We don't have to be so unequal

propositions Better education could lead to less poverty, says John Hills
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The Independent Online
The Rowntree Income and Wealth report has highlighted the damaging social and economic consequences of a substantial minority of the population failing to benefit from economic growth. This raises the question: is such inequality inevitable?

Some of the factors contributing to rising inequality are external ones - intensifying competition in the global labour market - or part of the economic and social environment - like the effects of new technology. The Rowntree report concluded that while policy-makers are more constrained than in the past, they have not lost all freedom of manoeuvre: domestic policies matter.

While all countries have been exposed to international competition and new technology, the effects have not been identical. Of the 18 countries for which there is information on recent trends, inequality was falling in seven; and in the others - with the exception of New Zealand - it was rising more slowly than here.

Factors underlying these trends suggest why we have been so much more sharply affected. The gap between higher and lower pay increased during the 1980s in 12 of the 17 countries for which the Organisation for Economic Co-operation and Development has data. But it found "these increases were generally small, except in the UK and the United States".

A reason suggested by the OECD for these differences was the way in which pay bargaining operates - countries where the gaps between low- and high- paid did not rise were those where national wage-setting institutions have a strong influence.

Rising relative earnings for highly educated workers were common to many countries in the 1980s. A result of intensifying international trade is that skilled labour gains while unskilled labour loses. New technology has the same effect.

But a country's skill level is not fixed. Other countries may have been less affected by these pressures thanks to historicallymore successful education and training policies. More of our young people now stay on in education and training after 16, but the numbers do not match those of France, Germany and Japan. Even with growth, the position of unskilled workers is likely to weaken further. So it is vital that we maximise the skills of the workforce.

But individual wages are only part of what determines family incomes. Rising women's employment in the 1980s has had a complex effect on income gaps. For couples where both partners earn, employment grew fastest for wives of lower-earning men, narrowing gaps in family incomes. But employment rates for wives of unemployed men fell - creating a growing gap between "no-earner" and two-earner couples.

Pinpointing why men and women whose partners do not earn are more likely to stay out of work, and ensuring that social security does not exacerbate the problem, is crucial.

A contributing factor to rising inequality is that benefit levels are now linked to prices rather than to overall incomes. As overall living standards rise, those dependent on benefits are left behind. In countries rooted in the Bismarckian social insurance system, benefits are related to past wages. As wages rise, benefits follow.

In some countries a rising tax take from those whose market incomes were rising fastest tended to slow or even cancel out inequality growth. In others, such as the UK and Sweden, changes meant that this did not happen. In the US, tax changes reinforced its growth.

There is no simple lever to ensure that all income groups benefit from future growth. Nor is growing inequality inevitable: other countries have made different choices, and through past investment in education and training, and their tax and benefit systems, are now more able to handle pressures we all face.

The author is a Reader in economics and social policy at the LSE and was secretary of the Joseph Rowntree Inquiry into Income and Wealth.