Wealth inequality: causes and consequences

A project proposal

The Institute for Public Policy Research (ippr) ippr is the UK’s leading progressive
think tank. Through our well-researched and clearly argued policy analysis, our strong
networks in government, academia and the corporate and voluntary sectors and our
high media profile, we can play a vital role in maintaining the momentum of
progressive thought.

Summary
Inequalities in wealth in the UK have grown greatly in recent years, but the distribution
of wealth remains a chronically under-researched field. This project will examine why
public policy should be concerned with different types of wealth inequality, and what
challenges increasing wealth inequality could present. It will also decompose recent
changes to reveal what is driving them. In the light of recent asset-spreading policies
such as the Child Trust Fund, the research will help inform future policy development
that may seek to influence the distribution of wealth. Finally, it will provide the
foundations for a second stage of research to forecast future changes in wealth
inequality.

Political and Policy Context

The inequality of wealth in Britain is around twice the inequality of post-tax income, and
getting higher. Under a broad definition of wealth, comprising financial assets, savings
and housing wealth, but excluding state pensions, the richest 5% owned 43% of all
wealth in Britain in 2001, compared to 35% a decade earlier. The poorest half of the
population owned only 5% in 2001, down from 8% a decade earlier.

These changes should be a cause for deep concern, for three reasons. Firstly, wealth
inequality can contribute to other unjustified inequalities. For example, high levels of
wealth inequality may lead to increased divisions in income, through individuals’ ability
to invest, obtain credit and bear risk. Secondly, it may reduce levels of intergenerational
social mobility, allowing some people to hand down generous inheritances to their
children, while others pass on nothing. Finally, wealth inequality could have under-
explored effects on social cohesion, accentuating and contributing to uneven
relationships of power and status. A culture of mutual respect and support may be
harder to sustain when wealth inequality is high.

Yet the study of wealth inequality has been relatively neglected. Income inequality is a
familiar topic in economics (e.g Atkinson and Bourguignon, eds, 2000; Goodman and
Oldfield 2004). Absolute wealth holdings are also well studied, although not to the same
extent (e.g. Banks et al 2002). The literature on wealth inequality, though, has been
dominated by research about developing countries. Evidence suggests that asset
inequality does reduce growth (Deinger and Squire 1998; Deininger and Olinto 2000),
but there has been little analysis of developed countries and in particular of UK-specific
trends. Without a clear understanding of what has happened, why it happened, and why
it matters, policy intervention can never be effective.

Government thinking is broadly sympathetic to the need to tackle asset poverty – but
has not yet made the analytical leap from poverty to inequality. So, for example, the
Treasury has conducted two consultations on promoting asset ownership (2000, 2001),
and has two innovative policies to spread asset ownership. Child Trust Funds,
operational from April 2005, will endow all new-born children with £250, and £500 for
the poorest third. By encouraging family donations, the accounts will help to spread the
benefits of asset ownership to all classes of society. The Saving Gateway, meanwhile, is
a pilot that provides government funding matched to the savings of the poor to
encourage the savings habit. In addition, increased levels of home ownership have been
highlighted as a priority by both the Prime Minister and the Deputy Prime Minister,
although this has not yet been related to the broader picture of ownership.

Wealth inequality is an increasingly important topic, and key players are increasingly
willing to discuss it. This project could add considerably to our understanding of why
and how it needs to be tackled.

Key components and methodology

Stage one – recent trends and their drivers

 Literature review
We will conduct a literature review to draw on academic analyses of changes in the
distribution of wealth. Key questions to be examined will include the following:

a. What are the recent trends in the distribution of wealth, as measured in different
ways and with different asset types?
b. How do UK trends compare with those in OECD countries?
c. What previous work has been done on the drivers of change?
d. What are the key methodological lessons that can be taken from previous work?

The literature review would help to focus the following analysis on new questions that
genuinely add to the debate, and would ensure the best methodology for the statistical
analysis.

 Statistical analysis
We will conduct new statistical analysis to decompose recent changes in wealth
inequality according to:

a. quantile
b. demographic group, including age, gender and household size.
c. form of wealth holding (for example, cash savings, housing, equities)

Data will come from the British Household Panel Survey (BHPS), waves 5 (1995), 10
(2000) and 15 (2005). Other BHPS waves did not collect data on wealth. Crucially, the
BHPS is longitudinal, and contains adequate personal information to control for
demographic characteristics.

The paper will also draw on Inland Revenue data. Although this is not longitudinal,
being based on personal wealth at death, it is more complete and has more
observations. It is anticipated that there will be some inconsistencies between the two
data sources, not least because Inland Revenue data is at the level of individuals rather
than households. But there will also be other inconsistencies. For example, previous
analysis has shown that in 1995, the wealthiest 1% of households in the BHPS sample
owned 6% of total wealth, compared to 19% in Inland Revenue estimates. This is
thought to be because BHPS systematically over-records housing wealth and under-
records unsecured debt (Redwood and Tudela 2003). However the significance of this is
partly reduced by the fact that the paper will be examining changes, rather than
absolute levels. We will conduct a detailed comparison of the two data sources as part
of this analysis.

Other datasets are not suitable for this analysis. The Family Resources Survey does not
include housing wealth, and the Social Trends dataset (“composition of the net wealth of
the household sector, 1987 to 1998: Social Trends Dataset 30”) does not contain
information on the distribution of wealth.

