Why the Rich Are Getting Richer

Economic inequality is a hot topic. Most people are now aware that the rich have got richer, leaving everyone else with less to share. However, most do not know why the situation has got so bad and what to do about it. Tax is the obvious remedy, but in the current context where demands are growing on shrinking public resources, this is not a realistic possibility.

nef’s research sets out to consider how to tackle inequality at its source. It explores pre-tax or market income inequality, bringing together the academic literature that identifies the key factors and processes that have caused inequality to grow in the UK. It also considers how more equal countries have successfully addressed causal factors. Finally, it uses these findings to highlight policy areas that offer potential direction for change.

Findings

There are multiple reasons why inequality has grown, and varying degrees to which each factor has mattered. In order to sort and make sense of these factors we have grouped them under five headings:

1. Initial conditions: the economic situation that people are born into, including wealth and asset ownership.
2. Channels of influence in early life: the routes that could potentially inflate unequal starting points, most notably early childhood education and care, primary and secondary education.
3. External influences: globalisation and liberalisation are two major external forces that have both directly fuelled inequality and played a considerable role in shaping the UK economy and labour market.
4. The national economic system: including the make-up of sectors and profile of the labour market.
5. The political system and tax: the type of political system, namely if it is proportionally representative or not, dictates the likelihood of governments tackling inequality. This in turn influences the progressive or regressive tilt of tax policy.

The connection between these groups of factors is best illustrated through a circular diagram, where initial wealth inequalities then dictate the channels of influence in early childhood. Included in this cycle are external influences, such as globalisation, which have pushed the economic system to develop in an uneven way. This unbalanced economy has resulted in an increasingly polarised labour market, causing outcomes to diverge further. Finally, the structure of taxes further entrenches inequalities for this and the next generation.

The interplay of factors driving inequality means that there is no easy resolution. But it is clear from international examples that UK levels of inequality are not inevitable.

Policy implications

These findings shed light over several current government policy positions, and in particular demonstrate that the continued fixation on equality of opportunity and poverty reduction is unlikely to bear any fruit. Three policy areas are especially undermined by the failure to acknowledge or tackle economic inequality:

• Social mobility: The current approach to increasing social mobility does not tackle wealth inequalities, leaving the rich to convey their advantages to their children.
• Child poverty: The strategy to tackle child poverty ignores the lack of decent work available at the lower end of the income distribution.
• Re-balancing the economy: The North-South divide is the consequence of deep-seated trends, most notably de-industrialisation. In the face of this shift, current policies encouraging enterprise growth are not enough to loosen the stranglehold either of London and the South East or of the finance sector.

Intervening to break the cycle

Returning to a more equal socio-economic structure does not mean reviving policies of the 1970s. We accept that top-down redistributive policies that rely too heavily on tax are unlikely to be effective on their own. Tax cannot provide a definitive solution while inequalities continue to grow, because this would require further tax increases.

The aim then must be to encourage structural change that prevents high levels of economic inequality from arising in the first place.

How can this be done? The analysis of the root causes of inequality suggests scope for action in five main areas primarily. Below is an overview, but further research is needed to explore and refine ideas in each area. This will be the focus of nef’s programme of continuing work on economic inequality.

1. The Labour Market:   

1. High income differentials are at the frontline in perpetuating economic inequality and the stark divisions that exist in our society in terms of access to resources, decision-making and opportunity. Possible solutions include the Living Wage and/or the introduction of maximum wage ratios within companies and organisations.
2. The hollowing out of skilled and semi-skilled jobs in the economy means there is a shortage of adequately paid jobs. Innovative policies are needed through an industrial policy which recognises the importance of creating meaningful employment, while at the same time pushing production into more green and sustainable areas. nef’s new programme of work, Good Jobs, aims to consider industrial strategies that would produce a more equal labour market.
3. Just as income and assets are very unequally distributed in the UK, so too are work and time. We need to see working hours better distributed.

2. Education:

1. The initial conditions that a person is born into are exacerbated in our system by unequal access to the best education. Thus, child-care and education systems are central to flattening differences at the beginning of life. We must look more to the universal child-care models used in countries such as Sweden to prevent inequalities based on parental incomes from emerging.
2. A small number of schools, mainly independent, confer dramatic advantages in terms of entry to the best jobs and positions of authority. Currently we focus on improving schools at the bottom end of the education system, but resources will never be level if independent schools continue to increase fees. Tackling the resource differentials in education could require capping the amount spent per pupil.
3. Vocational training needs to be built into the fabric of businesses, such that many more are involved in taking on apprentices and training them. Alongside this shift, more must be done to improve the respect afforded to vocational qualifications, this point is linked to re-balancing the economy.

 3. Structures of ownership:

1. To give everyone a more equal share in society, the ownership of assets needs to be more equally distributed. Ideas for how this could be achieved include introducing a mechanism to broaden the distribution of shares to workers and to communities.
2. Changing the ownership of assets also allows us to consider the spread of profits among and between individuals. The distribution of unearned income is another vital component of economic inequality.

4. Tax:

While tax cannot continue to take centre-stage in tackling inequality, it does play an important role in entrenching inequalities at the end of the cycle depicted above. A land-value tax and a form of citizen’s endowment could offer a more effective way to tax and fairly redistribute wealth.

5. Structures of democracy:

We need to examine further the relationship between different voting systems and economic inequality. In particular, we need to look at how to give a more equal voice to those with less economic resources.