When talking to people about why tackling income inequality matters, one of the most common objections I have found is the assumption that reducing income inequality means making everyone poorer. The challenge is normally worded “if we make the poor poorer, and the rich poorer still, so reducing income inequality – how can this be better for everyone?”
Firstly, it’s worth pointing out that this objection tackles an artificial problem. In reality, as economies grow it is possible to spread the benefits of that growth without making anyone poorer. Yet, what we have seen over the past 30 years is exactly the opposite – with the richest getting richer and middle incomes unaffected or in decline. The Resolution Foundation published in a report, Missing Out1, in July 2011, which highlighted that median wages in the UK were stagnant through the ‘boom’ period from 2003 to 2008 despite GDP growth of 11 per cent in the period. They also looked over a 30 year period at the growing income inequality:
“In 1977, of every £100 of value generated by the UK economy, £16 went to the bottom half of workers in wages; by 2010 that figure had fallen to £12, a 26 per cent decline. Indeed, the trend may be even starker: inclusion of bonus payments reduces the bottom half’s share to just £10 in 2010.”
Missing Out, Exec Summary, page 2.
Some of this decline in wages is due to greater proportion going to shareholders than to wages, and greater percentages going to social contributions (e.g. NI and pensions), but these account for only a third of the decline. The vast majority of this decline is due to growing income inequality –with the top 10% getting the same share of the growth as the whole bottom 50% put together. Over the past 30 years, the top 1 % of earners have seen an increase of 50% in their share of the growth of the economy.
The truth is that growth can be more evenly spread to benefit everyone without making anyone any poorer. The irony is that as the IMF have recently highlighted2 income inequality may well hamper sustained economic growth and that the recent economic crash may be due to growing inequality – so income inequality in itself may well be making us all poorer.
I, also, think it is worth dwelling though, on the artificial problem itself, because I do believe that “were the poor to get poorer, and the rich poorer still, so reducing income inequality, everyone would still be better off”. Firstly, I think it is also worth remembering that if we are to follow the law of supply and demand – if everyone was to become poorer, that essential goods and services should also become cheaper to compensate and peoples’ quality of life would not be affected proportionately. So why does income equality matter in this scenario, then?
Human beings are instinctively social animals, and we compare ourselves to others. So as income inequality grows, the goods we need to buy and own to be seen as ‘successful’ or gain ‘respect’ becomes greater as those above us gain greater wealth. This has been most clearly outlined by Professor Robert Frank, an economist from Cornell University, in his book, Falling Behind: How rising inequality harms the middle class3, when people are asked if they would prefer a 4,000ft2 house in an area of 6,000ft2 mansions, or a 3,000ft2 house in an area of 2,000 ft2 starter homes – most people chose the smaller house, but to be better off in comparison with their neighbours. People want what other people have. As Joseph Stiglitz, Nobel Prize winning economist writes: “Trickle-down economics may be a chimera, but trickle-down behaviourism is very real”4.
Therefore, growing income inequality promotes unsustainable consumerism, as we all compare ourselves to those who are growing richer (or appear to be), affecting everyone all the way up the income scale. This promotes the debt spiral. It has been found that the debt/income ratio rose from 45 in 1980 to 91.1 in 1997 and to 156.4 in 20075 ; in the same period, the UK’s Gini co-efficient, as a measure of income inequality has gone from 0.26 to 0.36, with the UK becoming one of the most unequal, developed countries in the world. So even the wealthy 10% will in many cases be trying to maintain a life-style beyond their means on increased debt, reinforcing the pressures of income inequality.
So reducing income inequality – reducing it to the level of Sweden, for example – would have dramatic impact, even if people are getting richer (or poorer) in the process. The reality is, with the right Government policies in place and commitment from businesses, this could be achieved so everyone experiences growth in a more balanced manner. The past 30 years have seen income inequality expanding rapidly in the UK, and urgent action is required to reverse the trend, so we can encourage sustained growth over the next 30 years.
Post written by Chris Burgess, a member of Equality West Midlands.
- Resolution Foundation, Missing Out Report: http://www.resolutionfoundation.org/media/media/downloads/Missing_Out.pdf
- Frank, R. H. (2007). Falling behind: How rising inequality harms the middle class. Berkeley: University of California Press.
- Stiglitz, J. (2011, May). Of the 1%, by the 1% for the 1%. Vanity Fair
- Credit Action. (2011). Debt facts and figures – compiled October 2011. London: Credit Action.
- Key Ideas: http://www.neweconomics.org/publications/ten-reasons-to-care-about-economic-inequality