The combination of the literature review and the statistical analysis will form a detailed
picture of what has driven recent change, so will allow stages two and three to focus on
the forms of wealth inequality that are most pertinent to Britain.

Stage two– scoping future trends in wealth inequality

Stages two and three will be carried out simultaneously.

Stage two will be a scoping of the possibility of commissioning a projection of UK wealth

inequality in the forthcoming decade. Similar work using microsimulation has been done
in Australia by Simon Kelly at the National Centre for Social and Economic Modelling,
University of Canberra, but there have been no similar projections for the UK.
Discussions with statistical economists in Britain have been encouraging and revealed
much interest. The projections will not be carried out as part of this project, but the
detailed analysis of recent changes will lay the groundwork for a scoping study.

Stage three – why wealth inequality matters

 Initial analysis
The initial analysis will scope the key questions and how they can be best divided, and
identify suitable authors.

 Commissioning of papers
It is expected that there will be three different papers looking at the significance of
wealth inequality :

a. Political philosophy. To what extent does greater wealth inequality threaten the
advancement of social justice? How can support be harnessed amongst politicians
or the public for policies aimed at reducing wealth inequality?
b. Sociology and social policy. Does wealth inequality reduce social cohesion, or
 produce unbalanced power relationships with potentially-damaging consequences
for health, self-esteem and ambition? How does it impact on happiness?
c. Economics. Wealth inequality may reduce growth and worsen income inequality.
For example, people with a larger wealth buffer are more tolerant of risk, so will
invest more, and more productively (Bouchard and Mezard 2000). Similarly,
ownership of wealth improves access to credit, acting either as a deposit or
collateral, and this opens investment opportunities that can radically affect life
chances. This section will also look at the impact of wealth inequality on asset
prices, such as housing.

 All-day seminar
The authors of the papers above will be invited to an all-day seminar to present drafts
and discuss ideas, together with other academics, policy practitioners and comment
journalists.

Stage four – publication and dissemination

The different sections will be drawn together and policy recommendations explored for
an edited volume to be disseminated to government, academics and the press.

Links to ippr work

Through its Centre for Asset-Based Welfare, ippr has a strong track record on questions
of wealth and ownership. The State of the Nation (Paxton and Dixon 2004) received
widespread news coverage for its conclusion that wealth inequality had risen over the
past decade. More generally, The Asset-Effect (Bynner and Paxton 2001) argued the
importance of asset ownership for social policy, and The Citizen’s Stake: Exploring the
Future of Universal Asset Policies (Paxton and White, eds., forthcoming) will look at how
ownership can be spread through universal grants. A project currently in development
will look at access to homeownership as an important constituent of individuals’ wealth
portfolio.

Dissemination
The final publication will be an edited volume, with a summary of key findings and
analysis available free of charge on the ippr internet. The primary audience will be
decision-makers in government, but the secondary audience will include all who
influence them, including the stakeholders described above. Journalists will be invited to
the initial seminar as a way of provoking interest in the project early on, and
commissioned authors will be asked to help disseminate the final publication through
academic networks they may be part of.
References

Atkinson, A.B. and Bourguignon, F., editors, 2000: Handbook of Income Distribution,
Amsterdam: Elsevier.

Anders Kevmarken, N, 2003: On Household Wealth Trends in Sweden over the 1990s.
Levy Economic Institute.

Banks, J., Smith, Z. and Wakefield ,M. 2002: The Distribution of Financial Wealth in the
UK: Evidence from the 2000 BHPS Data. London: Institute for Fiscal Studies.

Banks, J., Blundell, R. and Wakefield, M. 2000: Wealth Inequality in the United States and
Great Britain. London: Institute for Fiscal Studies.

Birdsall, N. and Londono, J. 1997: “Asset Inequality Matters: An Assessment

of the World Bank's Approach to Poverty Reduction”. American Economic
Review 87, 32-37.

Bouchard, J. and Mezard, M. 2000: “Wealth condensation in a simple model of economy”,

Physica A, 282:536

Bynner,J. and Paxton, W. 2001: The Asset-Effect. London: Institute for Public Policy
Research.

Deininger K. and Squire, L. 1998: “New ways of looking at old issues: inequality and
growth”. Journal of Development Economics, 57(2), 259-287.

Deininger K. and Olinto P. 2000: Asset distribution inequality and growth. Policy Research
Working Paper 2375 Washington, DC: World Bank.

Giddens, A. 2004: “We can and should take action if the earnings of the rich set them
apart from society” New Statesman 27 September 2004: pp 50-51

Goodman, A. and Oldfield, Z., 2004: Permanent Differences? Income and Expenditure
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HM Treasury 2000: Helping People To Save: The Modernisation of Britain's Tax and
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Kelly, S. 2001: Trends in Australian Wealth – New Estimates for the 1990s. Canberra:
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Morissette, R. Xuelin, Z and Drolet, M. 2003: The Evolution of Wealth Inequality in Canada
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Paxton, W. and Dixon, M. 2004: The State of the Nation: An audit of injustice in the UK.
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Paxton, W. and White, S. forthcoming: A Citizen’s Stake: The future of universal asset
policies.

Redwood, V. and Tudela, M. 2003: Grossing up of Dissaggregate Household Data from the
BHPS: How does this Match with Aggregate Data? London: Bank of England

Smith, J.P. 2000: “Why is Wealth Inequality Rising” in F. Welch (ed) Increasing Income
Inequality in America: The Facts, Causes and Consequences. Chicago: University of
Chicago Press.