Yesterday, 8 June, my son, daughter and I walked down a Byres Road in Glasgow bathed in glorious sunshine. My young son Michael is mad about sports cars and Ferraris. As we ambled along suddenly we saw this beautiful red Ferrari. "Dad take a picture with your 'phone!" Which I duly did. And here it is.
But then I noticed this.
Makes you think.
I have written several posts on income inequality in Scotland and the UK: here and here. Last week the ONS published information that allows us to examine wealth inequality in Britain.
The information comes from the Wealth and Assets Survey (WAS) 2008/10. Comparisons can also be made with the WAS undertaken in 2006/08. This is a valuable data source. More detailed data from the latest survey will be published later this year.
The first thing that stands out is how much greater wealth inequality is than income inequality. The Gini coefficient (0 = perfectly equal; 1 = perfectly unequal) for total wealth was 0.62 in 2008/10 and 0.61 in 2006/08. This is almost twice the Gini measure for income inequality of 0.35 for Scotland and 0.36 for the UK in 2009/10. We also note that the degree of income inequality in Scotland and UK was considerably higher than the OECD average of 0.31.
The stability of the Gini coefficient between the two surveys suggests that household wealth inequality while high did not change much over the two years. However the same cannot be said for wealth inequality across the regions and countries of the UK.
The chart below shows the change in regional and country median household wealth Compared to Britain between 2006/08 and 2008/10 in percentage points.
What these data show is that there was a marked regional/country divide in Britain in the change in median household wealth. The median household in London dramatically improved its wealth position relative to the median household in Britain. Median households in Scotland, Yorkshire & the Humber, North West, South East and England as a whole also improved their relative position but by a much lower order of magnitude than London.
In contrast, households in Wales lost out compared to their counterparts in the rest of Britain. And in England, households in North East, East Midlands, South West, and West Midlands lost out considerably relative to the median household in Britain.
What accounts for these changes over the two years?
It is not clear.
There has been a large rise in pension wealth between the two surveys due, it would appear, to improved measurement. But this should not affect median household income given the concentration of pension wealth. It would affect the (arithmetic) mean, however. In addition, detailed pension and financial wealth data, which might help answer this question, will not be available until later in the year.
It must be remembered that the period between the two surveys coincides with the Great Recession and fall in property and other asset prices. Net property values fell in most regions except South West and Scotland. And as the Report notes:
The largest decreases in the mean net property wealth occurred in the North East, Wales and the North West, which showed decreases of 8.8, 8.7 and 8.6 per cent respectively.
Change in net property values might account for some of the relative deterioration in North East and Wales but runs counter to the change in the North West and South West.
Changes in physical wealth also seem unable to account for the regional variation since physical wealth is a small proportion of overall household wealth and the movements were not well correlated with the change in regional wealth.
So, we are left with change in financial wealth as the likely factor accounting for the regional variation in median household wealth. This begs several questions and among them what is the link to median household wealth from
There is evidence - see here - that labour's share of income is falling relative to capital in the US and other OECD countries. But higher incomes, whether from labour earnings or not, allow higher savings and accumulation of assets and in this way income and wealth inequality are linked. But Thomas Piketty and Emmanuel Saez in this 2006 paper found
that the dramatic recent increase in income concentration is a primarily a labor income phenomenon and this has not yet translated into a dramatic increase in wealth concentration.
But maybe there are regional effects if neutral at the national level.
We need further data before we can begin to provide answers to these questions.
It is well known that Scotland enjoyed a strong growth performance in the devolution years until the Great Recession in 2008. (This is not to assert that devolution was the cause!) As GDP grew strongly the employment rate also rose both absolutely and relative to England and other countries of the UK. In July -September 2006 the rate rose above the rate in England and stayed above that rate until January - March 2010. It fell below the English rate again as the recession began to bite more strongly on jobs in Scotland if not on Scottish GDP.
One less well known outcome is the extent to which there were variations in the degree of labour market inequality across Scottish regions during the period.
The latest Local Area Labour Markets in Scotland data published on 5 July throws some light on this issue.
The data are drawn from the Annual Population Survey 2011 which offers data back to 2004. These data can be combined with the less reliable Labour Force Survey data to take the series back to 2001.
Using these data and focussing specifically on the employment rate we get the following chart:
What these data show is that there is a clear negative relationship between growth and geographical inequality in Scotland. Between 2001 and 2007/08 the rising Scottish employment rate was associated with a narrowing in a measure of inequality across Scotland's 32 local authorities. The measure controls for the scale of the mean or average unemployment and so should not rise or fall as the mean Scottish rate rises simply for arithmetic reasons.
