When inequality is a problem, and when it isn't

The bottom line is that social mobility and improvements in wealth levels for all, especially at the bottom of the pile, are far more important measures of a country's economic well-being than equality. As usual, the Left just doesn't get it

Does it matter?
Sir John Redwood MP
On 19 December 2014 09:44

All the main parties believe in equality of opportunity. There are various policies pursued to try to give people from disadvantaged backgrounds a decent chance in life. There is no disagreement about the aim.

All the main parties also agree that the tax and benefit system should narrow inequalities of outturn. All believe in taxing the rich more, and giving more benefits to the worse off. The political argument again is not about aim, but about the means and extent of the transfers.

The left like to portray the UK as a uniquely unequal society. The traditional method of measuring it, the Gini coefficient, shows the UK within the typical European range for inequality. We are more equal than Italy, Spain or Greece, but less equal than the Scandinavian countries. Our rating is almost the same as Switzerland’s, the richest European country.

If a country is too unequal or becomes more unequal because the poor are getting poorer, then it has a serious social issue which it needs to address. In the decade up to the financial crash under Labour there was a serious problem, with the lowest 10 percent of incomes not joining in the general advance in living standards enjoyed by all other income groups.

If a country becomes less equal because it attracts some very rich people at the top, that is less of a worry. Compare the following two models:

In Group A the 9 people with an average income of £25,000 and an income range of £10,000 to £50,000 are joined by a tenth person with an income of £1 million. Income inequality has risen from a multiple of 5 to a multiple of 100, a huge rise in inequality. Average incomes have also increased, and no-one is worse off. Indeed, the nine can look forward to increasing their incomes by offering goods and services to the rich new comer.

In group B ,with 9 people on an average income of £25,000 with a range of £10,000 to £50,000, the poorest member of the group experiences an income fall to £8000. Income inequality goes up from 5 times to over 6 times. This does matter because the poorest has just got poorer. Average incomes fall.

Tackling inequality should be mainly about trying to get more people into jobs and once in a job into better paid jobs. The position in 2012-13 in the UK was far from satisfactory for the bottom tenth of income earners. This bottom decile earned on average just £3,875 a year in income, and received £5,868 in benefits to top up.

This group of course included many people unable to work or unable to find a job, or on a pension. The importance of welfare reform is to get more into jobs, and I trust then to be more generous to those who are unable to work. All should participate in the general advance of real wages in the country through the tax and benefit system.

Many more people are now in jobs, and wages are now moving up a bit. As the economy grows and as productivity rises, so real wages can improve more, and there will be more opportunities for people to move into better paid jobs.

Both right and left should be able to agree on this.

Mr. Redwood's writing is re-posted here by his kind permission. This and other articles are available at  johnredwoodsdiary.com

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