Is the Coalition on course to reduce inequality?

Jonathan Portes

eton boys 2 150x150 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.

IFS Is the Coalition on course to reduce inequality?

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.

chile Is the Coalition on course to reduce inequality?

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.
  • 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.

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  • CareersPartnershipUK

    Hi Ron

    Personally, I think housing costs are far too high and we need to put slow but steady pressure on them to come down until the cost / salary ratios are at 1970s levels.  The suggestion will infuriate landlords, property owners and construction companies but I think it’s socially necessary.

    Unions and employees will be pleased about providing a better earnings “floor” for the badly paid and those on benefits.  They’ll be much less happy about the squeezing of ratios between the low earners and those on middle incomes - however, they may come to feel such a deal is in their interests too.  

    The tabloids and government will be very hostile to these proposals.  Perhaps riots in Greece and Spain would make them more acceptable????  

  • Martin Nickson

    Not on course to reduce inequality, however equality/inequality is measured wither in terms of opportunity or outcome. In fact, there’s nothing in their plans to address equality of opportunity, and nothing in their policies likely to address equality in outcomes.
    Nice graphs though.

  • barabu

    Triple tuition fees, privatise the NHS. Two of the surest ways to reduce inequality.

    No. They want to widen inequality. That or they are morons.

  • Firozali A.Mulla

    Johnathan,I was and am still very weak with the graphs. Please next time just give me Chrlie Champion standing with Andy and Flo. You see the ECG etc also go beeeee beeeep beeeee bip  beeee bippp then get stuck. >……… so. Dead? no? yes? What do you have to say about Greek churches. I saw the TV SKY< and the Greece is bleeding at some times, bread is given out from the church. For how long this practice will last was the quetion to the bishop or who ever was giving the bread, He said, " People her mix politics with the Church in the name the Creator . You see I have no problem to that as we have bigger ones. Read on if you can send some cash to me, I need a generator   Love that mmmmm Aptly put there. Many would not look and see, I mean see the deeper meaning of the ice crushing and going to the booze. Thank Allah I AM A Muslim and do not drink but I see. Read  the power religion still stand , We do not THE USA AND UK may be like this but it is here stuck so I have to paste it. Do you see the power of prayers. I went to pray for my Eid , Sunday, and now we have some turning toward good. May be we will survive, after all, all the boats have to come ashore if only you have a team work. Greece's embattled prime minister and main opposition leader agreed Sunday to form an interim government to ensure the country's new European debt deal and oversee early elections, capping a week of political turmoil that saw Greece facing a catastrophic default and threatening its euro membership. Greek leaders had been anxious to end a severe political crisis with some positive result before Monday, when the country heads to a meeting of eurozone finance ministers in Brussels. If you are in Tanzania as I am, we have had all black outs for many days, the half toast stuck in the toaster and wife screaming,  “The fuse has blown again and they always do even when the car has puncture!!!!”  Tanzania signed a $1 billion loan agreement in September with China to build a 532-kilometre natural gas pipeline from Mnazi Bay and Songo Songo island in the south of Tanzania to the country's commercial capital, Dar es Salaam. Energy demand is expected to grow to 1,583MW by 2015 from the current demand of around 1,000MW, according to estimates by the country's energy ministry. The International Monetary Fund (IMF) cut its 2011 growth forecast for Tanzania to 6 percent from 7.2 percent in March, saying frequent power outages would hurt output while food and fuel prices could push inflation higher. And The USA and UK wonder why the Gay acts are not accepted in Tanzania. Well thin again. We too need little help, more daily at the geometric proportions, ration 2*2*2* “ ??? That .   So the Far West and the Far East come up to help I thank you Firozali A.Mulla DBA

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