Income gap shrinks - but for how long?

The gap between rich and poor has been getting smaller in the UK - but recent events may not help...

Last Updated: 31 Aug 2010

According to the Organisation of Economic Co-operation and Development, income inequality has fallen faster in the UK than in any other developed country since 2000. This might seem a bit odd given the notorious wealth accumulation by the City during this period – but apparently the rise in employment rates has boosted the income of the lower end of the spectrum. So unfortunately, if the forthcoming recession leads to more people losing their jobs, this trend could start reversing again even as City wages fall…

Most people would agree that huge income inequality within a country is a dangerous and divisive thing, both politically and socially. So these figures in some ways come as a pleasant surprise. Even the OECD calls the post-millennium decline in inequality ‘quite remarkable’ – and given that it came during a huge boom period for the City, as private equity and hedge fund bigwigs made vast personal fortunes, you can see their point.

However, it appears that although the rich have indeed been getting richer, the poor have getting richer at an even faster rate. According to the report’s author Mark Pearson, rising levels of employment have been the most significant factor. ‘Because we have had a lot more people in employment and a lot more redistribution, these two effects combined have actually increased the incomes of the poor quite dramatically,’ he says. Income poverty (households earning less than half the average income) fell from 10% to 8% - the first time since the 1980s we’ve been well below the OECD average. Child poverty – one of Labour’s key targets – also fell, from 14% to 10%.

On the other hand, the Government shouldn’t get too pleased with itself. The UK still has one of the highest levels of income inequality in the developed world. There are still more children living in poverty than there were in the 1980s, and social mobility is still much less than in other countries: a child’s social class at birth is still the best indicator of how well they’ll do in later life, which is rather embarrassing for a left-wing party that’s been in power for a decade (although this has been a long-term trend: the gap between rich and poor has widened by 15% since 1985).

It’s not just a UK problem, of course: income inequality has increased in more than three-quarters of countries covered by the report. That said, the OECD reckons the rise in inequality hasn’t actually been as bad as everyone thinks – it argues that the ‘Hello Magazine effect’ makes people feel worse off, because they read magazines full of super-rich celebrities flaunting their wealth (and lack of taste) to the world.

So if a decline in inequality seems rather improbable and counter-intuitive to you, in the light of the conspicuous consumption of the last few years, blame Paris Hilton...

In today's bulletin:
Income gap shrinks - but for how long?
Green backs off Baugur as Arcadia slips
Brown's corporation tax headache
MT's Little Ray of Sunshine: The ten o'clock brainwave
'35 under 35' spawns its first business 

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