Analysing Trends in UK Household Income Inequality: A New Approach

Abstract

Using data derived from 30 years of the IFS Households Below Average Income Data Set, this paper examines the impact that the UK social security system had on UK household income inequality between 1961 and 1991. It asks whether rising inequality during the 1980s was due to a greater proportion of households being in receipt of social security or whether it was due to the fact that the system became less generous to households on social security because benefits were index linked rather than being linked to average living standards. Using a new, systematic procedure for decomposing changes in income inequality, strong evidence is found for a rising inequality 'numbers' effect, largely offset by an inequality-decreasing 'generosity' effect, during the 1970s and an uncompensated inequality-increasing generosity effect during the 1980s.