Housing estate

Trends in income and wealth inequalities

The IFS Deaton Review of Inequalities

Published on 9 November 2022

Trends in inequalities in income, wealth and, to a limited extent, consumption in the United Kingdom.

  • This chapter brings together trends in inequalities in income, wealth and, to a limited extent, consumption in the United Kingdom, with a focus on trends until the onset of the COVID-19 pandemic.
  • In the most recent years of data, the 90:50 and 50:10 ratios for household disposable income both stand at around 2. That is, household income at the 90th percentile is around double that at the median, which in turn is around double that at the 10th Unsurprisingly, disparities in household wealth are much greater, with the 90:50 ratio being around 5 (and the 50:10 ratio being almost meaningless, as households at the 10th percentile of the wealth distribution have close to £0 net wealth). On several measures, the UK has high levels of income inequality internationally, driven by the gap between the top and middle.
  • The recent history of household net (i.e. post-tax and post-transfer) income inequality in the UK can be summarised in four broad episodes. In the 1960s and 1970s, incomes grew at similar rates for low-, middle- and high-income households. In the 1980s, income inequality increased substantially and across the board: the middle pulled away from the bottom, the top pulled away from the middle, and the very top pulled away from the high-income households just below them. From the early 1990s until the late 2000s financial crisis, incomes changed in a way that compressed the distribution, but not at the very top: the top 1% continued to pull further away, as they had done in the 1980s. Finally, from the late 2000s until the eve of the COVID-19 pandemic, the UK saw weak income growth across the population, but one which was evenly spread overall.
  • The rise in income inequality in the 1980s was remarkably widespread, seen within people of all ages, and driven by earned and unearned sources of income. At its heart was increased inequality in both hourly wages and earnings, but, as is shown in detail in other chapters, these either peaked in the early to mid-1990s, or have risen only slightly in the near 30 years since (depending on the precise measure, and whether we look within gender or across all workers).
  • A key labour market change in the past few decades has been that women’s careers now look more similar to those of men. This has reduced gender inequalities (i.e. the within-household disparities in earnings), but inequality between different households in household-level earnings – a key driver of inequality in household net income – continued to rise until very recently: the 90:10 ratio in household earnings peaked only in 2012, much later than hourly wages or individual earnings. Four factors help explain this: falling hours of work among low-wage men, which has exacerbated the persistent wage gaps between low-skilled and high-skilled men; changing norms for couples to have two earners, rather than one; an increased tendency for low-wage men to live alone; and an increased tendency for high-earning individuals to be partnered with each other.
  • Given these forces pushing household earnings inequality up (until recently), crucial in containing inequality in net incomes among working-age households in the 1990s and 2000s was a fall in the extent of household worklessness, and a substantial system of in-work transfers that expanded rapidly in the early 2000s (although there have been cutbacks in recent years). In 1968, income from state benefits and tax credits made up a fifth of all income of the bottom income decile (and less in all other income deciles); in 1978, this was true for the second decile too; by 1991, this was true in the third decile, and in 2008 and 2019, this was also true for the third and fourth deciles.
    An additional force acting to reduce income inequalities over the whole population has been the rising relative income of pensioner households, driven both by policy and a tendency for newer retirees to have larger pensions.
  • The other force shaping inequalities in the UK is wealth. Here, the story is the dramatic change in its importance: since 1991, net household wealth has almost doubled relative to GDP (from about three and a half times as large to seven times as large). Although typical measures of relative wealth inequality show little change over that time period, the increased amount of wealth is stretching out the distance between different parts of the wealth distribution. For example, the mean wealth of the 5th decile grew by two-thirds of a typical full-time salary over the decade after 2006–08, but the mean wealth of the 9th wealth decile grew by 5.4 times, and the mean wealth of the 10th wealth decile by 8.9 times a typical full-time salary, making it ever more difficult to save one’s way up the wealth distribution. As a result, the gap between someone in the 5th decile of wealth and someone at the 9th decile has grown from £299,000 to £432,000 (in 2019–20 prices) in the decade since 2006–08, or from 10 years to almost 16 years of average full-time earnings. The UK’s housing market has been at the core of the rise in net household wealth, with the rise due more to capital gains more than active net saving.
  • The huge growth in house prices since the mid-1990s has also upended patterns of homeownership, with today’s young people far less likely to own their own homes than their parents were, and those born in the 1980s on a track that will give them lower rates of homeownership than all birth cohorts since the 1930s. Inheritances will, in time, transfer some of the wealth to today’s younger cohorts, but increased longevity means that this won’t happen until very late in life. Furthermore, it looks like inheritances will act to reduce social mobility, strengthening the link between the living standards of the 1980s cohort and their parents’ circumstances than was the case for the 1960s cohort.
  • This new intergenerational divide in wealth has come on top of generally weak growth in income in the UK since the mid-2000s. Driven by the labour market (and with sluggish productivity growth at its core), this has had much more of an impact on the most recent cohorts who would have expected to have seen rapid earnings growth in their 20s and 30s: the cohort born in the 1980s, for example, has experienced lower levels of earnings than the 1970s cohort at the same age throughout their working life so far. As a result, cohort-on-cohort improvements in the level of household disposable income – something that would have been taken for granted throughout the second half of the twentieth century – have also slowed, or stopped, for the most recent cohorts. For example, over a 25-year period beginning from the age of 25 or 30, median within-cohort income for those born in the 1940s and 1950s approximately doubled, in real terms. Those born in the 1960s saw a rise of around a half from age 25 to 50; on current trends, those born in the 1970s will see a rise of less than a quarter over 25 years. The result is a profound reversal of between-cohort differences in living standards and wealth, with those born in the 1980s or later both suffering from the UK’s poor record on productivity, and having missed out on falling or low interest rates that have caused a surge in the value of wealth that has principally accrued to those in previous generations.
  • There have been key changes in many between-group differences in incomes and wealth. Of these, the most dramatic has been in how disposable income varies by age within the population at any given time. Around the 1970s, those aged over 65 were about three to four times as likely to have a low income than younger individuals; by the late 2010s, this difference had become considerably smaller. This reflects policy changes that have tilted state support towards low-income older people, but also the trend for newer retirees to have more pensions. Ethnic differences in household net income have shrunk in the last 25 years, but ethnic differences in household wealth remain extremely large. And regional differences have changed, driven in part by the UK’s housing market. Measures that capture the value of housing show how the East of England and, to a lesser extent, the South West are joining the South East of England and London in pulling away from the rest of the UK. But the high costs of housing in the capital also lead London to be a very polarised region, with homeownership rates considerably below those in other regions of England and the nations of the UK.
  • The considerable amount of government support means that the immediate impact of the COVID-19 pandemic on incomes was a lot more muted than it could have been, with household incomes rising at the bottom of the distribution in 2020–21. But the distributional impact of the crisis – and a hint to its long-term impact – can be seen more clearly in how household wealth changed. Unusually for an economic downturn, wealth disparities appear to have increased, driven by the enforced saving that look place when spending opportunities were curtailed, and passive gains to wealth through the unprecedented rise in asset prices. The longer-run impact will be driven by the loss of experience and opportunities for career progression that could cause long-term lower earnings for some younger workers, and by the accelerated exits from the labour market among some older workers; the disruption that many children have faced to their education may also further reduce social mobility.
  • These are among the many important developments not captured by crude summary statistics such as Gini coefficients. Understanding the rich and interlocking patterns of earnings, income and wealth inequality that are hidden underneath the apparent stability of relative gaps in income and wealth between the rich and poor, and how they are affecting different generations, is essential if we are to address concerns about inequalities.

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