The next three posts from Charlotte Cavaille are based on the talks heard at a conference held by Cumberland Lodge on Attitudes to Wealth and Economic Inequality in the UK. Thanks to the Cumberland Lodge’s generous invitation, Charlotte spent a day and a half in the idyllic surroundings of the Great Park, Windsor, sharing with a very diverse and dynamic group of participants thoughts on the reasons behind the rise in income inequality, the political and social implications of this rise and what can and should be done about it. In this first post, she looks at what inequality has meant for the fabled ‘squeezed middle’.
“Living in Squeezed Britain, attitudes to Wealth and Economic Inequality in the New Age of Austerity”. When Ben asked me of I was interested in attending a conference with such an eye-catching title I jumped on the opportunity. It was indeed, a fruitful two days and I will here share my thoughts on some of the recurrent themes in the conference – often reflecting my own preoccupations as a political scientist.
John Hills, lead author for the very detailed 2010 report on all forms of inequality in the UK (which Ben has blogged about here), kicked-off the conference with a presentation on inequality trends in the UK. Most of the graphs Professor Hills presented will be familiar to our readers. People at the cut-off for the top 10th have an income 4 times the income of households at the cut-off for the bottom 10th percent. [For individuals at the cut-off for the top 1 % the ratio is 5 times the income of individuals at the median].
Most of the shift from a 3:1 – which was the situation in the early 1970’s – to a 4:1 society occurred in the 80’s. Since 1991, the ratio has remained relatively stable. This is not the case however when one looks at the situation of individuals in the very very top relative to the rest of the population. They have seen their “take home” share of the national income go up continuously since the late 1970’s.
Fascinating – but nothing new under the sky for anyone who looks at these issues in developed countries. But what do these numbers mean “in practice” for these individuals and households that get so neatly organized in earnings percentiles? At the 10th percentile, household income (controlling for household size) is £191 per week, at the 90th percentiles it is £806 – so about £3000 per month. This is a lot but, some might argue, not that outrageous. Maybe society can tolerate this.
It becomes less clear when we look at higher percentiles with average monthly market earnings of roughly £10,000 pounds. But if this is just one percent of households, who really cares? Unless they use their wealth to buy out politicians and rig market competition in their favor, can’t society tolerate a few hyper wealthy first-movers in the tradition of Bill Gates or Steve Jobs ? Could the recent concern about income inequality be one of these fads created by liberal academics obsessed by a dangerously homogenizing ideal of equality?
But how might the ‘squeezed middle’ actually experience income inequality growth?
In examining the role of income inequality in democratic politics, the political economy literature has focused on changes in relative income, i.e. one’s material well-being relative to the average income in the population. Inequality growth in the UK is skewed towards the top, meaning that the difference between the average and the median income has increased over time. This happens when the share of income going to the top half of the income distribution (actually it has been the top 10 %) is increasing faster than the share going to the middle. However, how would individuals be aware that their income is not increasing “enough” in relative terms? They might also believe that high rates at the top might be what allows for some growth at the middle and the bottom, according to the famous trickle down effect.
One thing that is pretty easy to perceive is a change in one own’s income both current/past and future (vs one’s income relative to others, or relative to the average). John Hills did not provide trend data on this, but we can see this in an IFS report (p7), showing a decent growth rate changes in the median household’s real income of around 50 % over the 1979-2008 period.
However, most of this increase, it is often argued, comes from women entering the labor market or increasing their working hours. What it means in terms of material well-being is far from straightforward. John Hills’ wealth data adds another interesting dimension. Indeed, the individual wealth distribution appears relatively stable over the last 30 years. Thus the top 10 % has, on average, held 50 % of marketable wealth since the mid-1970’s down from 89 % in 1923. For the top 1% the numbers are around 20 %. Using a different data set the number even decrease from 48 % for the top 10 % in 1995 to 39 % in 2005.
John Hills has a crafty way of re-framing the data : what is important to consider, he argues, is that while inequality in wealth might seem stable, things change when one looks at relative differences in the values of added wealth. The financial and housing wealth of the median household has increased by 3.1 times the median (market) income. Yet for the top 10 % the added wealth is the equivalent of 8.6 times the median income (let me mention that in the meantime nothing has happened to the bottom, but I am focusing on the median voter here).
I will here only focus on what a 3.1 increase in wealth (more than 300 %) might mean for the middle. What is driving this of course, is the housing bubble in the 1990’s. This wealth, might not be instantly perceived (one does not sleep differently whether one’s roof is worth £100k or £300k). However, this increase might have a delayed impact which materializes when the house is sold. It might also have an “insurance effect”. Houses are an asset that can be sold to cover unexpected expenses, increasing one’s sense of security [regarding the impact of the crisis on these perceptions, I am currently examining this question and will come back to the crisis in the last post].
So just how badly is the middle doing?
In this context, is it that surprising that the middle class does not seem to really want to make income inequalities a central concern of electoral competition? While most people find income inequalities disturbing and too high (74 %, from a even higher number in the early 1990’s), a much smaller group argues in favor of government intervention to remedy this. In 2008 according to BSA data, only 43% agree that it is the government’s responsibility to reduce income differences and 32 % that the government should redistribute income from the better-off to those who are least well-off (down from 49 % in 1994).
In a conversation with Professor David Soskice at Nuffield, I expressed my concerns about the current situation, diligently mobilizing my knowledge about income growth and changes in the distribution of income. He respectfully pointed to the fact that I had not lived in the 1960’s and that in terms of norms and quality of social life things had definitely improved. I remembered my farther describing what it meant to live in De Gaulle’s France where breaking into the girls dorms were a subversive act against the established order. I think I am happy I live in the years of “permanent austerity” after all. Researchers have still to take that kind of non-material improvement into account.
So where does this leave us? Our focus on inequality is mainly a focus on change. Inequality has always existed. What raises our concern is that there has been times when the trend was for the rich to get less and less so, now we are back in times where the rich get more and more of the available income and wealth. It is these trends that we worry about. However how is this change experienced by the middle? Maybe not in such a traumatic way I have here argued.
Some attendees pointed to what I agree might be the most perverse effect of this increase in income inequality, followed by a crisis. In a world of growing material insecurity, where, because of a stretched social ladder, one falls from much higher, the fight for maintaining one’s social status is becoming fierce. In the US, the increase in the competition to get in the Ivy League schools could be a manifestation of this. The rich work hard to maintain their children at the top. They increase the cost of entry into elite programs for the near rich right below them.
These individuals in turn adapt and invest resources in the educational race, which in turn impacts the cost for the middle. We might be seeing some trickle down effect after all! (see also Robert Frank). With the maintenance of social status becoming a full-time job, family wealth increases in important. Income transfers from parents to their children (to help them for a house downpayment for instance) have sharply increased. Those with parents who do not have much accumulated wealth will suffer the most. How is this switch from a “many opportunities” society (that of the highly upwardly mobile baby-boom generation) to a “get there first” one experienced? Sociologists and psychologists might be better equipped here to provide an answer.
In Charlotte’s next two posts she continues her reports from the Cumberland Lodge event, looking at (i) hostility to welfare recipients and (ii) ideas for getting out of the high inequality/low transfers trap.