The Wealth Gap

I have recently become quite interested in the wealth (or more accurately income) distribution in the UK. This was partly motivated by a couple of what I thought were interesting articles by Polly Toynbee in the Guardian. In the first article (which I can no longer find – maybe it wasn’t Polly Toynbee) a group of people are asked if they believe that a wealth gap exists in the UK. Most answered that they did, but when asked to guess the salaries of some top earners (solicitors, investment bankers, etc.), they generally guessed salaries significantly lower that what these top earners typically earned.

In the second article (which you can find here ) a group of high earners are again asked some questions about the wealth distribution in the UK. More than 50 % of people in the UK earn less than what this group thought was the poverty line, and less than 1 % earned more than what this group thought would put you in the top 10 %. Essentially these two articles illustrate – or supposedly illustrate – that the lowest earners believe there is a substantial wealth gap, but don’t realise quite how big it is, and the highest earners believe there isn’t really a substantial wealth gap, but only because they don’t really realise how little most people earn.

Although I haven’t investigated this in extensive detail, I have looked up some numbers related to the distribution of wealth in the UK. When considering any distribution it is quite important to understand the difference between things like the median and the mean (Stephen Jay Gould has an excellent book called Full House that explains some of these statistical terms extremely clearly). In the UK in 2004/2005 the mean annual income (pre tax) was about £23000. This, however, can be distorted by a small proportion of the population earning extremely high salaries. A better measure is the median which tells you, in some sense, the middle salary (i.e., 50 % of the population earns less than the median and 50 % earns more). In 2004/2005 the median, pre-tax income was about £16500, significantly less than the mean.

Although the median income has increased somewhat since 2004/2005, to something around £18500, I still find it quite remarkable that 50 % of the British working population earn £18500 per year or less. If, rather than considering indivduals, one considers households, it is slightly higher, but not by much. The mean household income for 2004/2005 was £31800 while the median was £24700. Again, these numbers will have increased slightly in the last couple of years, but I still find somewhat disturbing that 50 % of households survive on about £25000 or less, but does this indicate the presence of a wealth gap in the UK? Certainly, trying to run a household on less than £25000 per year must be pretty tough. That the top 1 % of earners have salaries more than 17 times greater than the bottom 10 % may suggest that a gap does indeed exist.

None of these numbers, however, convincingly illustrates that there is a substantial wealth gap in the UK. I then found a figure from the government’s office of national statistics which illustrates to a certain extent how wealth is redistributed. The figure (which you can read more about here) shows the average annual household income broken up into 5 groups (bottom 20 %, next 20 % etc. – known as quintile groups). household income The dark blue columns are the original annual household incomes and the light blue columns show the annual household incomes after tax and benefits. The bottom 20 % more than double their income to about £ 15000 per year, while the top 20 % lose almost 30 % of their income. The median (which would be roughly the 3rd quintile group) have a household incomes of just over £20000 per year which isn’t affected much by tax or benefits. The figure suggests that the top 20 % have average household incomes only 3 times greater than the bottom 20 %. The figures also suggests that the top 40 % of households end up with about 60 % of the total amount of money earned in a year, and the top 20 % end up with about 37 % of the total. Does this suggest an unfair distribution – I don’t really know. My first impression was that it actually looks quite reasonable.

Having started this post expecting to illustrate that there is indeed a wealth gap in the UK, I am finding myself now less convinced than I was when I started (interestingly Polly Tonybee was on the BBC news this morning stating once again that the UK – along with the US – does indeed have a very big wealth gap). Having said that, I do still find it disturbing that most households survive on less than about £25000 per year (after tax and benefits). I have also been using wealth here to mean income, so this doesn’t really illustrate how the actual wealth is distributed. Most of the numbers here are also based on taxable income. What I also don’t know is how much of the country’s income is given out in a manner that allows the receiver to avoid tax and therefore isn’t included in the analysis here. I was going to continue and talk about the Gini index which is an index for illustrating how income/wealth is distributed in a country but, since this is already quite long, I will leave it for a later post.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s