Page last edited: 22/10/2010
Click here for Social Democracy, New Labour and Economic Inequality
Click here for The Distribution of Income: Technical Appendix
This document is the first of a series of three in which I shall attempt to analyse the main trends in income inequality between 1979 and and 1997 and between 1997 and2008/09 . The two documents on income trends under Conservative and Labour Governments respectively will be supported by a "technical appendix" introducing some of the technicalities involved in measuring trends in the distribution of income. This first document is subdivided as follows. [Note that the first two sections of this document appeared almost identically as introductions to my earlier documents on the New Right and the Family and the New Right and Education Policy and so some students might wish to skip straightaway to section 3 of the document!]
The Growth of Ideological Divisions within the Conservative Party
The New Right, Neo-Liberalism and Neo-Conservatism.
Conservative Governments and New Right Perspectives on Economic Inequality
Trends in Economic Inequality 1979-1997
An Exercise on Conservative Governments and Economic Inequality 1979-1997 Completion of this exercise should enable students to produce their own short revision summary on the explanation of trends in income inequality under Conservative Governments 1979-1997.
For much of the post 2nd World War period the Conservative Party was led and dominated by so-called Right Progressives or One Nation Conservatives such as R. Butler, I. Macleod, H. Macmillan and Q. Hogg who harked back to the Disraeli tradition of One Nation Conservatism and were prepared to accept pragmatically the expansion of state activity ushered in via by the 1945-51 Labour government programmes involving selective nationalisation, expansion of the welfare state, Keynesian economic policies and tripartite decision making. Once in Government the One Nation Conservatives broadly retained these Labour programmes initiatives while emphasising that the most profitable sectors of the economy would remain in private control and supporting the continuation of economic inequality because of their belief that private property was a pre-requisite for liberty and that capitalist economic inequality could best promote economic growth and rising living standards. However they also recognised that full employment and the expansion of the welfare state were necessary to improve health, housing, education and to reduce poverty if the UK was to be a cohesive One Nation community.
Consequently it has been suggested that from the late 1940s to the end of the 1960s a bipartisan political consensus existed between Labour and Conservative parties in relation to the most important areas of government policy although the extent of political consensus should not be overstated because the Labour and Conservative parties did of course disagree over important details of policy.
Increasingly , however, and especially from the 1970s onwards the views of the Right Progressives were challenged by the New Right Thinking associated especially with the theoretical ideas of academics such as Friedrich Hayek and Milton Friedman and with their development in the UK in pro-Conservative think-tanks such as the Institute of Economic Affairs , the Adam Smith Institute and the Centre for Policy Studies. Among the first modern UK Conservative politicians to espouse elements of New Right thinking were Enoch Powell and Keith Joseph although it was only when Mrs Thatcher,[ having become leader of the Conservative Party in 1975 ]consolidated her hold on power in the early 1980s that New Right ideas became more influential in government.
Mrs Thatcher and her supporters were very critical of the Right Progressive tendency which dominated the Conservative Party during the period of the so-called post war consensus prior to Mrs. Thatcher's ascendancy. The Thatcherites claim that successive Conservative governments of 1951-1964 more or less accepted the policies and institutional frameworks developed by the Labour governments of 1945-1951 which had resulted in the so-called post-war "Butskellite consensus between Labour and Conservative governments from 1945 until perhaps 1970.
According to the Thatcherites the Right Progressive Conservatives had encouraged the growth of an excessively bureaucratic state; they had helped to destroy individual initiative because of their acceptance of high rates of income taxation which reduce incentives to work, save and invest; they had permitted the growth of an expensive, inefficient Welfare States which create exactly the kind of dependency culture which prevents individuals from helping themselves possibly leading to the development of a so-called Underclass; they supported economically inefficient nationalised industries at the expense of the private sector and they relied on flawed Keynesian techniques of macroeconomic management. Their reliance on tripartite or corporatist bargaining processes undermined the ability of government itself to manage the political process. In effect, because Conservative governments between 1951-64 and 1970-74 had made no serious attempts to reverse the Labour policies of 1945-51, subsequent Labour administrations of 1964-1970 and 1974-1979 were able to push the UK even further along the road toward what the New Right regarded as the eventual socialist nightmare. Therefore if and when a new Conservative government were returned to power it would be necessary to reverse these trends.
