Income and wealth: Report of the JRF Inquiry Group

Since the late 1970s the gaps between rich and poor in Britain have widened rapidly. The Joseph Rowntree Foundation established a series of research projects to examine different aspects of the rise in the inequality and convened a special Inquiry Group, chaired by Sir Peter Barclay, to consider the research findings and their implications, and to make recommendations for policy changes. The Group's main findings are summarised below.

1 - Key findings from the evidence

The gaps between rich and poor have widened

• Income inequality in the UK grew rapidly between 1977 and 1990, reaching a higher level than recorded since the War.
• Internationally, there has not been a universal trend towards greater inequality in recent years, although this has been the case in the majority of industrialised countries. The pace at which inequality increased in the UK was faster than in any other, except New Zealand.
• Between 1979 and 1992 the poorest 20-30 per cent failed to benefit from economic growth, in contrast to the rest of the post-war period.

The growing gap has had multiple causes

• Income inequality increased in the 1980s for a variety of reasons.
• More people became dependent on benefits like Income Support as a result of both higher unemployment and demographic factors.
• The income gap widened between those dependent on benefits and those with earnings.
• Inequality grew not just because of the growth in the gaps between different population groups, but mainly because of the growth of inequality within them.

Differences in income from work have grown rapidly

• After 1978 hourly wages for the lowest paid men hardly changed in real terms, and by 1992 were lower than in 1975; median wages grew by 35 per cent; but high wages grew by 50 per cent.
• Education now has more of an effect on both wages and unemployment, although rising returns to education only explain the smaller part of the rise in the earnings gap between high paid and low paid.
• The stakes are higher for young people entering the labour market, with greater differences between those who do well (linked to education) and those who do not.
• In the 1980s the number of women in work (or looking for work) from couples with low incomes increased more rapidly than for those with high incomes, except for couples where the man was not working.
• The numbers of two-earner and of 'no-earner' couples have both increased. The chances of getting into work have fallen sharply for both men and women who are not working and whose partners are not working either.
• Rising self-employment contributed to the rising numbers with relatively low incomes. While some may under-report incomes, there is a growing group for whom 'self-employment' involves marginal activities.

Social security slowed the growth of inequality in the early 1980s, but has not since

• Between 1978 and 1984, inequality in gross incomes (including social security benefits) rose much more slowly than inequality in market incomes. Between 1984 and 1990, the pattern was the opposite.
• Since the early 1980s, benefit levels have generally been linked to prices, so that the incomes of those dependent on benefits have fallen behind the working population.

And the tax system did not slow inequality growth

• The tax system had much the same impact in reducing inequality in 1992 as in 1977.
• This is because two factors cancelled out: the 'automatic' effects of progressive taxes like income tax tend to slow the growth of inequality, but discretionary tax changes shifted the burden of taxation from higher to lower and middle income groups.

Particular groups and areas have done disproportionately badly

• Not all pensioners are poor, but it cannot be assumed that there are no longer poor pensioners. A growing group of younger pensioners are receiving significant occupational pensions, but a substantial proportion depend heavily on state benefits.
• The incomes of certain ethnic minority groups are well below the national average and a large proportion of their populations live in areas of deprivation.
• Parts of the country seem locked in a spiral of decline, but others changed their relative position in the 1980s, with the problems of Inner London growing substantially.
• At ward level, the already substantial differences between deprived and affluent neighbourhoods grew further over the 1980s.
• Because council housing is concentrated in particular estates, polarisation of income groups by tenure leads to a concentration of people with low incomes in particular neighbourhoods.

Wealth inequalities have stopped declining

• Until the mid-1970s wealth inequalities narrowed rapidly, but have now levelled out. Wealth remains much more unequally distributed than incomes.

2 - The implications of the changes in distribution

• The Inquiry Group's prime concern is with the overall social effects of the changes in distribution, which impact on the whole community; with the accumulation of problems in particular areas; and with the long-term economic costs.
• It might be possible to justify a growth in inequality on the grounds that the beneficial effects on growth would raise the living standards of the poorest, but there is no evidence that this has occurred in Britain: there is no sign of 'trickle-down'.
• Several factors which led to wider income inequalities in the 1980s also contributed to the overall rate of growth. Economic efficiency need not be damaged if the gainers can both compensate the losers and retain part of their gains. The balancing act is to decide how and to what extent that compensation should take place.

