Inequality remains lower than before global financial crisis says IFS

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Inequality in the capital has actually fallen as high earners have been hit hardest (Source: Getty)

British income inequality remains lower than it was before the global financial crisis, according to new analysis by a group of respected economists, with London experiencing a “dramatic” fall in income disparities.

The gap between the top and bottom 10 per cent of earners across the Great British economy fell during the global financial crisis starting in 2007 and has remained steady since then, according to the Institute for Fiscal Studies (IFS).

The figures correct a common misperception that income inequality has soared since the financial crisis. However, the perception of rising inequality has been fueled by sluggish growth in real wages and, therefore, living standards. The influential IFS director, Paul Johnson, has previously called British wage growth in the decade since the financial crisis a “dreadful situation”.

The figures also do not take into account wealth inequality, which some economists, such as the late Anthony Atkinson, have found has risen as asset prices (including London house prices) have increased.

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The fall in inequality came as pay for higher earners slumped. Average household income has seen “extremely slow growth” of only 3.7 per cent up to the 2015-16 financial year, the latest available data, since before the recession after adjusting for inflation, the IFS said.

Meanwhile, the proportion of the working age population in employment has risen to record levels, raising overall earnings for lower-income workers.

The fall in inequality was biggest in London, where the incomes of the richest decile, the top 10 per cent of the population, have fallen by more than 10 per cent, while the incomes of the poorest decile have risen by a similar proportion.

Agnes Norris Keiller, a research economist at IFS and an author of the report said: “While London remains the most unequal part of the country, inequality in the capital has seen a dramatic decline over the last decade.”

The South East is actually the highest-income region, rather than London, the IFS finds, with income 25 per cent higher than the West Midlands, the lowest-earning in Great Britain. After housing costs Londoners’ income is actually slightly below the national average.

Read more: Real wage fall fastest in three years as Britons feel the inflation squeeze

The IFS findings on the broader economy are supported by other measures of inequality. The Gini coefficient, a measure of how income is distributed through the economy, has fallen since the financial crisis from 0.374 to 0.36, according to the Organisation for Economic Co-operation and Development (OECD), although it has risen slightly from its 2012 low of 0.351.

Historically inequality grew sharply during the 1980s according to widely used measures such as the Gini coefficient and the Palma ratio before remaining relatively stable from the early ‘90s and falling after the financial crisis.

Absolute poverty has remained little changed since the financial crisis, which is “historically unusual”, the IFS said.

Campbell Robb, chief executive of the independent Joseph Rowntree Foundation (JRF) think tank, said: “These alarming figures highlight how far behind some parts of the UK have fallen, with millions of people seeing their incomes stagnate or even worse decline.”

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