Economic Theory

The rich get richer and the poor get… richer.


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The general secretary of the Trade Union Congress, Frances O’Grady, said last year that Britain is a country in which ‘inequality soars’ and ‘social mobility has hit reverse’. The Guardian tells us that Britain is ‘Europe’s sweatshop’, a country where workers put in the longest hours in the EU. And it is a perennial lament that ‘the rich get richer while the poor get poorer’. Taken together, these assertions encourage a council of despair about the prospects of workers in the UK today, but they are all empirical claims and can be tested against the facts. Here is some of the evidence presented in Selfishness, Greed and Capitalism.

The well-worn assertion that the rich get richer while the poor get poorer echoes Karl Marx’s theory of immiseration which said that capitalists could only become richer by lowering wages, thereby reducing the living standards of workers until they had no choice but to revolt. Marx was wrong. Today, no one seriously argues that the poor are poorer than their Victorian counterparts, but some claim that they are poorer – and that there is more poverty – than twenty, thirty or forty years ago. It is not true.

There has been a steady increase in wage rates for more than 150 years. Average earnings have risen more than four-fold since the start of the twentieth century despite two world wars and intermittent recessions. Wages declined or stagnated in the mid-1970s, early 1990s and, above all, during the recent economic downturn.

As painful as these pay cuts have been in recent years, it is unlikely that posterity will view them as anything more than a blip in the upward march of progress. The bigger picture is quite clear. Since 1975, average real wages have more than doubled for full-time workers and nearly doubled for part-time workers. Amongst the poorest decile, full-time wages rose from £3.40 to £6.67 between 1975 and 2013 (in 2013 prices) and part-time wages rose from £2.83 to £5.83.

Wage rates do not tell the full story. Many people do not work and many workers have their incomes supplemented by benefits. If we look at household disposable incomes (i.e. income after direct taxes and benefits have been taken into account), we see a similar story of rising prosperity. Between 1977 and 2011/12, the incomes of the poorest twenty per cent (the bottom quintile) rose by 93% in real terms. Those of the top quintile rose by even more – 149% – so it is true that the rich have got richer, but it is clear that the poor have also got richer. The last forty years have been an era of rising prosperity across the board.

Is income inequality rising?

Because it is difficult to maintain the notion that the incomes of the poor have been falling in the long-term, critics of capitalism often base their argument regarding poverty around concepts such as ‘relative poverty’. However, reductions in relative poverty typically coincide with periods of general impoverishment.

The official (relative) poverty line is generally understood to be 60% of the median income, but this is essentially a measure of inequality and does not tell us whether or not the poor are getting poorer. In 1979, thirteen% of the population was living below the relative poverty threshold. By 2005, the real disposable incomes of the poorest fifth had risen by more than 50% and yet 18% of the population was now officially living in poverty. In other words, raising the incomes of Britain’s poorest people by half did not prevent the official poverty rate rising by half.

Just as the relative poverty rate can rise despite the poor becoming richer, so too can the relative poverty rate fall as long as the wages of the poor fall less sharply than those on median incomes. This is precisely what happened during the recent financial crisis. In 2010/11, Britain’s (relative) poverty rate fell to 16% and the child poverty rate fell to 18%. Both figures were the lowest they had been since the mid-1980s, despite – or rather because of – wages falling across the board.

Not only has poverty reduced but income inequality, as measured by the Gini coefficient which is the standard measure of inequality, is falling too: it peaked in 1990. By 2011/12 it had dropped to 32.3, the lowest since 1986.

Contrary to popular belief, the modern peak of income inequality was twenty five years ago. There was a significant rise in the 1980s, but since then rates have been quite stable except when a weak economy brings them down. It is simply untrue to say that ‘inequality soars’ in modern Britain.

Does Britain have the longest working hours in Europe?

In 1900, workers spent around 3,000 hours a year on the job. In most developed societies today, they work fewer than 1,800 hours a year. Amongst OECD countries, average weekly hours range from 48.9 in Turkey to 30.5 in the Netherlands. Britain fits comfortably in the middle of this range. In 2011, the average number of hours worked by British workers was 36.4 per week, down from 37.7 hours in 2000, which was itself less than the 38.1 hours worked in 1992.

The picture is only slightly different if we look at full-time employment. Full-time workers in Britain put in an average of 42.6 hours per week in 2011, amounting to eight and a half hours a day if we assume five working days per week. This is only thirteen minutes more than the EU average and it is shorter than the average working week in Australia, Austria, Greece, Iceland and New Zealand, not to mention virtually all poorer countries. It is a far cry from the ‘7am to 7pm’ shifts that some claim is the British norm and it hardly justifies the Guardian’s description of the UK as ‘Europe’s sweatshop’.