The growing gap between rich and poor is damaging the social fabric

• The way in which the living standards of a substantial minority of the population have lagged behind since the late 1970s is not only a problem for those directly affected, but also damages the social fabric and so affects us all.
• Regardless of any moral arguments or feelings of altruism, everyone shares an interest in the cohesiveness of society. As the gaps between rich and poor grow, the problems of the marginalised groups which are being left behind rebound on the more comfortable majority.
• In many areas of the UK the living standards and life opportunities of the poorest are simply unacceptably low in a society as rich as ours.
• The falling relative incomes of the poorest are a concern, whether or not they reach or exceed a particular absolute standard of some years ago.
• Those remaining dependent on price-linked benefits have little or no stake in the prosperity of the country, since rising real incomes in general have no effect on their own standard of living.

Problems are becoming concentrated on particular groups and areas

• There has been a shift towards double-income families, where both parents work but can spend less time with their children, and lone parenthood, with its associated vulnerabilities and stresses which also reflect on the children.
• The Group is concerned by the position of children being brought up in low-income families, particularly in neighbourhoods where most families are poor. Whilst parents have the primary responsibility for their children's welfare, the community as a whole has a vital role in supporting them to carry out that task.
• We are particularly concerned that the non-white population is at much greater risk of poverty than the white population; low educational qualifications for some ethnic groups imply that such differences may remain or even increase in future.
• Poverty threatens to overwhelm the investment which has been made in the people and fabric of some of the poorest council estates in the country.

Increasing inequality can damage the economy

• Since the trend towards greater equality of incomes was reversed in the late 1970s there has not been a faster rate of growth in Britain than in previous periods when the gap between rich and poor was smaller.
• If future international competitiveness depends on flexibility, and investment in human and physical capital, it is necessary to forgo higher levels of individual consumption now to secure collective benefits for the future. People will only make such sacrifices if they believe that they have a stake in society and the economy.
• Action should involve not just active measures to reintegrate people into the labour market, but also changes to the social security system which ease the transition into work. Current disincentives to move from welfare into work must be transformed into strong positive incentives to do so.
• For many, increased income has come at the price of insecurity. It is in all our interests to sustain and develop mechanisms which smooth out incomes or insure against such insecurity.
• Left to themselves, market mechanisms will not deliver optimal levels of education, training and investment in human capital.

3 - Directions for policy

• Policy-makers have to operate under constraints set by global forces, which may now be tighter, but they have not lost all freedom of manoeuvre.
• We need more positive strategies. First, it is hard to overstate the importance of raising education and training standards for the problems we have described. It is imperative that skills are maximised. It is not a matter of choosing where to redirect existing resources; investment is required at virtually every level.
• It would be very optimistic to suppose that education and training policies will by themselves solve the problem of the lagging living standards of the poorest 20-30 per cent. A range of measures is needed involving labour market policies, social security, pensions, taxation, housing policy, and policies to reverse the dynamics of decline in low-income communities.
• Many of these areas require investment now, and sacrifice of consumption in the short-term. If we fail to make this investment, the costs we shall face and the consumption we shall have to forego in the future will be greater.
• At present too much public spending is directed at paying the costs of failure, rather than in promoting future success. Public spending appears to have got into a trap, where short-term savings have had long-term costs, in turn creating pressure for later short-term savings, in a continuing spiral.

The labour market

• Active labour market measures are needed, including:
  • Direct provision of employment opportunities, bringing idle resources to bear on community and environmental needs;
  • Greatly improved childcare provision;
  • Encouragement of more flexibility in working time; and
  • Strengthened legislation against discrimination in employment practices, so that it covers disabled people, not just women and ethnic minorities.
• If current experiments with subsidies to employers to take on the long-term unemployed show promise, they should be extended.
• Further measures to improve the incomes of low-paid workers are needed. Some members of the group favour a minimum wage, others an extension of in-work benefits, and others a combination of the two. Doing neither is not a satisfactory option.
• A review is needed of how the social security system should adapt to labour market changes, particularly for part-time workers and the self-employed.
• Individual employers have an interest in and a responsibility for the long-term consequences of their investment, training and employment decisions.