[ The UK Economy under the Conservatives 1979-1997: Some Further Background Information. on Aspects of Economic Theory. Students may skim -read or skip this section if they wish] For much of the post-war period in the era of the so-called post war consensus both Labour and Conservative governments attempted to use Keynesian policies of macroeconomic management to maintain high levels of employment. Essentially it was argued that unemployment was caused mainly by a shortfall of aggregate monetary demand and that this aggregate monetary demand could be increased by a combination of fiscal and monetary measures [increases in government spending, reductions in taxation, reduced interest rates and increases in the money supply] which would have the effects of reducing unemployment. However by the 1970s it came to be argued by monetarist economists that Keynesian economic policies could only reduce unemployment as far as the so-called natural rate of unemployment and that any attempts to reduce unemployment below its natural rate would lead only to accelerating inflation. This was a view which was accepted by James Callaghan in a speech in 1976 [apparently written largely by his son-in law, the economics journalist Peter Jay] and led the Labour government to reduce its reliance on Keynesian methods.
It is then generally argued that Conservative governments under Mrs Thatcher distanced themselves even further from Keynesian methods and based their economic theories much more on monetarist policies embodied in the so-called Medium Term Financial Strategy which involved 4 yearly targets for government spending, government borrowing [as measured by the PSBR i.e. the public sector borrowing requirement], and the money supply although even by the early 1980s it was being suggested the Conservatives were actually adopting a more pragmatic approach to economic policy and adhering less strictly to the dictates of monetarist theory.
Whatever the complexities of the economic debate it is the case that unemployment did rise very sharply under the Conservatives at the beginning of the 1980s. Mrs Thatcher and her supporters claimed that this was a price worth paying to reduce the rate of inflation and increase the international competitiveness of the UK economy .The rate of inflation , after rising in 1979-1980 did fall as unemployment remained high into the late 1980s.There then followed a period of severe economic instability between 1988 and 1992 as unemployment first fell with a consequent rise in inflation followed by a rise in unemployment with a consequent fall in inflation. Following the exit of the UK from the ERM in 1992 we have had relative economic stability under both Conservative and Labour governments with steady economic growth , falling inflation and falling unemployment. Supporters of Thatcherism argue that, in the final analysis, here economic policies were necessary to create the conditions for future economic stability and growth , a conclusion which is rejected by her critics. Unfortunately I cannot pursue these controversies any further at this point.]
The New Right, Neo-Liberalism and Neo-Conservatism
Mrs Thatcher’s version of New Right ideology has involved a combination of elements of neo-Liberal and neo-Conservative ideologies which can sometimes be contradictory. These two aspects of New Right ideology can be summarised as follows.
2.The core elements of neo-conservatism
In seeking to combine these two aspects of New Right ideology Mrs. Thatcher and her supporters have believed that expansion of the private capitalist economy was necessary to secure economic prosperity and that a strong state would be necessary to re-establish law and order, to maintain law and order in the face of significant industrial disputes such as the miners’ strike of 1984 -85, and to increase expenditure on defence in order to counter the then perceived USSR threat. Consequently Andrew Gamble has argued, very importantly, that Mrs Thatcher’s beliefs may be summarised as involving a belief in "the free economy and the strong state. "
Dimensions of Market Liberalism : A Checklist
- Support for Individual Freedom
- Support for the Market Mechanism and the Private Sector
- Support for Economic Inequality combined with Equality of Opportunity
- Opposition to an extended role for the State or Public Sector within society which implies
- Opposition to Socialism and
- Opposition to the Post-War Consensus which implies:
- Support for lower levels of government spending and lower rates of taxation
- Support for Monetarist rather than Keynesian methods of macroeconomic management.
- Support for privatisation as an alternative to nationalisation
- Support for lower levels of spending on welfare
- Support for the privatisation of welfare services
- Support for Private Health care and Private Education
- Support for "Quasi-Markets in State Health and Education services
- Supporting the reduction of local government autonomy
- Supporting the reduction of "excessive" trade union power
Dimensions of Neo - Conservatism : A Checklist
- Support for Traditional Sources of Authority which implies:
- Support for the State
- Support for strong, punitive approaches to law and order
- Support for "traditional approaches to morality
- Support for the "traditional family"
- Support for "traditional" approaches to education
- Support for "national culture" rather than multi-culturalism
- A tendency to Euroscepticism
Conservative Governments and Economic Inequality.
