IT’S fashionable to suggest that economic reform under Margaret Thatcher exposed us to a form of capitalism where “the rich have got richer and the poor have got poorer”. We’re told this has led to increasing inequality, which has damaged our economic and social fabric and that only redistributive policies – in the form of punitive taxes on the wealthy and hand-outs to the poor – can rectify the situation.
But there are problems with this analysis. First, the “rich richer, poor poorer” claim is not true. Last week, the Office for National Statistics published evidence of earnings growth across the income spectrum over the past 25 years. There have been significant increases in real earnings for all, with the average full time employee seeing a rise of 62 per cent between 1986 and 2011. The very poorest 1 per cent saw real earnings increase by 70 per cent, the bottom 10 per cent by 47 per cent and the top 1 per cent by 117 per cent. Similar results are found in household-level analysis, looking specifically at disposable income. So while the rich have definitely got richer, the poor have got richer as well.
Second, though inequality has risen across the period, it has recently been falling. The earnings ratio of the top 1 per cent of earners against the bottom 1 per cent of earners increased from 8.1 in 1986 to 10.3 today. But this measure peaked in 1998 above 12, and has been on a downward path ever since. This suggests that today’s concern about inequality is largely a reflection of current, tough economic conditions.
More significantly, static inequality measures do not account for people moving up or down the relative income scale over time (evidence of economic opportunity). Someone in the top 1 per cent today may not have been in the top 1 per cent five years ago. In his recent book Changing Fortunes, Stephen Jenkins of the London School of Economics found just 17 per cent of households remained in the same tenth of the income distribution in 2006 compared to their original 1991 position, suggesting fairly significant mobility over time. With 40 per cent of households remaining in the same tenth between two consecutive years, Britain was more income mobile during the 1990s than Germany (42 per cent) and Canada (45-50 per cent).
Do rising incomes, higher but falling inequality and relatively high income mobility mean we shouldn’t worry about inequality? Not necessarily. But the underlying causes must be identified. If anti-competitive, rent-seeking activities are to blame, we should stamp them out.
Reams of analysis suggest, however, that it’s global competition and new technologies – the engines of future growth – which are leading to large rewards for the highly skilled or talented. Correcting for this through the high-tax, redistributive policies that equality campaigners advocate would be self-defeating. These policies retard growth and diminish incomes for all without addressing the real challenge: to produce a highly-skilled workforce, incentivised to undertake innovative and entrepreneurial activities.
Ryan Bourne is head of economic research at the Centre for Policy Studies.