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The Monday Briefing, written by Ian Stewart, Deloitte's Chief Economist in the UK, gives a personal view on topical financial and economic issues. Please feel free to forward the Monday Briefing to your clients, colleagues and friends who can, in turn, subscribe to it at:
www.deloitte.co.uk/mondaybriefing
Monday Briefing: Inequality on the Rise
* One of the striking features of most industrialised economies in the last 20 years has been growing income inequality.
* In the US, the share of total income earned by the top 1% income earners, a commonly used measure of inequality, more than doubled from 8% in 1975 to 18% in 2007.
* In the UK, the share of total income earned by the top 1% income earners rose from 6% in 1975 to 14% in 2005.
* An OECD study in 2008 found that income inequality rose in 19 of 24 OECD economies between the mid-1980s and the mid-2000s. This process was not just confined to mere free market economies such as the US or the UK. In traditionally egalitarian Norway, Finland and Sweden, inequality rose at a faster pace than in the OECD as a whole.
* In the US, a significant section of the population has seen little growth in their real incomes in recent decades. In the 30 years to 1979, median family incomes after inflation, a proxy for middle-class household income, rose more than 110%; in the ensuing 30 years they rose by just 11%.
* In the UK and Israel, rising inflation and low wage growth have hit middle income earners hard, over the last 3 years. Since mid-July, thousands of Israelis have flocked to the beautiful Rothschild Boulevard in central Tel Aviv to join demonstrations demanding relief for the nation's middle class.
* There are a number of factors behind the growth in income inequality.
* Globalisation and the rise in the number of high-skill jobs in areas such as finance and technology have boosted demand for skilled labour, enabling individuals with special skills to earn higher wages. In 1973, US chief executives were, on average, paid 26 times the median income. Now they command more than 300 times the median.
* Rising immigration, offshoring and the rise of new technology have weakened the bargaining power of semi-skilled and unskilled workers in the developed world. Since 1997, for instance, the number of foreign nationals working in the UK has risen by 2 million, far more than the 766,000 rise in employment among UK nationals.
* Over the last two decades, most OECD nations have sought to make their labour markets more competitive and adaptable. Employment protection legislation for workers with temporary contracts has become more lenient in several countries. Minimum wages, as a percentage of average wages, also declined since the 1980s. Wage setting mechanisms have changed and there has been a dramatic decline in union-membership among public and private sector workers.
* Taken together these trends have meant that, since the mid 1980s, wages for high earners have risen significantly faster than for low earners.
* The changing structure of households in developed nations has also contributed to rising inequality. The growth in one-person and smaller households has reduced the scope for families to benefit from the savings associated with pooling resources and sharing expenditures.
* Finally, among couples so-called assortative mating means that top earners are increasingly pairing up and having children together. Today, among 40% of working couples, partners belong to the same or neighbouring earnings deciles compared to 33% two decades ago. These trends have contributed to higher household earnings inequality.
* Rising income inequality is a feature of most industrialised economies. But there is little consensus on how much this trend should be resisted. More importantly, with the global recovery looking shaky, policymakers and politicians have more pressing concerns on their hands.