Social security for those out of work

• While the priority has to be to ensure that, where possible, people do not remain dependent on benefits, there will remain groups who do so. In such cases, indefinite price indexation is not adequate, and their benefits should increase by more than inflation at times when living standards in general are rising.
• More payments from the Social Fund should take the form of grants, and the Fund needs more resources to allow long-term benefit recipients to replace household goods, as well as to allow mandatory 'start-up' grants for those setting up or moving home.
• For those out of work and on benefit:
  • Rules limiting participation in education should be relaxed;
  • There should be more opportunities to take part in work training schemes in return for training allowances over and above benefit;
  • It should not be possible for someone to become 'long-term unemployed' without receiving good quality training or the offer of work, if necessary for the community;
  • The Training Guarantee should be honoured; if not, there is a clear case for widening benefit entitlement for 16-17 year-olds;
  • It should be easier for the unemployed to take part in voluntary work without disqualification from benefit.
• Individually-based insurance benefits like Unemployment Benefit do not interfere with the work incentives of partners. The Government should think again about the proposal to limit entitlement to the non-means-tested part of the Jobseeker's Allowance to six months. In general we favour a retention of individual insurance benefits to preserve incentives for partners.
• A percentage of maintenance payments should be disregarded in calculating Income Support.

Between benefits and work

• To ease the transition between benefits and work:
  • The calculation and payment of in-work benefits should be speeded up;
  • It should be made completely straightforward to reactivate an Income Support claim if an attempt to move back into employment fails;
  • The 'trial period' ('employment on trial') rules should be better advertised and benefit disqualification periods should be shortened;
  • A similar arrangement to the Business Start-up Scheme should be available to all those who have been on benefit long-term but want to get back into employment;
  • A lump sum payment is essential to help the long-term unemployed back into work;
  • The weekly earnings disregard in Income Support should be raised to £10 per week;
  • It should be possible to accumulate the disregard, say with a total of up to £60 disregarded over a 6 week period;
  • Legitimate childcare and work expenses should be deductible in assessing earnings for the disregard;
  • Free school meals should be restored to those on Family Credit;
  • Benefit withdrawal rates for Family Credit and Housing Benefit should be reduced.

Pensions

• The Inquiry Group does not make specific proposals on pensions, but argues that reform should:
  • Be based on political consensus;
  • Give clear encouragement to all income groups to accumulate private or occupational pension rights, appropriate to their circumstances, over and above state entitlement;
  • Avoid the extension of means-testing in a way which would exacerbate the 'pensions trap';
  • Embody a floor to incomes in retirement which increases by more than simple price indexation when general living standards are rising.

Taxation

• The balance of incremental taxation decisions in future should be to reduce the share of the overall tax burden borne by those with low incomes. Possible changes include:
  • Restructuring employers' National Insurance Contributions;
  • Removal of the residual jump in employee NICs as they cross the Lower Earnings Limit;
  • Any reductions in income tax should give greatest relative benefit to those with low incomes;
  • The tax treatment of charities should be reviewed and greater tax incentives given to individuals and companies to donate to charity.

Housing

• The reduction in subsidies to local authorities and housing associations has gone too far. Rent levels for local authority and housing association tenants should be moderated so that Housing Benefit takes less of the strain.
• Local authorities and housing associations should avoid allocations to a particular estate consisting overwhelmingly of those dependent on benefits. New developments should avoid large estates, and where possible there should be a mix of tenure types.

Marginalised areas

• A strategy to revitalise marginalised areas should include:
  • Business leaders ensuring that such communities are not excluded from mainstream economic activity;
  • More links between training schemes and nearby employers;
  • Local management, decentralised budgets, and resident involvement in decision-making in areas like schools, the police, social services and health care, as well as housing;
  • Support workers on estates working long-term with residents on local initiatives;
  • Training of residents in appropriate skills;
  • Radical improvement in the performance of local schools;
  • A positive role for young people in local initiatives;
  • Physical improvements;
  • Improved transport so as to integrate outer estates with the wider city;
  • In particular parts of the country an economic regeneration policy which goes beyond initiatives on particular estates.