Given the support of Mrs Thatcher's governments for the core elements of New Right ideology it was entirely predictable that these governments would introduce a range of economic and social policies which would result in increased economic inequality and relative poverty while claiming that such policies would result in rising living standards for all, including the poorest, in the longer term.
Although, as mentioned above there are significant differences between neo-liberalism and neo-conservatism within the New Right both neo-liberals and neo-conservatives accept the arguments [ which are supported also by Functionalist sociologists] that economic inequalities are both inevitable in a free society based primarily on laissez -faire and desirable. Individuals differ genetically in their talents and abilities and in free societies with limited government intervention this will lead inevitably to economic inequality of outcome which is also desirable because it will provide the financial incentives necessary to generate economic growth, the advantages of which will also "trickle down" to the poor so that everyone gains from economic inequality of outcome.
However although New Right theorists are supporters of economic inequality of outcome they nevertheless claim to support equality of opportunity or meritocracy which is seen as necessary to promote economic efficiency and as a necessary aspect of social justice. While critics of the New Right argue that equality of opportunity is impossible in unequal societies which deny opportunities to the poorest New Right theorists argue conversely that government policies designed to redistribute income to the poor actually restrict the freedoms and opportunities of those subject to high taxation, undermine economic efficiency and restrict improvements in the living standards of the poor in the longer term.
In the era of the so-called Butskellite post-war consensus the overall scope of the state had been expanded in ways that New Right theorists believed were damaging to economy and society. Consequently the Thatcherites hoped to reduce the overall level of government spending and the role of the state within society by privatising the nationalised industries which were claimed to be inefficient and by reducing the scale of social security payments on the grounds that they had undermined individual initiative and created a welfare-dependent underclass composed mainly of single mothers and their children as in Charles Murray's version of the underclass theory. In this way it would by possible to reduce rates of taxation which would encourage hard work, enterprise and economic efficiency while the overall management of the economy was to be improved via a retreat from Keynesian economic policies and from corporatist approaches to decision-making.
Trends In Income Inequality 1979-1997 [In this section students may follow links to the "technical appendix" for further information.]
The Importance of Equivalised Household Income
In the analysis of the effects of Conservative Government policy upon economic inequality as measured by income distribution statistics it is essential to note that the presentation of data on the distribution of income relies on the concept of equivalised income whereby the data are presented for childless couples and equivalence scales are used to translate the actual incomes of different types of households into equivalent incomes for a childless couple. For example a childless couples' disposable household income [before housing costs ] is given the weight of one and the disposable household income before housing costs of a single adult household is given the weight of 0.67. This means that in order to calculate a single adult' equivalent disposable household income his/her actual disposable household income is divided by 0.67 so that for example a single adult actual disposable household income of £300 per week translates into an equivalised disposable household income of £447 per week. Click here and here for further information on Equivalised Household Income.
2. Some Important Definitions
We must note also that statistical information is presented on the distribution of different kinds of income:: that is original income, gross income, disposable income, post-tax income and final income .These different kinds of income are defined below.
These various definitions of income are used to illustrate the effects of taxes and benefits on the distribution of income. Original incomes are distributed much more unequally than final incomes mainly because social security cash benefits and state benefits in kind are received disproportionately by low income groups. Meanwhile overall taxation has little impact on the distribution of final income because mildly progressive direct taxation is offset by mildly regressive indirect taxation. Click here for further information on the redistribution of income via taxation and state benefits in cash and in kind.
3. Overall Trends in the Distribution of Income 1979-1997
Overall trends in the distribution are measured via the use of Lorenz Curves and Gini Coefficients and/or via comparisons of the shares of income received by different deciles of income recipients over time. The value of the Gini Coefficient can vary between Zero and One where a Zero value represents total equality in the distribution of income and a value of One represents total equality in the distribution of income. so that an increase in the value of the Gini Coefficient signals an increase in income inequality and vice versa. Click here to find further information on the nature of Lorenz Curves and Gini Coefficients. [If you are studying Lorenz Curves and Gini Coefficients in a little more detail you will come across the technical issues which emerge in the comparison of Lorenz curves of different countries or at different times when two Lorenz curves cross but I have not pursued that issue here ].
