Life in the Middle - income distribution in the UK

The TUC has published a report ‘Life in the Middle - The Untold Story of Britain’s Average Earners’ surveying ‘Middle Britain’ in particular, and income distribution across the population as a whole. They define Middle Britain as the fifth of the population (quintile) which earns within 10% of the median income of about £20,000 per year for households in the UK in 2006/7, the last year when full figures are available. The results make very interesting reading, and give some good up-to-date figures on income distribution for use in A2 microeconomics papers.

Students should remember to use some critical evaluation of the source of the report when reading the TUC’s interpretation of the data, some of which is given below. As representatives of union members, who typically come from the lower income groups, the TUC has a particular point to make about income distribution and income inequality.

The graph above shows that the mode net weekly income at that time was about £80 lower than the median, and almost £200 below the mean or average net income of £467, which is heavily skewed by the higher incomes of the top quintile.

In real terms, median wages for the middle quintile rose by 1.6% annually during the 18 years the Conservatives were in power, and by 1.9% during the period Labour has been in power (although that rate of growth has now slowed dramatically). But in the same period, the income of the top 1% rose by 3.9% annually under the Tories and by 3.2% under Labour - widening the income gap substantially. The BBC News report also shows some statistics for the middle and top quintiles:
Middle Top
Homeowners 77% 81%
Shareowners 19% 43%
Company pension scheme 44% Not given
Union members 28% Not given
University degree 28% 61%

The summary of the report on the TUC’s website concludes that while Middle Income Britain is materially better off, better housed and educated than their parents’ generation, they have slipped further behind more privileged groups. In the last thirty years statistics show firstly a rise of a small group of the super-rich, and secondly, a much greater concentration of the population by income in the bottom half of the distribution. As a result, the report says that “in just 30 years Britain has moved backwards from a ‘diamond’ to an ‘onion-shaped’ society.”
They identify two key causes of this repositioning. First, the last 30 years has seen a steady rise in the gap in earnings between the top and the bottom, together with a ‘hollowing out of the middle’ - a loss of jobs paying middling wages and the concentration of employment in high and low paying jobs. Secondly, although all households enjoy greater absolute opportunities in modern Britain, relative social mobility has declined. The spread of opportunities - especially in education and through the growth of well-paid, secure professional work - has benefited higher earners to a greater extent than the bottom two-thirds.

In order to address this perception of a widening gap, the pamphlet calls for the creation of an inequality commission, targets for reducing inequality and a return to the principles of progressive taxation, including higher capital gains tax. If you were called upon to evaluate these proposals, which aspects of labour market economics would you use?