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Money

It is no surprise that inequality increases when the incomes of the very richest go up, and decreases when the incomes of the very poorest go up, but what effect do pay rises for people on middle incomes have on inequality? 

Research by Dr Laurence Roope from the Health Economics Research Centre (HERC) in the Nuffield Department of Population Health shows that in the UK an increase in the income of anyone in the bottom two-thirds of the income distribution tends to reduce inequality, while an increase in the income of anyone in the top third tends to increase inequality. This is according to the Gini coefficient, the most widely used measure of income inequality, and means that increases in incomes below around £32k before tax, in the UK tend to reduce inequality. 

Dr Roope said: “It might seem surprising that inequality can be reduced by income rises so far up the income distribution. In the UK, for example, someone earning, say, £30k is earning well above the median income and is by no means poor. Inequality and poverty are often conflated. A key message for policymakers from this research is just how distinct the two concepts really are. The economy can grow, and become more equal, while the incomes of the poor, and even those on middle income, are left behind.” 

The threshold income, below which pay rises reduce inequality, is nearer the middle of the income distribution in less unequal countries such as Sweden and Denmark, and nearer the top in more unequal countries, such as the United States and the large emerging economies of Brazil, Russia, India, China, South Africa (the BRICS).

The scale of global inequality means that increases in the incomes of well over 80% of the world’s population would decrease inequality. This includes the majority of people in the developing world, including the BRICS, and a sizeable minority in many developed countries.

The research emphasises the fact that the impact of economic growth on inequality depends very much on the type of growth, and on which percentiles of the income distribution most share in that growth.”

The study is based on data from the United Nations University World Institute for Development Economics Research (UNU-WIDER)’s World Income Inequality Database (WIID) and the findings were presented at the European Meeting of the Econometric Society in Lisbon on 22nd August.