Income Inequality

Income inequality refers to the distribution of income from all sources across all individuals or families or households. Incomes may be measured over a week or a month or a year or even longer, and before or after receipt of benefits and payment of taxes and housing costs. The choice between all these variations on income depends both on data availability and on the purpose of the analysis being performed.

There are a number of ways of measuring income inequality. One of the most straightforward is the 90/10 ratio, which measures the gap between rich and poor as the ratio between incomes at two points in the whole distribution, chosen to represent ‘high’ and ‘low’ incomes respectively. It shows the ratio of the 90th income percentile (income level which only 10% of the population exceed) to the 10th percentile (the level which only 10% have less than). If this ratio goes up, the gap between rich and poor is growing.

The Gini coefficient (G) is more complicated and incorporates incomes at all levels of the distribution. G can take any value between 0, if all individuals had the same income, and 1 or 100% if a single individual received all the income in the economy. More generally, a G value of say 0.25 indicates that the income difference between any pair of individuals drawn at random is expected to be 2xG i.e. 50% of mean income. Rising G means that the gap between rich and poor is growing.

In the graph we show these two measures applied to UK households’ weekly disposable income (income after receipt of cash benefits and tax credits and minus direct taxes) before the payment of housing costs derived from the UK’s Family Resources Survey supplemented from HMRC’s Survey of Personal Incomes. The FRS collects information on household incomes, and any given household income obviously provides a much higher standard of living for a single person than for a family of four. Household incomes are therefore adjusted or ‘equivalised’ using the modified OECD equivalence scale to produce a distribution of incomes across individuals.

[Data from 1993 onwards are based on fiscal years]

The two measures show the same general picture. There was a pronounced increase in income inequality in Britain in the 1980s. Since 1990 the two indicators have more or less flat-lined and so they are both still well above their 1961 levels.

Commentary - Income Inequality

The commentary shows that rising income inequality has been observed in a number of other countries. Gini coefficients and the share of the top 1% of income-earners are graphed for a selection of other countries.

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