Explaining the growth in UK income inequality 1979-1988

Official statistics give rise to the perception that UK income inequality increased substantially during the 1980s, but are not of themselves adequate to provide unambiguous conclusions about inequality changes. Department of Social Security statistics report a sharp rise in the number of individuals with household income below half the national mean, but do not provide a complete description of the income distribution. Similarly, figures produced annually by the Central Statistical Office suggest a trend of growing inequality, but are acknowledged by their author to be inconsistent in their definition of income over time. Here we start by confirming that on standard inequality measures the UK income distribution widened during the 1980s.3 This is demonstrated using the same income definition as is used in the official DSS series. In doing this we seek to provide a link between academic studies of inequality and those used by policy-makers and the general public. We then consider the causes of the growth in inequality using a simulation model of the tax and benefit system to quantify how far tax and social security p.9licy has contributed to this growth. We also assess the role of differential rates of earnings growth at different income levels and of changes in the size and composition of the employed and non-employed populations.