So, Scottish growth appears to bring reduced spatial inequality. This would seem to fit with a "trickle down," or convergence, view of the spread of growth as overall growth rises. There can be several reasons for this including rising prices/costs and reduced availability of resources in core areas as the economy grows. This supports the EU view that growth enhances regional convergence. It would appear to conflict with the cumulative causation, or even Krugman 'new economic geography', theory that growth is associated with divergence. It is also at odds with econometric evidence that regional inequalities are pro-cyclical, that is widen when the economy booms and diminish when the economy deflates over the cycle.
But the recession stopped the convergence.
The degree of inequality began to rise as the recession bit. But, interestingly, as the Scottish employment fell to, and then below, where it had been in 2001 the dispersion of employment rates across local authorities did not rise to, and above, where it had been in 2001. The coefficient of variation certainly rose from 5.5 per cent of the mean local authority employment rate to 7 per cent but not the 8 per cent that had existed in 2001.
Why was this?
I'm not sure. There is a clear asymmetry as discussed by Maria Demertzis & Andrew Hughes Hallett in this 1996 paper. It seems, in part, to fit with their centrifugal model. They found for the UK a negative/positive correlation between GDP/unemployment and regional variance, with both the negative correlations and the positive correlations decreasing with increasing lags in the cycle. This suggests that regional inequality falls as GDP rises above trend and unemployment falls with the effect diminishing over the cycle. However, we can't push this too far on such limited data with no econometric analysis.
What does appear to be the case is that as the severe recession hit local authority area inequality worsened but then slowed down as employment rates in core areas fell faster. As the Local Area Labour Markets in Scotland data release explains:
Since 2009 the gap has been reducing slowly but has not returned to the level seen in 2008. The most recent data shows that the employment rates are more stable and the gap between the top three and bottom three performing local authorities has reduced by 2.4 percentage points to 16.3 percentage points. However, this is generally due to deterioration in the position of the best performing areas, rather than an improvement in the worst performing areas.
This is clearly an interesting area for more detailed research.
In an earlier post I noted the evidence on the rising degree of income inequality in the UK. The key chart from the OECD's recent report Divided We Stand: Why Inequality Keeps Rising is below
The high and rising level of income inequality in the UK was, I suggested, put into sharper focus by recent political developments. Specifically, the UK government's austerity programme with associated rising unemployment and real income constraint, and the concern about banker's bonuses and CEO pay.
It was therefore a surprise to learn from an excellent article by Alf Young in Saturday's Scotsman of this recent comment by Michael Gove, Secretary of State for Education in the UK Government:
We live in a profoundly unequal society. More than almost any developed nation ours is a country in which your parentage dictates your progress. Those who are born poor are more likely to stay poor and those who inherit privilege are more likely to pass on privilege in England than in any comparable country. For those of us who believe in social justice this stratification and segregation are morally indefensible.
As Alf Young points out this
was an astonishing critique, given that it was coming from a member of a party that proposed, in opposition, to ease dramatically the burden of inheritance tax and has, in government, agonised over how quickly it could remove Labour's 50p levy on the incomes of the highest earners.
Gove's particular interest was to seek to highlight the role that private education was playing as a gateway to privilege and power across all major professions in the UK. Hence, as Alf suggests, buttressing the case for Gove's reforms of state education in England.
Alf's main point in his piece was to ask where is the debate on the role of private and state education in Scotland. Gove's writ does not run to Scotland. The Scottish Government is responsible for education here. Moreover, an independent Scotland would certainly have responsibility for a policy choice on income inequality and that would also likely be true for Devo-Max and probably Devo-Plus.
So why no debate here?
Alf Young notes that the issue of private education might be considered less salient here since pupils attending independent schools in Scotland account for only 4.31 per cent of all pupils compared to some 7 per cent in England. But he shows that the significance of private and private secondary, education is much higher in the city of Edinburgh and areas such as Perth and Kinross.
Moreover, the significance of private education should, in my view, be viewed as a symptom of the degree of income inequality.
How does Scotland compare on that score? Data from the Scottish government offer the following comparison with the Great Britain
Measures and comparisons of income inequality are fraught with difficulty - see here - so one needs to be cautious. But what these data show is that while the degree of income inequality is lower than in GB it is still quite a bit higher than the OECD average. Since 1995 the Scottish Gini coefficient has ranged between 30 and 35 while the OECD average has ranged between 30 and 31. And the OECD average is quite a bit higher than many countries that Scotland would seek to compare itself such as the Nordic countries and Germany.
