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11 May 2023

How families matter for understanding economic inequality

Income inequality in the United Kingdom is relatively high. The Gini coefficient of household disposable income was 0.366 in 2019, which is well above the European Union average and one of the highest in the OECD.After a period of increasing inequality in the UK during the 1980s and 1990s, the Gini coefficient has stabilised at a relatively high level. Understanding what explains the high level of inequality is an important and much discussed topic. Here we zoom in on the connection between families and economic inequality, with a focus on the relationship between families and inequalities in income and consumption.

Family structure can, in principle, act as an amplifier or a mitigator of economic inequality – not only because family members can provide insurance to each other, but also because over time and across generations, much of the human capital investments for the next generation (and hence inequality in the future) are made within families. Thus, one would like to know what role UK family structure plays in dampening or amplifying economic inequality. And what about inequality within families – does it exist and is it quantitatively large? Can changes in family structure explain changes in inequality over time? And do cross-country differences in family structure play a role for understanding why inequality in the UK is particularly high?

Two channels stand out in our view on how the existence and structure of families shape economic inequality. First, families are relevant for inequality as they can amplify or mitigate inequality both within and across generations. In particular, a higher degree of assortative mating is related to higher inequality; whereas a more random matching across spouses mitigates inequality. So where people (i.e., future parents) meet and along what dimensions they match matters for the next generation. Similarly, parental investment in children can amplify existing inequalities. Second, a more subtle point that is mostly ignored in economic analysis is that inequality exists even within families. Thinking about within-family inequality requires us to depart from the concept of earnings inequality. Consumption inequality is more relevant when analysing inequality within families, but it is also much harder to measure. Earnings inequality within families, especially between husband and wife, is also interesting of course. But within-family earnings inequality is not very informative when thinking about welfare. Most households pool resources to some extent, so earnings inequality is a poor proxy of consumption inequality within families.

We will zoom in on the two channels discussed above. First, we discuss the role of families as an amplifier of inequalities in the UK and then we elaborate on the importance of inequality within families.