Information on trends in the distribution of income can be found in the Department of Work and Pensions [DWP] publication entitled Households below Average Income, in various reports from the Institute of Fiscal Studies and in reports from the ONS. Much of this information is summarised also on the Poverty.Org website. The DWP measures trends in income inequality using disposable income both before and after housing costs as measures of income and the income distribution after housing costs can be shown to be more unequal than the income distribution before housing costs.
Trends in Gini Coefficient [measured for disposable income after housing costs] are shown in the following diagram taken from the Poverty Org website. The diagram shows that income inequality as measured by the Gini Coefficient rose significantly between 1979 and 1990 during the Conservative administrations led by Margaret Thatcher but more slowly between 1990 and 1997 during the Conservative administrations led by John Major perhaps illustrating the greater political pragmatism of John Major relative to Margaret Thatcher..
You may also click here for information on differences in the growth of income of low and high income recipients and on differences in the income shares of high and low income recipients. Especially between 1979 and 1990 the incomes of high income recipient increased more rapidly than the incomes of low income recipients leading to an increase in the share of total disposable household income received by high income recipients and a decline in the share of total disposable household income received by low income recipients
4. Explaining Trends in the Distribution of Household Income
Several factors have contributed to the rise in income inequality between 1979 and 1997 and we may distinguish broadly between demographic factors, economic influences on the distribution of original income and the effects of government policy.
Household income inequality has increased for the following demographic reasons.
Broadly speaking individuals are likely to choose similarly qualified individuals as husbands/wives or partners. As increased numbers of women have entered the work force household income inequality has increased as a result of the income differences between households containing well qualified/employed/well paid couples and households where neither partner is in employment or one of the partners is employed in a poorly paid occupation.
Increasing life expectancy means that more people depend upon the state pension as their sole source of income.
Increasing numbers of people live in single adult households or in lone parent families.
Trends in the distribution of original income which is defined as income received before any kind of government intervention.
The operation of the UK economy from the 1970s onwards contributed automatically to the growth of original income inequality because relatively high levels of demand combined with shortages of supply of skilled non-manual and manual workers increased these workers' original incomes relative to the original incomes of lower paid workers. However it has been argued that actual Conservative Government economic policies contributed further to original income inequality because these policies themselves contributed to the growth of unemployment and to reduced trade union power which further reduced the original incomes of low paid workers [ much as has traditionally been suggested in Marxist theories relating to the effects of growth of the reserve army of labour.] Furthermore despite arguments in support of the introduction of a minimum wage as a means of reducing economic inequality and poverty the Conservatives rejected such arguments between 1979 and 1997 on the grounds that the introduction of a minimum wage would actually increase unemployment although they would later [under the leadership of William Hague] come to support Labour's introduction of the minimum wage.
Trends in the distribution of gross income which is defined as original income plus social security benefits such as state retirement benefits, unemployment benefits, child benefits etc.
The New Right desires to restrict the overall scope of the state in order to facilitate the transfer of resources from the public sector to the private sector of the economy and reductions in taxation and in particular their desires to reduce social security spending as a means of reducing what they considered to be welfare dependency were likely also to result in increased inequality of gross income. From the mid 1960s onwards, mainly as a result of the publication of Abel-Smith and Townsend's "The Poor and The Poorest, UK governments had been obliged to acknowledge the problem of relative poverty as well as absolute poverty although there was little evidence of any significant fall in relative poverty between 1964 and 1979.
However the Conservative governments of Mrs Thatcher claimed that by 1979 absolute poverty had been all but eradicated and that concerns with so-called relative poverty were misguided. The Thatcherites pointed out that since relative poverty was usually defined in relation to average income so that, for example, individuals receiving less than 60% of median income would be defined as living in relative poverty, it followed that in an unequal society some relative poverty as defined above was numerically inevitable unless income inequalities were very limited so that no-one actually received less than 60% of median income.
