Country Studies: Inequalities in Europe and North America
Employment, wages, hours and individual earnings
The UK has seen a sustained rise in employment rates among prime working-age (25–60-year-old) women over the last four decades, from 54% in 1968 to 78% in 2019. The employment rate for men, which fell over the 1970s and 1980s as the economy deindustrialised, has also been on the rise over the past decade, approaching 90% in 2019, but is still slightly below the levels seen in the early 1970s. Increases in the compulsory school leaving age and the expansion of higher education have led to a large rise in educational attainment for both men and women. In 2021, 39% of prime working-aged people had high levels of education (ISCED 6–8), and just 4% had low levels of education (ISCED 0–2).
Median real hourly wages for employees rose by around 2.3% a year on average between 1968 and 2007 but stagnated after the Great Recession. This stagnation is seen across all education groups, and cannot be explained by rising employment rates and selection into employment (Blundell et al. 2018). Median wages exceeded pre-2008 levels for the first time in 2020.
Inequality in hourly wages increased substantially in the 1980s. Since then, wage inequality across most of the distribution has stabilised, as measured by the 90:10 ratio (the Gini coefficient continued to rise due to rising wages at the top, albeit at a much slower rate than in the 1980s). The relative stability of overall wage inequality masks a sustained rise in male wage inequality up until the Great Recession: the 90:10 ratio of male wages rose from 2.8 in 1980 to 3.6 in 1994 and 3.8 in 2007. This was offset by women’s wages catching up with men’s wages on average, as well as some fall in wage inequality among women. Since the Great Recession, and in particular since 2016, wage inequality has fallen for both men and women in part as a result of large increases in the minimum wage. Average hours worked among employees have increased for women, and fallen gradually for men, since the mid-1990s. The increase in hours worked for women was seen across the wage distribution. For men, the fall in hours worked was concentrated among low-wage, low-educated men, up until the Great Recession.
Combining trends in hourly wages and hours worked, inequality in individual earnings has been relatively stable over the last 25 years. But inequality in male earnings rose between 1980 and the Great Recession, driven by rising wage inequality at the top and rising hours inequality at the bottom. This trend appears to have stopped in the last decade, as growth in the minimum wage outstripped wage growth further up the distribution, and hours worked stopped falling disproportionately for low-wage men. Further, the rise in employment rates means that earnings inequality across all prime working-aged people, including those out of work (with zero earnings), has fallen over the past decade.
Labour market institutions
There has been a dramatic decline in collective bargaining in the UK, with union density falling from its peak of 52% in 1980 to 24% in 2019. A minimum wage was introduced in 1999 and its bite has increased over time, especially since 2016. The minimum wage does not cover self-employed workers, and self-employment has become much more prevalent over the last four decades, especially among those on low hourly wages. The share of prime working-aged people who are self-employed rose from 6% in 1980 to 9% in 1990 and 10% in 2019. In recent years (when data are available), there has been a rise in ‘solo self-employment’ and a fall in the share of people who are self-employed with employees. The UK social security system is unusual by European standards in having virtually no contributory component. Instead, entitlement to most benefits is means-tested and depends on financial need (e.g., due to having a combination of low income, high housing costs, and a number of children) rather than previous earnings. As such, replacement rates vary widely depending on previous pay and circumstances, and there is no distinction between short-term and long-term replacement rates. There have been large changes to the welfare system in the UK, including a large expansion of state benefits in the late 1990s and early 2000s and retrenchment in their generosity after 2011.
Two key factors affect the way in which inequality in individual earnings translates into inequality in household incomes: household structures and the tax and benefit system. There has been a rise in assortative matching in marriage and partnership in the UK over the past four decades. First, the relationship between individual earnings and the likelihood of being in a couple is now more strongly positive than before. The share of prime working-aged people who are single has increased much more in lower-educated groups. Second, high-earning individuals are now more likely to have a partner who works than before. In 1968, men around the 95th percentile of earnings were 10 percentage points less likely to have a working partner than those in the 15th percentile of earnings (though they were more likely to have a partner at all), while in 2019 they were 8 percentage points more likely. Third, for couples in which both partners are in paid work, the positive correlation between partners’ earnings is now stronger than before. The rise in assortative matching means that the catch-up of women with men over the last four decades has largely reduced earnings inequality within, rather than across, households. Coupled with the rise in male earnings inequality, which remains the largest source of household earnings, the result is that inequality in earnings among working households rose up until the Great Recession, especially in the 1980s.
The tax and benefit system somewhat dampened the rise in household earnings inequality in the 1980s, but the effect was far from complete: between 1980 and 1994, disposable household incomes among working households rose by an average of 3.7% a year at the 95th percentile of household incomes, compared to just 0.9% at the 5th percentile (the corresponding figures for household earnings were –1.7% and 4.2%, respectively). Further, the fall in male employment rates over this period meant that more people lived in workless households, pushing up household earnings inequality across all households (including workless households). As result, inequality in disposable household incomes rose sharply in the 1980s: the Gini coefficient rose from 0.26 in 1980 to 0.33 in 1994, and the 90:10 ratio rose from 3.2 to 4.1. In contrast, the expansion of state benefits in the late 1990s and early 2000s entirely offset the rise in earnings inequality among working households in the decade before the Great Recession. State transfers propped up incomes at the bottom, so that the growth in disposable household incomes between 1994 and 2007 was similar across the income distribution (around 2.3% a year on average). Further, the rise in employment rates from the mid-1990s meant that more households had someone in work, reducing earnings inequality across all households. Taken together, inequality in disposable household incomes across all households was relatively stable between the mid-1990s and the Great Recession.
Inequality in disposable household incomes has also been stable since the Great Recession (since 2007), offsetting slightly increasing household earnings inequality, but the underlying drivers have been very different. Household earnings growth has been broadly progressive, especially since 2016, as wage inequality fell and trends in male hours also worked to reduce earnings inequality. However, a series of cuts to working-age benefits after 2011 meant that growth in disposable household incomes at the bottom of the distribution was lower than growth in household earnings. While the tax and benefit system offset rising earnings inequality in the decade leading up to the Great Recession, fiscal austerity pushed in the opposite direction in the last decade, offsetting declines in household earnings inequality.
Immigration has changed the composition of the UK population in recent decades. The fraction of the working-age population that was born abroad rose from 9% in 1993 to 15% in 2008 to 21% in 2021. Immigrants in 2008 were particularly clustered towards the bottom, and top, of the income distribution, but by 2019 this had changed and they were much more evenly spread across the population. On average, immigrants have very high education levels and similar labour market outcomes to UK born people, with the exception of lower levels of female employment.