Income inequality

Income inequality is increasingly a subject of public discussion and analysis. Productive debate about what is happening to inequality requires reliable estimates. Yet the two main sources of information – household survey and personal tax return data – provide very different estimates of inequality trends.

The UK’s main official income inequality statistics, published by the Department for Work and Pensions (DWP) are based on Family Resources Survey data. They are the basis of the recent statement by a Deputy Governor of the Bank of England that income inequality is ‘broadly unchanged’ over the past quarter century (Broadbent 2016: 2). And yet we also know that the share of total income held by the very richest groups in the UK has increased dramatically over the same period – but the main data source is administrative record data from personal income tax returns held by HMRC.

One of the reasons that survey- and tax-based data provide different conclusions is because the statistics derived from them use different definitions of ‘income’, the income-sharing unit, and the unit of analysis. But a more fundamental reason for the different conclusions is that household surveys are increasingly bad at capturing the income of the very richest people, while tax data has very much better coverage of exactly this group.

Research by ISER Visiting Professor Stephen Jenkins derives estimates using common definitions that can be applied to both types of data set, and combines the data sources to exploit the strengths of each – essentially survey-based data for all but the very richest and tax data for the richest.

The results show that income inequality has increased since the mid-1990s to a much greater extent than most people claim. This research also provides some insight into how official income distribution statistics in the UK and elsewhere could be improved.