Inequality falls as surge in jobs helps poorest households

INEQUALITY has fallen since the financial crisis as record low unemployment means more people are in work, so fewer are going without a private income, the Institute for Fiscal Studies has found.

Weak growth in wages has contributed to a common political view that inequality is rising, but the IFS said this was not correct. When it comes to incomes – rather than wealth, which is not covered in the report – the least well-off Britons have made the biggest gains in recent years, while the biggest earners have typically seen their incomes stagnate or fall.

Average earnings fell by 3.7pc after inflation between 2007-08 and 2015-16, the IFS found. At the very top of the earnings spectrum, those in the 90th percentile found their pay had fallen by more than 10pc in real terms. But at the bottom, the lowest percentile have seen their real-terms pay increase by more than 10pc – narrowing the gap between high and low earners.

The picture changes when non-earnings income is included, adding in benefits and pensions, because retirement benefits have increased. Household incomes rose by an average of 3.7pc after the financial crisis, reflecting this generosity to pensioners. None the less, it was “extremely slow growth by historical standards,” the IFS said.

Substantial inequalities still exist between age groups, as well as major differences in pay across regions. Young workers’ incomes are stuck at 4pc below their pre-crisis peaks, and once housing costs are included their incomes are down 7pc on the 2007-08 levels – and 4pc below their 2002-03 levels, indicating that young adults are facing two decades without income growth. This is thought to be partly as a result of the financial crisis, when younger, less experienced workers were more likely to be unemployed – a gap in their working lives that has cast a long shadow over their earnings.

Average household incomes in the South East are 25pc above those in the West Midlands, the IFS found, and the gap between the South East and the national average has risen in the past 40 years from 7pc to 13pc. Some regions have prospered more than others. Scotland, the South West and East Anglia have climbed from below average to above average since the 1970s, while incomes in London have fallen back towards the national average.

The IFS also found it may be difficult to reduce in-work poverty among the poorest households – typically families where the father is the only earner and has suffered from stagnant wages.

“The scope for simply increasing the amount of paid work they do is limited. Very few of them (around 5pc) are parttime employees, and it is not falls in hours worked that have led to weak growth in weekly earnings for most of these men,” the IFS said.

“For the vast majority of these fathers, what is needed is higher hourly wages: the median hourly wage of working fathers has risen by only 0.3pc a year over the last 20 years.”

At the same time, the analysts believe it would be hard for the Government to encourage mothers in the family to go into work, as that would mean higher childcare costs, which may make work unaffordable.