Why has income inequality in the UK and US increased so rapidly in recent decades?
David Bell Caius Part II Mr.M.Roberts
Why has income inequality in the UK and US increased so rapidly in recent decades?
In the 30 years up to 1979, income inequality in the UK was largely stable, possibly falling slightly. However, the decade after 1979 saw an unprecedented widening of the income distribution, a phenomenon replicated in the US: the ratio of the 90th and the 10th percentile of the in the UK the male wage distribution rose from 2.53 to 3.21 between 1980-90 and in the US from 4.76 to 5.63 over 1980-89. Moreover, at present the bottom decile accounts for just 3% of total income whilst the top decile accounts for 25%, which suggests widespread inequality in the UK. Other OECD countries have also experienced steady rises in income inequality in recent years, but the crucial issue, and one which can help our understanding of the underlying causes of income inequality, is to explain why this process has been so exaggerated in the UK and US elsewhere.
One explanation as to why income inequality has risen in recent decades has been the growth in international trade, which Saughter (1998) claims accounts for a positive but small share of rising inequality. This can be demonstrated through the application of the Hecksher-Ohlin model. The assumptions of this model are as follows: firstly, there are two factors (skilled and unskilled labour), two goods (X and Y) and two countries (UK and India, for example); secondly, there is no factor intensity between regions, constant returns to scale and identical technologies; thirdly, the Stopler-Samuleson criterium is assumed to hold which means that if the price of a good rises then the price of the factor used intensively in that industry will increase. Assume also that it is the UK that has the abundance of skilled labour and that India has the abundance of unskilled labour. This means, according to the model, that when the two countries trade, the developed economy (UK) will specialise in the production of skill intensive goods, because it has a relative abundance of skilled labour giving it a comparative advantage in this good, and the less developed economy (India) will, for a similar reason, specialise in producing goods that are not skill intensive. In the UK, the relative price of skill intensive goods will rise and so will the relative demand for skilled labour and hence the wage of skilled labour, whereas unskilled workers will see the opposite take place. This theory provides a good framework explaining rising wage inequality through a rise in the price of skilled labour intensive products to the unskilled labour intensive products. However, Saughter (1998) has shown that there is little empirical evidence to suggest that unskilled labour intensive goods have shown a decline in price relative to skilled labour intensive goods in the 1980s, and so this theory may not be that appropriate to explaining the changes in practice.