Paths to Poverty

Published: 18 June 2015
Author: David Eiser
Income inequality in Scotland (and the UK) was low and stable throughout the 1960s and 1970s. The 1980s saw a significant increase in inequality, driven by a variety of factors. Deindustrialisation and technological change caused a fall in demand for many middle and lower-skilled occupations, and this combined with an erosion of trade union power and labour market deregulation led to a relative decline in wages at the lower end of the distribution. Financial deregulation and a reduction in top rates of income tax contributed to a rise in salaries at the upper end. At the same time there was a significant rolling back of the progressivity of the welfare state, including a reduction in the generosity of both out-of-work benefits and the State Pension, and a reduction in the progressivity of income tax rates.
During the 1990s and early 2000s, inequality has grown more slowly (mitigated in part by the introduction of the minimum wage in 1997). And increases in the generosity of the State Pension, benefits for families with children, and the introduction of tax credits to supplement the incomes of the low-paid, have also helped to stem any increase in overall income inequality. In fact, since the late 1990s, households in the bottom third of the income distribution have seen their incomes increase somewhat more rapidly than households in the top third of the distribution, on average.
However, the picture becomes more nuanced the more we look into the detail. Since the late 1990s, the very poorest 5% of households have become even poorer, partly as a result of stricter rules around benefit eligibility. At the same time, the richest 1-2% of individuals have seen their incomes grow far more rapidly than any other group, largely driven by pay increases in the financial and business services sectors.
Our most recent population-wide data runs until early 2013. But it seems almost certain that inequality will have increased since then. The recession and its aftermath saw a large increase in the proportion of insecure work – part time work, temporary work, and out-sourced agency self-employment. These trends have increased wage inequality, and are only just beginning to reverse.   
Changes to fiscal policy are also likely to have increased inequality. Many working-age benefits have been cut in real terms, reducing the incomes of the poorest households. And although rises in the income tax personal allowance have taken some people out of income tax altogether, they have also provided a tax cut for all individuals earning above the personal allowance (and, as better-off households are more likely to have two income taxpayers, raises to the personal allowance tend to benefit richer households more than poorer households). To its credit, the Scottish Government mitigated the effects of the cuts in Council Tax Benefit that were imposed in England.
In terms of monetary policy, one of the side effects of the quantitative easing policy pursued by the Bank of England is that it raises the prices of assets, including housing, pensions and other financial assets. These types of assets are not evenly distributed, by heavily skewed, with the top 5% of households holding 40% of the assets. The QE policy is thus likely to have raised levels of wealth inequality. 
An edited version of this article appeared in the Herald.