Inequality in the distribution of incomes increased dramatically during the 1980s, having fluctuated over a relatively small range since the early 1960s. The living standards of the poorest tenth of the population have barely risen over the last 20 years. But the population as a whole has become 50 per cent better off and the richest tenth almost twice as well off.
The IFS study is one of the most authoritative analyses of income distribution ever carried out in Britain, using detailed information on more than 200,000 households. Its findings will increase pressure on Kenneth Clarke to do more to help the less well-off in his Budget, although he said recently that political action to narrow the gap between the high and low-paid risked destroying jobs and damaging economic performance.
The number of people in Britain with income below half the national average fell from around 5.3 million in 1961 to a low-point of 3.3 million in 1977. Since then it has more than trebled to about 11.4 million - around one in five of the population. The main period during the last 30 years in which inequality narrowed was the mid- 1970s, when pay increases were capped by an incomes policy.
The Chancellor defended the widening in inequality in his recent Mais lecture by arguing that the poor had seen their incomes rise more quickly than prices, so their absolute living standards were better. But the IFS found that - after taking into account the taxes, benefits and housing costs - even this was not true.
The study looked at a representative childless couple which was worse off than 95 per cent of the population, but better off than the other 5 per cent. The income of this household peaked at pounds 73 a week in 1979 (at current-day prices), but because of the recession and high interest rates had fallen to pounds 61 by 1991, no higher than a quarter of a century earlier.
In contrast, a relatively well-off childless couple - better off than 95 per cent of the population - saw its weekly income rise consistently - from pounds 239 in 1961 to pounds 311 in 1979 and pounds 508 in 1991. The average household saw its weekly income rise from pounds 114 in 1961 to pounds 150 in 1979 and pounds 189 in 1991.
The most recent figures from the Central Statistical Office suggest tentatively that inequality may have begun to narrow again.
There are several reasons why inequality rose so sharply in the 1980s. Wages before tax are now more unequally distributed than at any time since the Edwardian era, with employers increasingly willing to pay more for workers with skills and education. Low- skill jobs are more scarce, in part because of competition from countries such as Korea or Taiwan with much lower labour costs.
Trends in unearned income have also boosted inequality. The well-off are increasingly gaining from investment income and private pensions, with the rich doing particularly well during the 1980s from dividends on shareholdings and rising property values.
The changes to the tax and benefit systems during the 1980s were also important: the tax cuts given out by Nigel Lawson in the late 1980s were skewed to the well-off, but the pain of the tax increases announced in last year's Budgets has been widely spread.
'Most of this growth in total inequality came from more unequal earnings,' Alissa Goodman one of the IFS reports authors, said.Reuse content