per person—with the median, which is the level at which the numbers of those with higher incomes per household and those with lower are equal. If the growth rate of the median income is slower than that of the mean, then the majority of people in an economy will have falling real incomes even if GDP per head is stable. This is useful when considering the political impact of economic change, as the median income provides a guide to the way in which the living standards of the average voter have changed.

I have been unable to find these data for the UK, but Table 6 compares the changes in US mean and median incomes from 1975 to 2013 and the two sub-periods 1975 to 1995 and 1995 to 2013. On this measure there was a rise in US inequality throughout the whole period, and, though there was some moderation in the second sub-period compared with the first, the negative impact on living standards was greater because of the marked slowdown in the growth of average incomes.

Table 6. Percentage changes per annum in US median and average incomes (Data source: US Bureau of the Census)

1975 to 2013

1975 to 1995

1995 to 2013

Mean household income

0.77

1.15

0.35

Median household income

0.29

0.54

0.02

Mean minus median

0.47

0.61

0.33

(p.44) Unless this US trend for increased income inequality halts, the threat to most people’s living standards will be greater than simply considering average incomes might imply. It is quite likely therefore that even if GDP per head rises in the US, the living standard of the typical voter will fall. The recent data suggest changes in income inequality pose less of a threat to living standards in the UK than in the US.

In the previous chapter I showed that the outlook for GDP per head is unlikely to differ much from what is worryingly indicated by looking at productivity and demography. An increase in inequality adds to the threat to most people’s living standards. I am not seeking to forecast how living standards will change. The scope for good and ill fortune is too great to make this, in my view, a sensible exercise. My purpose is to show the extent of the threat we face. It is, therefore, important to understand that if the recent trends in productivity and income inequality do not improve, the living standards of most people in the UK and the US may well fall and at best are unlikely to meet voters’ expectations.

When asked what to do when driven onto a lea shore with loss of power, sailing manuals tell us that there is one and only one solution: ‘Do not allow this situation to arise.’ We should attend to the sailing manuals’ advice. We are threatened with a sustained fall in the real incomes of most people and we must not allow this situation to arise.

Notes:

(1) See Appendix 3 for an explanation as to how this is calculated.