Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 23 September 2016

Inequality under the Labour government

In the last few months I have sometimes been told that the last Labour government did nothing to reverse the rise of inequality seen under the previous Conservative administration. It is a serious charge, given the harm that inequality creates. But it is also incorrect, and here is a nice chart that shows why.


The Gini coefficient measures inequality. The black line looks at incomes, but the grey line looks at full time earnings. It shows that inequality in earnings was rising throughout the period, including when Labour was in power. Inequality of incomes was flatter while Labour was in power.

The chart is taken from a paper by Mike Brewer and Liam Wren-Lewis (short summary here). The authors use microdata to explain these divergent trends in the 1990s and 2000s. They find four factors at work.
“First, inequality between those with different employment statuses has fallen, primarily due to a fall in the number of unemployed. Second, employment taxes have played a larger role since 1991 in mitigating the increase in inequality of gross employment income than they did before 1991. Third, investment income has contributed less to total income inequality since 1991, largely due to the decline in its importance as an income source. Finally, a rise in the relative incomes of pensioners and households with children under five – both groups that benefited from reforms to welfare benefits and tax credits during the 1990s and (especially) 2000s – has pulled inequality down. Overall, since 1991 these four factors have almost entirely offset the impact on income inequality of the inequality-increasing changes in the distribution of earnings and self-employment income.”

Some of these factors may not have owed much to government policy, but others clearly did. The bottom line is that the last Labour government did quite a lot to reduce inequality. Only once you recognise that can you be realistic about what it would take to do more. Here are some ideas from Tony Atkinson, and I personally would be even more radical in one particular area. 

15 comments:

  1. Except that the very graph to which you have referred shows that inequality did not decrease during the Labour years. Instead, at best, it was stable (and even then only if you use one specific measure). Hence, you have proven that your own claim is fallacious.

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    1. OK, let spell it out really slowly. The claim that I wanted to show was wrong is that "the last Labour government did nothing to reverse the rise of inequality seen under the previous Conservative administration". Now most people would place the emphasis on "did nothing" i.e. passivity. What the chart and analysis shows is that if they had done nothing, inequality would have gone on rising.

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    2. If this post was arguing against the premise that "labour did nothing to stop the rise in inequality", it would be accurate. However the phrase is the last Labour government did nothing to REVERSE the rise in inequality".

      I'm afraid you have been hoisted with your own petard here, Simon!

      In any case, people expected, quite rightly, that a left wing government with a strong majority would be able to reduce inequality, rather than merely preserve it the level reached by the Conservatives.

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    3. I'll use a quick analogy to explain. Imagine someone is running a bath, and you takeover. You turn off the tap, and so you have done something to stop the rise of the water levels. You have done nothing to reverse the rise in water levels.

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    4. You make two claims, the weaker I agree you demonstrate. Labour did stop a further increase in equality. You then went further with the claim "The bottom line is that the last Labour government did quite a lot to reduce inequality." This is untrue, inequality was not reduced merely stopped increasing as clearly shown by the figure. I, for one, hoped Labour would have reduced the inequality that is why their performance was unacceptable.

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    5. It seems to me that the "serious charge" is in fact justified. To "reverse the rise of inequality seen under the previous Conservative administration", the Labour party would have to bring inequality back down to pre-1979 levels. To say that Labour did nothing to reverse the rise in inequality is true, and your graph illustrates it. You are taking the statement to mean something different from what it says. It doesn't claim that Labour did nothing to halt the rise in inequality, it only claims that nothing was done to reverse the rise.

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    6. I agree Labour took measures to mitigate the rise in earnings inequality but that rise cannot itself be treated as independent of government policy, notably the encouragement given to the growth of finance at the expense of other sectors. The lesson here is that policies to tackle inequality have to include what Stiglitz has called “rewriting the rules”, i.e. shifting the balance of power within the market economy not just government action on tax and benefits. We also need to consider inequality in wealth as well as income.

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  2. What about wealth inequality from the New Labour property bubble? Also your quote mentions investment income. Investment income is a somewhat arbitary portion of Haig-Simons income. Companies can choose whether to distribute earnings or retain them on behalf of the owners.

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  3. In the words of Denethor II, Steward of Gondor, "Rohan has deserted us."

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  4. As I read the graph, the argument is that whilst f/t earnings continued to get more unequal, post-tax, post-benefits etc incomes stopped becoming more unequal. If government policy is affecting the difference between the two, Simon's point holds. The important point is to look at incomes and not just f/t earnings.

    In one of the linked pages you mention a maximum wage. Of course, a simple way of getting this would be to have a very high marginal rate of income tax at whatever the max wage should be. Was the top marginal rate of income tax not 97% at one point? Tax returns distinguish between earned income and property income, so people with high investments need not face such a limit on their income, though the question might then be raised of whether this was a good idea.

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  5. You can choose a graph to demonstrate any viewpoint. Income/ft earnings are not particularly effective in demonstrating inequality because they don't take account of housing student loans,travel costs etc, nor the huge rise in wealth inequality for which can be attributed to Labour policies. Millions of people were put into financial stress during the New Labour period -OK this has got even worse under the coalition. The Labour performance has to be qualified because it was benign period for the world economy leading to healthy employment and wage growth.

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  6. No-one has commented on the exact timings on the graph. Income inequality is shown as levelling off in 1990, when the Conservative government still had seven years to run.

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  7. Roger Backhouse

    It was 98%; the maximum tax rate on earned income was 83%, plus the 15% Investment Income Surcharge.

    As a very young Inspector of Taxes I cheerfully negotiated increases charged at 98%; this may explain why I derive amusement from shock horror claims that an increase in levels of taxation would result in Armaggedon.

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  8. "Inequality of incomes was flatter while Labour was in power."

    It was flatter than under Thatcher, but not any flatter than under John Major. It should not have been flat at all, but sloping downwards,given the huge increase under Thatcher.

    The fact is that after thirteen years in power, New Labour left inequality more or less exactly at the very high levels to which Margaret Thatcher had raised it. That's a huge indictment of a supposedly progressive centre-left government.

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  9. Sadly, this effort can only earn a 'D'.
    Wishful thinking does not make up for a lack of proper analysis.

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