Is the Coalition on course to reduce inequality?
Everyone knows that inequality has skyrocketed in the UK. Perhaps we know it too well, in that we seem to accept it as something that was foreseen and inevitable, rather than, as it was, something of a surprise for economic historians. Today the National Institute of Economic and Social Research publishes four papers that look, through different lenses, at the evolution of the UK income distribution – the components and dynamics of income over time. Taken together with other research, they paint a much richer picture of this issue, and provide some pointers about what we should be looking for in the future.
The broad story, over the last 40 years, seems to be the following. The very substantial increase in inequality that began in the 1970s and continued through the mid-1990s was followed by a more complex picture, with inequality increasing in some parts of the income distribution and decreasing elsewhere, as shown in this well known chart from the Institute of Fiscal Studies.
Inequality rose sharply in the period up to about 1995, driven by growth in earnings inequality over the entire earnings distribution, demographics and other structural change, as well as a less progressive tax and benefit system.
After 1995, and especially after 2000, the picture became more mixed. Structural changes, especially at the very top of the earnings distribution, continued to drive greater inequality; those in the financial sector and high earners in London did particularly well. However, a much more progressive tax and benefit system, and the National Minimum Wage, helped reduce inequality at the lower end and in the middle of the distribution.
Throughout this period female labour force participation increased, driven by societal trends and also recently by welfare policies. However, once in the labour force, a disproportionately large number of women are low-paid, part-time and often in families on the edge of poverty, with limited opportunities for advancement.
What does this tell us about the future? In the short to medium term, it is difficult to be optimistic. Much of the progress in reducing child poverty came from increases in the progressivity of the tax and benefit system; but changes made by the Coalition Government are likely to reverse this. The Government argues that welfare reform, and in particular helping workless families into work, is the key to escaping poverty; but even relatively successful welfare reforms under the previous government contributed only modestly to progress. In particular, while, because of improved work incentives and active labour market policies, the lone parent employment rate increased by about 10 percentage points – reversing the previous long-term downward trend – the impact on child poverty was limited.
It is difficult to see why this should change: even if the Government’s flagship welfare reform measure, the Work Programme, is reasonably successful, it is implausible that it will result in employment increases that are significant at the level of the population as a whole.
Meanwhile, structural factors – regional and sectoral disparities, as well as the increased importance of skills – are the key underlying drivers of growing earnings inequality. While one might hope that rising educational participation would over time help, there is little evidence of this yet. And we are building up a worrying problem of insufficient saving for retirement, particularly for “precarious” workers in the private sector.
Turning to the longer term, what light does all this shed on the ongoing debate about social mobility? The much cited paper by Jo Blanden et al, showing that social mobility fell for those leaving school in the late 1980s compared to those who left school in the mid-1970s, has had a huge impact in policy and political circles.
While the specifics of the paper have been criticised, the consensus among economists is that by any measure there was a significant fall in intergenerational social mobility (or more precisely a significant rise in the correlation between the incomes and educational attainment of parents and children) over roughly this period.
There is, however, no definitive consensus on what explains this fall, although the obvious explanation – the rise in earnings and income inequality for the families in which these cohorts were growing up – seems eminently plausible. As this chart shows, social mobility is inversely correlated with income inequality, although the relationship is clearly not deterministic.
One explanation widely cited by politicians and the press can, however, be dismissed – the (near) abolition of grammar schools – recent research has shown that for the 1958 cohort comprehensive schools performed over all at least as well as grammar schools in terms of social mobility, individual examples to the contrary notwithstanding. The OECD, looking across countries, concludes that selective education damages social mobility:
“Early selection into different institutional tracks is associated with larger socio-economic inequalities in learning performance without being associated with better overall performance.”
A more plausible alternative explanation is that the fall in social mobility is partly due to the increase in higher education participation being focused on those from higher income families.
It is far too early to come to a definitive conclusion on developments in intergenerational social mobility over the last decade or so. But early indicators suggest that there be may be some modest improvements, with some narrowing of gaps in educational performance, as shown by a recent analysis in the Financial Times. On the other hand, if anything, the youth labour market appears to have become more polarised (with an increasing proportion of young adults attending university, but also a rise in the number not in education, training or employment), which does not bode well.
What about the future? With the prospect of a further rise in income inequality, driven both by structural change and government policies, it is difficult to be optimistic. It is, however, worth setting out the government’s counterarguments. The government argues that the increase in progressivity of the tax and benefit system, while reducing measured inequality, was just papering over the cracks, and failing to deal with the structural causes of greater inequality and reduced social mobility. The priority should be early years education, to reduce educational underperformance among more disadvantaged groups, and to tackle entrenched worklessness among some groups, especially young adults with low qualifications.
In principle, there is much to commend in this approach. Indeed, it seems plausible that if successful policies could be implemented in these areas that, over the longer term, they would at least contribute to reducing inequality and eventually increasing social mobility. It is, however, worth noting that in a number of areas the specific policy changes announced so far do not seem to be based on strong evidence of what might contribute to greater social mobility.
- The reduction in funding available for SureStart does not seem consistent with the priority attached to the early years – a point made strongly by the Frank Field Review. By contrast, the extension of childcare to relatively disadvantaged two-year olds may have some positive impact. In both cases, however, it should be noted that while there is very strong evidence that early outcomes are important for later educational attainment, and hence very probably for social mobility, the evidence base for particular interventions is less strong.
- The impact of the introduction of free schools is obviously difficult to predict at this stage but existing evidence suggests it is likely to be negative for social mobility. The OECD argues, citing multiple references, that “research has shown that school choice, and by extension school competition, is related to greater levels of segregation in the school system, and consequently, lower levels of equity.” In Sweden, the closest direct analogy, most evidence suggests it has resulted in some rise in segregation, consistent with the OECD view. This may, however, be countered by the introduction of the pupil premium; although there is little evidence to suggest that simply increasing school expenditures substantially improves the performance of poorer pupils.
- The abolition of the Education Maintenance Allowance, despite strong evidence that it significantly increased staying-on rates and attainment among the target group (16-18 year olds from poorer families) is likely to have a negative impact on social mobility, given the impact both on further educational attainment (eg university participation) and on earnings.
- On a more positive note, the Wolf Report on Vocational and Technical Education makes some important and evidence-based recommendations designed to help, in particular, the most disadvantaged young people: “Among 16 to 19 year olds, the Review estimates that at least 350,000 get little to no benefit from the post-16 education system”.
To conclude, it is difficult enough to state with any degree of confidence what has happened to social mobility in the last decade, so predicting the future is at best courageous. The coalition government has a clear commitment to implementing policies designed to increase social mobility, and its broad policy focus is sound. Nevertheless, at present it is difficult at present to be optimistic about either broader structural trends or about the majority of the specific policies implemented so far.Tagged in: coalition, Frank Field, Gini, inequality, Jonathan Portes, social mobility, Sure Start, Work Programme
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