This is a summary of the main findings of ‘Two Decades of Income Inequality in Britain: The role of Wages, Household Earnings and Redistribution’, published today as an IFS Working Paper and forthcoming in Economica. The paper looks back at changes in income inequality in Great Britain over the past 20 years, with a particular focus on explaining why – contrary to popular perception –income inequality over most of the distribution has actually declined over this period. We focus on inequality in household incomes, net of taxes and inclusive of benefits and tax credits. We explain trends in inequality by breaking this down into the effect of changes in hourly pay and hours worked of men and women, the tax and benefit system, and the incomes of pensioners.

Summary: why is income inequality across most of the population lower than 20 years ago?

Inequality in pre-tax pay across working households rose...

  • This is largely becauseweekly earnings inequality among men rose: partly because hourly wages grew faster towards the top than at the middle and bottom of the distribution, and partly because men with low hourly wages are now working fewer hours per week.
  • It is despite a fall in weekly earnings inequality among women, driven by less variability in the hours worked by female employees, and in particular more full-time work for women with low hourly wages.
  • Male earnings remain the largest source of income for working households, so they drove an overall increase in household pay inequality. An increasing tendency for high- (and low-) earning men and high- (and low-) earning women to be partnered with each other also contributed.

...but including benefits and after taxes, inequality in total household income among working households has not risen

  • The tax and benefit system has worked increasingly hard to offset the rise in inequality in pay between working households.
  • This partly reflects deliberate large increases in benefits and, particularly, tax credits which boosted the incomes of low-income working households in the late 1990s and 2000s.
  • It also reflects the insurance against falls in pay provided by the tax and benefit system to those on low incomes during the recession.

Once we include all households, not just those in work, we find that income inequality has actually fallen over the past 20 years because:

  • The number of workless households has fallen.
  • The gap between workless households (of working age) and working households has narrowed since the recession.
  • Pensioners have caught up with the rest.