Moreover, the above chart shows that income inequality was rising more rapidly in Scotland than GB since 2004-05, so that by 2009-10 there was little difference between the two: Scotland 35, GB 36.
So why no debate about this in Scotland? Why isn't this issue, given its roots in political struggle since time immemorial, a key feature of the so-called "big-debate" on Scottish independence and constitutional change?
My guess is that the parties advocating independence, especially the SNP, and those supporting the union, especially Labour, are frightened of the topic. Reversing income inequality does not give wins for everyone. There has to be losers and a few rich, and perhaps not so rich, ones at that! Therefore, better not antagonise the donors, or the business fellow travellers. We hear from some Labour party figures that when they get up in the morning they think social justice, in contrast to nationalists who think separatism and break-up of the UK. But this is surely a charade since the Labour government did little to roll back rising income inequality in Scotland and the UK. The introduction of the 50p tax on high income earners being the exception. How do they propose to operationalise their concerns about social justice if Scotland continues in the UK?
The Scottish people should be told what are the specific options and policies being proposed by nationalists and unionists to deal with rising income inequality. And we need to be told now, not reassured that everything will be fine in the nirvana of Scottish independence, or a UK union with more constitutional change.
As austerity programmes begin to bite across the developed world, it is quite natural that the issue of fairness should become more prominent. Sovereign debt is high - although not by historical standards, which is another story - largely because of the need for the state to compensate for the debt excess in the private sector. The financial sector grew rich on the back of this debt explosion. The Scottish banks were no exception. Originate and distribute models of lending, and mortgage lending in particular, meant that appropriate due diligence was often absent on the part of the lender. Ethical issues such as whether the lending, pension, or care bond, was appropriate to the circumstances of the individual were often swept under the carpet. Yet, when the bubble burst while many of the workers in the financial and property service sectors lost their jobs , the senior executives and key traders continued to receive high and rising salaries and bonuses. At the same time government's had to borrow to bailout the banks thus raising the present and future tax burden right across society.
It is, therefore, not unreasonable that the Occupy Wall Street movement and its offshoots across the world appear to have struck a chord with many people. But the OWS is about more than banking excess. It points to the rising inequality across western societies. A warning that was given firm empirical support on Monday (5 December) with the publication by the OECD of its Divided We Stand: Why Inequality Keeps Rising report.
The report finds that
"Income inequality among working-age persons has risen faster in the United Kingdom than in any other OECD country since 1975. From a peak in 2000 and subsequent fall, it has been rising again since 2005 and is now well above the OECD average." (See Figure 1)
I see no reason to doubt that the position in Scotland would be much different from the UK.
Figure 1
The report finds that technological progress has led to higher wage differentials benefitting workers with high skill levels. Hence, the importance of education a rising supply of skilled workers in limiting the rise of inequality. Globalisation is found not to play much of a generic role in widening wage inequality but the pressure from globalisation precipitated domestic policy and institutional reforms, which did widen the distribution of wages. But a key reason for widening income inequality in the UK is that taxes and transfers became less redistributive.
The report notes:
"Between the late 1970s and mid 1980s, the tax-benefit system in the UK offset more than 50% of the rise in market income inequality. This effect has fallen in the subsequent decades."
Against this background it is strange to read the following by Bill Jamieson writing in the Scotsman on 1st December:
"But addressing inequality by further taxes on the rich may prove a road with little mileage. The top 1 per cent of taxpayers in the UK are already providing 25 per cent of tax revenue. Back in the 1970s when we last faced economic misery, the top 1 per cent accounted for just 11 per cent of tax revenue."
What this comment fails to appreciate is that the reason for the top 1% paying a greater share of tax revenue is not that they are being taxed more heavily. Rather, because they are appropriating an ever greater share of income. Again as the OECD report notes the income share of the top 1% doubled in the UK between 1970 and 2005 rising from 7.1% to 14.3%. This occurred during a period when the top marginal rate of income tax fell from 60% in the 1980s to 40% in the 2000's before its recent rise to 50%. But what the report does not say is that this growth in the income share of the top 1% and, indeed, the top 0.1% is due to the explosion in CEO and senior corporate executive pay and bonuses not simply in banking but right across the corporate sector of the UK and the US. This growth cannot be justified rising performance - value of the marginal product - of the executives in question. It is largely down to a power relationships and corporate politics and represents a weakening in the power and control of shareholders over corporate executives.
It is for these reasons, coupled with rising austerity, that I expect that the campaigning of the OWS movement and its growing offshoots will become more central to US, UK and Scottish politics.
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