According to Thatcherites, therefore, theorists who emphasised the need to alleviate relative poverty were actually "closet egalitarians" who actually sought the reduction in income inequality while claiming that their concern was the reduction in [relative] poverty. And ,of course, the Thatcherites themselves, while claiming to support equality of opportunity, believed that reductions in income inequality in 1979 were highly undesirable because they would affect adversely incentives to work , save and invest. Indeed Mrs Thatcher's government intended to take measures which would actually increase income inequality .[See below]
Thatcherites argued also that while a fairly full range of social security benefits was necessary to provide a safety net for those in real need [who in earlier times might have been described as members of "the deserving poor"], the easy availability of social security benefits had led to the creation of a so-called "culture of dependency" which was being transmitted from generation to generation and leading in turn to the creation of an "underclass" of work-shy individuals who preferred to rely upon social security benefits rather than to lift themselves out of poverty through their own efforts as described in some detail in the theories of the American social scientist Charles Murray. It followed that even if it was desirable to increase social security benefits ,say, for working families with children or for the elderly or sick who were members "the deserving poor", availability of social security benefits for members of the underclass ["the undeserving poor"] should be strictly limited. [Students must obviously familiarise themselves with Charles Murray's version of the Underclass theory and with important criticisms of it.]
Critics of the Thatcherite approach to social policy have claimed that between 1979 and 1990 a variety of changes to the social security system have contributed to greater income inequality and affected the poor adversely.
Until 1980, social security benefit levels were increased in line with earnings rather than prices but since then, they have been increased in line with prices which has meant that social security benefits as a percentage of the average earnings have declined implying an increase in relative poverty.
In addition, before 1979 and since, the % of social security payments which are means tested and selective rather than universally available has increased. For example, when the Job Seeker' Allowance [JSA] replaced Unemployment benefit in 1986, it would be means tested after 6 months rather than after 1 year. [In favour of means tested benefits, it is argued that the means test ensures that benefits are targeted only on those who really need them and that this should prevent "wasteful" spending on social security, thus perhaps creating further scope for the reduction of taxes. However, against means tested benefits it is argued that complex claiming procedures and perceptions of social stigma may result in low take up and hence lead to the intensification of poverty. Also, means tested benefits can themselves create a poverty trap in that, for example, a part-time worker claiming a range of means tested benefits may have no financial incentive to work longer hours because benefits are reduced as earnings increase.]
The introduction of the Social Fund lead to the replacement of grants by loans to finance exceptional payments on items such as furniture and conditions attached to the granting of such loans have been stringent.
16 and 17 year olds lost their eligibility for Income Support and lower rates were introduced for 18-24 year olds. The assumption here has been that 16-17 year olds, if they become unemployed and refuse a YT place, can be expected to live with and be supported by their parents but if the parents themselves are poor or if family relationships are strained, this can lead easily to a growing problem of youth homelessness which is made worse by the sometimes unsympathetic housing policies of some Local Authorities.
There was also controversy over the payment of Invalidity Benefit which allegedly was leading some people to overstate the extent of their invalidity in order to claim benefit at a higher rate than the orthodox Unemployment Benefit or Income Support. Consequently the payment of Invalidity Benefit began to be regulated more strictly. [Invalidity benefit was subsequently replaced by Incapacity Benefit but even by 2010 it is still claimed that even tighter restrictions on payment of Incapacity Benefit are still required, a view which also attracts wide criticism.]
Trends in the distribution of disposable income which is defined as gross income -direct taxes and employers national insurance contributions
Mrs Thatcher's governments introduced a range of policies designed to increase financial incentives to undertake training, to work hard , to save and to invest all of which, the Conservatives claimed, would result in increased economic efficiency, higher rates of economic growth and rising living standards for all.
Thus the Conservatives introduced major changes to the structure of UK taxation. Prior to 1979 earned income, [that is: income from employment] was taxed at a lower rate than unearned income, [that is: income from returns on saving and investment}. The Conservatives argued that the distinction between earned income and unearned income was essentially meaningless because those individuals who saved and invested prudently could be seen as earning their incomes just as workers earned their incomes from employment and , in any case it was seen as desirable to encourage saving and investment as a means of stimulating economic growth. The Conservatives therefore abolished the distinction between earned income and unearned income so that incomes from saving and investment were now to be taxed at the lower rate which originally applied only to earned . Clearly this change in taxation benefited the rich and comfortably off who had money to save and invest relative to the poor who did not.
