What happened to inequality under conservative and Labour governments since 1979?

 

Many people, I think, would answer that question by saying that it goes up under both. But does it? The answer depends on how we think about inequality. Inequality has been generally falling in the UK since the end of the Thatcher premiership when we measure inequality, as is most commonly done, by the Gini which takes a value of 0 if all incomes are equal and a value of 1 if one person has all the income. This fall in inequality is true if we take market incomes, that is what households get from their wages and self-employed incomes, or if we take equivalised disposable income. The latter allows for cash transfers to households and the taxes they pay and makes an allowance for household size.  I show this in Figure 1 below which tracks the Gini for the period from 1979, the start of the Thatcher premiership to 2019 which is the most recent data I have. Clearly post-Thatcher the Gini for both measures of income has tracked down, albeit with a marked upward spike with the most recent conservative government. This can be seen more clearly if we extract the numbers for the Gini for the periods of Conservative and Labour governments as I do in Figure 2 below. 

Figure 1 The Gini as a Measure of Inequality

Source: ONS data: Average household incomes, taxes and benefits of all households by decile group.

Figure 2 Conservative and Labour Governments Compared

Source: As for Figure 1.

 Two points stand out from the charts. The first is that inequality of equivalised disposable incomes is far lower than that of market incomes, and this is true over the whole period. All governments, both Conservative and Labour have used tax and benefit policies to reduce the level of inequality delivered

 Two points stand out from the charts. The first is that inequality of equivalised disposable incomes is by the market. The second point is that the premiership of Margaret Thatcher increased inequality both in market incomes and in equivalised disposable incomes. While, as I have noted, both measures have trended down they have not returned to the level before Thatcher’s first term.

Now the Gini is hard to interpret. Another way of presenting the information that underlies the Gini is by what is called a Lorenz curve. This shows how much incomes households get in percentage terms. In Figure 3 I show a Lorenz curve for equivalised disposable income for 1979 and 1991, ie the beginning and end of Thatcher’s government. The way to read the chart is to begin with the 45-degree line (in green) which is perfect equality if we think in proportional terms. It says the 20 per cent of households get 20 per cent of incomes, that 30 per cent of households get 30 per cent of incomes etc. So, the further is the line plotting actual percentages from this 45-degree line the more inequality there is in the Gini sense of the term. So, we can see from Figure 3 that this Lorenz curve shifted out quite noticeably over the period of the Thatcher premiership. In Figure 4 we present the same curve for the period afterwards.

Figure 3 The Thatcher Premiership

Source: As for Figure 1.

Figure 4 Lorenz Curves Post Thatcher

Source: As for Figure 1.

 Now what is striking in Figure 4 is that, if anything, there is a move inwards in the Lorenz curve from 2019 compared with 1991. True, very slight, but no evidence here of increasing inequality in the Gini sense of the term.

 However, the Gini, while commonly used, is not how people think about inequality.  The Gini is a relative measure, it is based on the proportions of incomes going to households as we have seen in the Lorenz curves above. If the incomes of everyone doubled the Gini would not change as the proportions would not change. But the gap between the richest and the poorest would have got a lot bigger. It is that gap that most have in mind when they talk about rising inequality. Telling them about the Gini cuts no ice.

What they have in mind is the differences been the top and bottom of the income distribution. There are two ways of looking at these differences. One is to look at the ratios between the top and the bottom (see Figure 5), a second is the gap between the rich and the poor (see Figure 6).

 

Figure 5 Ratios of incomes between the rich and the poor

Source: As for Figure 1.

Figure 6 How much do the rich get relative to the poor

Source: As for Figure 1.

 It is the difference shown in Figure 6 that people partly have in mind when they talk of increasing inequality. Between 1991 the gap in household incomes between the top decile and that of the bottom decile, increased from £57,863 to £88,785 (both numbers in constant 2019 prices), an increase of over 50 per cent. What they also have in mind is the levels of income for the poor and the rich.

In my last blog ‘The assault on the poor by the current conservative government’ I documented what had happened to the levels of income in the poorest decile, see Figure 7 below. What these 

Figure 7 Incomes of the poorest

Source: As for Figure 1.

policies were that had such a catastrophic effect on the incomes of the poor is well documented in an article first published in the Guardian on the 1^st June by John Harris https://www.theguardian.com/politics/2022/jun/01/the-decade-that-broke-britain-the-disastrous-decisions-that-left-millions-in-a-cost-of-living-crisis.

In Figure 7 I show the incomes of the top decile. In the period since 2015 when the incomes of the bottom decile fell by some £3,000 (in 2019 prices) that of the top decile increased by some £10,000 (in 2019 prices).

Figure 7 Incomes of the richest

Source: As for Figure 1.

 An overview

So, what is the answer to the question posed by this blog: What happened to inequality under Conservative and Labour governments? If we focus on the Gini for equivalised disposable income this fell under Labour and rose markedly under the Thatcher and current Conservative government. If we focus on how the top decile have fared relative to the bottom, on this measure inequality remained unchanged for the labour government but nearly doubled for both Conservative governments.

 If rather than focus on gaps, we focus on the level of incomes of the bottom decile this increased by 34 per cent under the Labour government, while under the current Conservative government their incomes fell by a similar percentage – back indeed to nearly their level in 1979. Those, often on the left, who think Labour policies under Blair were Thatcherite, could not be more wrong.   

 A note on the data

 As indicated under the Figures the source of this data is from the ONS which provides data for the incomes across the deciles of the income distribution for each year, the most recent data being for 2019. The ONS data is drawn from household surveys. Many economists think that using such a source is inadequate for capturing the full extent of inequality in an economy. This is because the very rich are so few they will not be captured by surveys. This has led to the use of tax data, where the super-rich will appear, and to combine such tax data with surveys to give a more accurate account of inequality. Thus, the data used in this blog may understate inequality. In a future blog I will review some work which has combined tax with survey data. I will also examine how far the incomes of the super-rich exceed those of the top deciles shown in Figure 7 above. Such work does not affect the picture shown above for the levels of incomes for the vast majority of households.