Average working hours in Britain have been falling for decades and are similar to those in comparable rich countries. Those who choose to work longer hours than average tend to be employed in well remunerated professions. This is in stark contrast to earlier eras when the poor tended to work the longest hours out of financial necessity.

Has social mobility hit reverse?

‘Sadly, we still live in a country where, invariably, if you’re born poor, you die poor’, says Britain’s ‘social mobility tsar’ Alan Milburn. This assertion reflects a conventional wisdom that is constantly reinforced by politicians, journalists and pressure groups – that accidents of birth rigidly determine people’s fate and what little social mobility ever existed is now in decline. Rafael Behr writes of Britain’s ‘soul-sapping immobility’ in the New Statesman. Polly Toynbee tells Guardian readers that the British have become ‘more hermetically sealed into the social class of their birth’ since the 1970s.

This message from politicians and pundits is entirely at odds with the academic literature on social mobility. Consensus opinion in academia is that there is more ‘room at the top’ than ever before and that movement between the classes is as fluid as it has been since studies began.

There are two aspects to social mobility which are easily conflated. Politicians tend to be interested in increasing ‘absolute mobility’ which refers to the total number of opportunities higher up the ladder in well-paid professions. Sociologists tend to be interested in ‘relative mobility’ which refers to how easily people move up and down the ladder. Both are important.

In the 20th century, structural changes to the labour market greatly expanded the size of the middle class. As the working class shrank and the number of white collar jobs rose, there was a revolution in absolute mobility which meant that far more people could be upwardly mobile than ever before. The odds of working class children becoming middle class adults became significantly shorter by virtue of there being more middle class jobs available.

With regards to relative mobility, there is some debate about whether fluidity between the classes has increased in recent decades, but there is certainly no evidence of a decline. This was confirmed again last year in a study of people born between 1980 and 1984. It found that about 78% of the men had moved out of the class of their birth by the time they were 27 years old. This is almost exactly the same degree of mobility enjoyed by men born in 1946, 1958 and 1970. For women, the mobility rate exceeded 80% and is higher than for any generation on record. The authors concluded that ‘if intergenerational mobility is considered in terms of social class, then, with relative just as with absolute rates, there is no evidence at all to support the idea of mobility in decline‘ (emphasis in the original).

The important lessons from the social mobility literature are:

·         The expansion of white collar work created more ‘room at the top’.


·         This expansion has inevitably slowed down over time and must eventually stop altogether.


·         The great majority of people move out of the class of their birth by the time they are thirty years old


·         There has been no decline in either absolute or relative mobility.


Conclusion

Science is not settled by sheer weight of numbers, but economists should not base policy on mere impressions. It is important to look beyond the headlines and polemic produced by journalists to ascertain the facts. It is wrong to say that ‘social mobility has hit reverse’; that people are working longer hours than anywhere else in Europe; that inequality is increasing; or that the poor are getting poorer. A large body of evidence shows otherwise.

Christopher Snowdon is the IEA’s Director of Lifestyle Economics. This is an abridged version of an article which first appeared in EA Magazine.

Head of Lifestyle Economics, IEA

Christopher Snowdon is the Head of Lifestyle Economics at the IEA. He is the author of The Art of Suppression, The Spirit Level Delusion and Velvet Glove; Iron Fist. His work focuses on pleasure, prohibition and dodgy statistics. He has authored a number of papers, including "Sock Puppets", "Euro Puppets", "The Proof of the Pudding", "The Crack Cocaine of Gambling" and "Free Market Solutions in Health".


2 thoughts on “The rich get richer and the poor get… richer.”

  1. Posted 13/09/2015 at 17:16 | Permalink

    Whilst I broadly agree with what is said in the above article, I have some reservations about the statistics used to support its view on social mobility. When the left complain of a lack of social mobility they often make the case that there exists a rich elite, often the top 1-5% for whom the use of social networks and private education enables them to dominate top jobs. Given that the article states that around 80% of men and women move out of their social class surely this neglects the fact that the given top percentage of elites may be almost entirely excluded from the segment of the population for whom their is a great deal of social mobility. Furthermore this neglects the possibility that this may predominately be dominated by downward social mobility and contribute to a widening gap between rich and poor.

  2. Posted 14/09/2015 at 22:38 | Permalink

    It’s not a question of should there be inequality,but is there excessive inequality. Excessive inequality is that which harms economic output. For there to be optimal output produced factors should remain untaxed, while economic rents, particularly those derived from location should be used as public revenue instead. This aligns incentives. As the very wealthiest currently pay less in tax(% of total tax) than the value of land they own(% total land values) we can empirically say there is excessive inequality which is economically damaging. Furthermore, excessive inequality also thins the market leading to diseconomies of scale. For those interested in greater equality, they only need argue for optimal efficiency. Luckily for todays wealth elite, those on the Left are far to stupid to realise this.

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