The Conservatives also reduced rates of income taxation especially for high earners. Prior to 1979 the standard rate of income tax was 33% but high income earners paid progressively higher marginal rates of income taxation reaching a maximum of 83% for earned income and 98% for unearned income . As mentioned the distinction between earned and unearned income was quickly ended, the standard rate of income tax was reduced to 30% and the highest marginal rate of income tax was reduced to 60%. Further by 1988 the Conservatives had reduced the standard rate of income taxation to 25% and the highest marginal rate of income tax to 40% all of which benefited the rich and comfortably off disproportionately and made the distribution of disposable income much more unequal than under previous Labour and previous Conservative Governments.
The overall progressivity of direct taxation would have been reduced further if the newly introduced and highly regressive poll tax had not quickly been replaced by the Council Tax once Mrs Thatcher forced to resign the premiership although even the Council Tax is a slightly regressive tax.
Trends in the distribution of post-tax income which is defined as disposable income - indirect taxes. [Note that the DWP , the IFS and from Poverty.Org do not provide estimates of the effect of the shifts from direct to indirect taxation on the distribution of income but it is clear that this effect further increased income inequality.
Given the government's necessity to finance its own spending the Conservatives obviously had to raise other taxes in order to offset the above reductions in income taxation and even before the 1979 General Election Labour politicians claimed that if the Conservatives were elected to power they would double rates of VAT in order to offset proposed reductions in income taxation. This the Conservatives denied and , true to their word [just!] raised the rate of VAT from 8% to 15% which combined with the fall in income tax rates combined to produce a significant increase in overall economic inequality.
To see this it is necessary to appreciate the distinction between progressive taxation [ where the percentage paid in taxation rises as an individual's income rises], proportional taxation [where the percentage paid in taxation remains constant as an individual's income rises] and regressive taxation [where the percentage paid in taxation rises as an individual's income falls]. These Conservative tax changes reduced the overall progressivity of the taxation system and shifted the overall burden of taxation from high to low income recipients resulting in a significant increase in post -tax income inequality.
Trends in the distribution of final income which is defined as post-tax income plus benefits in kind [education, health etc.]
The allocation of Benefits in kind serve to increase income equality .We might for example envisage that many pensioners are relatively poor and also disproportionately likely to use the health services; that large families are disproportionately likely to be poor and also have children likely to be using state education services and also that households in the highest quintile are more likely to use Private Education [and Private Health Care] which reduces the average benefits in kind gained via the use of state education and health Services. However upper quintile families who do use the state services are likely to benefit disproportionately from them in that, for example, they may use the services of their GP more effectively and the children of middle and upper class parents are more likely than the children of working class parents to achieve educational success..
The DWP, the IFS and Poverty.Org to not provide estimates of trends in the distribution of final income but it seems very likely that in the current economic situation as the current Conservative Government implements wide ranging reductions in public expenditure much more attention will be given to the distribution of final income than has been the case in the past.
Overall Trends in the Distribution of Income 1979-1997: A Summary Exercise
Explain the terms "Lorenz Curve" and "Gini Coefficient".
If a Gini Coefficient increases from 0.3 to 0.4 has income inequality increased or decreased?
What do Gini Coefficient data tell us about the income distribution trend between 1979 and 1997?.
In the investigation of trends in the distribution we may distinguish between factors influencing different kinds of income . Bearing this in mind make sure that you can define each type of income and then complete the following table.
Type of Income
Factors contributing to trends in the distribution of each type of income
5. Income inequality clearly did increase between 1979 and 1997 but how could these increases in income inequality be justified and criticised using differing sociological perspectives?
You may have noticed that the key diagram in this document illustrates that income inequality increased further under Labour Governments between 1997 and 2008/09 .You may click here for some information on the BBC coverage of IFS analysis of income distribution trends under Labour Governments and I shall compare Conservative and Labour Governments' records in relation to trends in income inequality in a following document.