By Valentina Magri
Inequality has been one of the most heated topics of economic debate in 2014 after the great success of Thomas Piketty’s “Capital in the Twenty-First Century”.
The book was awarded the 2014 Financial Times and McKinsey Business Book of the Year prize on 11 November 2014. Mr Piketty, who is in China promoting his book, said in the accepting video that “issues about economic wealth and capital and public debt are too important to be left to a small group of economists and statisticians.”
The nearly 700 page long best-seller by “the modern Marx” concludes that inequality has been risen in Britain since 1980, but in what way are Brits unequal today and where does inequality come from?
The sources of economic inequality
Economic inequalities lie at different positions within economic distribution. They stem from income or wealth. The former includes not only pay, but also money earned via investments, pensions, rent, savings, state benefits and other money received due to employment, such as bonuses. The latter refers to the total amount of assets of an individual or a family, including financial and real assets.
The most common measure of inequality is the Gini coefficient. Its value ranges from 0 (perfect equality) to 1 (maximum inequality).
Inequality in the UK
The Gini index in Great Britain is equal to 0.34. The coefficient reached a peak of 0.362 in 2000-2001 (Household below average income: 1994/95 to 2012/13, Department for Work and Pensions). Moreover, the crisis had only a very small effect on income inequality: the top fifth continue to take over 40 per cent of the total income, while the bottom fifth have only eight per cent of the total income. According to the ONS, the richest one per cent of British households have more wealth than over half of the population.
This infographic by the Equality Trust is particularly insightful.
National data also tells us that inequality between regions does exist: an average household in the South East of Britain has almost twice of the amount of wealth of an average household in Scotland. The World Top Income Database points out that in 2011, the top one per cent received the 12.93 per cent of the total income, enjoying a real income of £248,480.
How does the UK compare with other countries?
Great Britain has a relatively equal distribution of wealth with respect to OECD countries, having a Gini coefficient of 0.675, compared to an OECD average of 0.717. In the latest “Global Wealth Report 2014” by Credit Suisse the debt-to-income ratio reached a peak of 180 per cent in 2008, then decreased to 150 per cent by 2013 and risen back to 170 per cent in 2014. In addition, there are two million USD millionaires in Britain.
In terms of income, UK is the fourth most unequal country and the first one in EU, says the latest Luxembourg Income Study.
Why inequality is a problem
Oxfam’s report “Even it up. Time to end extreme inequality” says that “extreme inequality hurts us all”, because it:
- is a barrier to poverty reduction;
- undermines economic growth;
- is one of the components of gender inequalities;
- drives inequalities in health;
- is a source of education and life chances inequalities;
- threatens society, since it triggers violent crime, conflicts and social problems in general.
How to tackle inequality?
Many solutions have been suggested so far.
Thomas Piketty in his best-seller calls for a progressive taxation at a European level. Oxfam suggests to apply this taxation in Britain and also advises to fix unfair tax rules to ensure that the strategy to reduce the deficit does not hit the poor hardest as well as raising the national minimum wage. Finally, Oxfam has a political request that party manifestos include an analysis of the impact of their pledges on economic inequality in the UK. The OECD in its 2011 report “Divided we stand. Why inequality keeps rising” writes that a significant reason for inequality in Britain is the failure to sustain education once compulsory schools ends, therefore also a change in the education system may help.
2014 is (almost) over; will 2015 be a good year for a change?
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