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Explaining the data: the background to our new animation

Sources for the figures mentioned in our new animation, income inequality in the UK

The growing pay gap

The animation highlights the growing difference in pay for Brenda, an experienced nurse earning the UK’s average annual salary of £27,000, and Brian, the boss of a big company, who makes £4,300,000 a year – the average pay package for a FTSE 100 Chief Executive in 2012 (the most recent year for which full data is available).

The UK’s average pay is taken from the Office for National Statistics Annual Survey of Hours and Earnings. The figure for executive pay is taken from the ‘Manifest/MM&K Executive Director Total Remuneration Survey’, published in June 2013.

The Manifest/MM&K report also highlights how executive pay has risen from around £2.6 million in 2002, a major increase, even allowing for inflation. Over the same period, data from the ONS shows that real pay did not increase at all for the average UK worker.

So the lifestyle of top executives like Brian have become more luxurious, while ordinary people like Brenda have found it harder and harder to make ends meet.

The cost of living

At the same time, as the animation highlights, research from the Citizens Advice Bureau found that energy bills have increased at 8 times the rate of average earnings, while food prices have increased by 10% more than wider prices since 2008, according to the Institute for Fiscal Studies.

So in recent years, the most essential items have become even more difficult to afford. The Trussell Trust say that the number of people receiving three days or more worth of emergency food from their food banks has increased from around 26,000 in 2009 to over 900,000 in 2014.

And these people are not necessarily just the homeless or the unemployed – the Joseph Rowntree Foundation’s ‘monitoring poverty and social exclusion’ report published in December 2013 shows that most households classified as living in poverty are also in-work. But low-pay, lack of job security and part-time working mean they still do not have enough money to live on.

International Comparisons

The animation compares this situation – the gap between the Brendas and Brians of the UK – with levels of inequality in other countries. Figures from the World Bank show that other countries in North and Western Europe such as the Netherlands, France or the Nordic countries (Denmark, Norway, Sweden and Finland) have similar or even higher levels of GDP per capita than the UK. This means that, on average, they are at least as rich per person as we are, if not richer.

But these countries are more equal than the UK. Their ‘gini coefficient’ – a recognised measure of inequality –  for income inequality is much lower, according to the Organisation for Economic Co-operation and Development think-tank. Wealth and incomes are distributed more evenly with a smaller gap between rich and poor. The richest 1 per cent of the population take around 6 per cent of total incomes earned in Denmark or the Netherlands, according to the World Top Incomes Database, less than half the 13 per cent taken by the richest 1 per cent in the UK.

The Database notes that total incomes in the UK add up to about £1 trillion (see the 'methodological note' via this link), so the 13% share taken by the 1% is worth about £130 billion. If this was reduced to 6%, the same as in Holland or Denmark, it would leave £70 billion for the other 99% of UK households – nearly £3,000 each, as discussed in the animation.

And remember, the Netherlands, Denmark, France and the other Nordic countries have higher GDP per capita than the UK, so it is not true to say that reducing the share of total incomes taken by the richest 1% would damage the economy and reduce total incomes for everyone.

This illustrates the potential cost of inequality and the failure of a society that allows such a small share of the population to capture such a disproportionate share of total incomes. If we want to make life a bit better for people like Brenda, in the middle or at the bottom of society, we need to think about how the riches of the UK economy are shared, as well as how to make the economy as a whole bigger. To tackle poverty, we must also tackle inequality.

Posted on 13 May 2014

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