Education & Income Inequality In The Uk

Executive Summary

Discussion on inequality has long been at the forefront of economic and political debate due to concerns regarding the disparity between the rich, the poor and its ensuing efficiency/equity tradeoff. Income inequality describes the extent to which earnings from various revenue streams are distributed unevenly amongst the population. Statistics from the OECD depict the UK has one of the highest levels of income inequality in the world, with quite a large differential between the top and bottom quintiles despite efforts to redistribute from progressive taxation, negating the Kuznets’s hypothesis. Income inequality does not just effect income and living standards but has flow on effects regarding family situations and even the scope of opportunities available to individuals with largely disproportionate incomes. In order to counteract this prevalent and growing economic issue, injecting investment into education and training programs to increase the quality of human capital would greatly benefit the UK, as an educated workforce is the foundation for sustainable wages growth and ultimately a prospering economy.

Context

The basis of growing income inequality in the UK stems from strong wages growth for the top 1% of the population, but stagnant wages growth for the bottom quintile. This decreasing pay progression for the low skilled workers leads to a weakened labour market creating a self-fulfilling prophecy of economic insufficiency. As per the IFS income growth for the median households has stalled due to “wages growth declining by 0. 3% and inflation increasing by 1. 8% due to the political uncertainty regarding Brexit and the EU referendum. Reductions in transfer payments and welfare benefits to low income families have also suppressed low income family income by 1. 6%,’’ (IFS 2019). The unequal access to credit for low income families reduces their capability to have access to enough human capital, specifically education, reducing their potential earnings in the workforce and overall standard of living. Furthermore over the 2018 UK fiscal year, the top quintile covered 42% of disposable income, whilst the bottom quintile covered only 7%, illustrating the significant income gap between the rich and the poor, (McGuinneas 2019). All these factors concurrently have lead to the UK Gini Coefficient being 0. 34, significantly higher than in the 1970s, indicating increasing levels of inequality (0 being perfect equality and 1 being perfect inequality). To make matters worse, ‘’income inequality is expected to rise into the 2020s due to two main factors; increasing real earnings for high earners and cuts to benefits to low income households by 7% in 2021-22,’’ (Deaton Review 2019).

Increasing housing costs, stemming from rising mortgage repayments limits income growth for the lowest earners by up to 5%. Low wage earners also tend to have low levels of education, stemming to restricted blue collar job opportunities and ultimately decreasing returns to scale restricting the productive potential of the overall economy.

Advances in the technological sector and computing have pushed wages to high skilled tech-based workers. Globalization and import competition have made manufacturing and administrative jobs redundant forcing low income earners out of employment. Outsourcing menial jobs offshore and rising innovation entrepreneurship have shifted the combination of the labour force towards high tech, high skilled firms and have ‘hollowed out the job market’.

Income inequality also has trickle down effects regarding family structures as less educated low-income families tend to have more volatile family environments, (Russell 2019). Lower education rates also has an inextricable link to societal problems as unskilled, uneducated workers are neglected. In the UK especially, most low-income families have no patriarch or father figure leading to disparity in family stability and a lack of parental investment in children leading to higher rates of inequalities for future generations, i. e. 8% difference in stability.

Income inequality ultimately is a result of a disparity between the top and bottom quintiles and in the UK there has been a stark increase in top incomes, where the top 1% used to control 3% of national income in the 1970s, almost tripling to 8% in 2017.

Higher levels of transfer payments from the government have helped to stem the flow of income inequality even though earnings inequality increased, as per the figure below showing the constructive effects of benefits for low income earners, especially for the lowest 10% of the population increasing their net income by approximately 25%, as per Figure 4. Nevertheless, this methodology is not sustainable in the long run, as increasing transfer payments are funded by taxation revenue, meaning higher levels of taxes disincentivize high earners to reside in the UK, shifting out productive human capital, which limits overall economic growth as the skilled population emigrate away.

The obstacles regarding increased educational reform through the UK stem from the fact that there are different governments (England, Ireland, Scotland, Wales) with various levels of spending per capita on educational attainment from 1550GBP in England to 1200GBP in rural Scotland. Furthermore, the UK only spent 4. 2% of their budget on education, most likely due to their current account deficit of -$32. 3 billion, leading to education being underfunded leading to higher scholastic inequality. Thus, it can be gauged increased levels of development on education will highly benefit the transition towards economic equality via a reduced income spread.

Policy Options

To counteract the widening income inequality in the UK- an impediment to economic growth and development, it is strongly recommended that the UK government invest a larger percentage of their budget and other fiscal measures towards education and training programs. The decision to invest in the acquisition of a more educated and skilled workforce by the UK government leads to an increasing rate of productivity gains in terms of future earnings job security and general increase in economic output. However, since there are benefits to the population are externalized the demand curve demonstrating the marginal private benefit will undercut the real social benefits. As per the graph below the high upfront cost of providing education leads it to being scarce and devalued. To further reinforce this, if left up to the free market it would be a misallocation of resources and education is undervalued and undersupplied at Q1 rather than Q*.

As a solution to this problem the UK government can either, subsidize demand by discounting the individual’s willingness to pay, (childcare support for parents reentering the workforce) or take responsibility for the provision of education and training programs at the optimum price and quantity. Scandinavian countries such as Norway spend 1. 5x more than the UK on education leading to equal access to higher education and a lower spread of income distribution. The UK government does provide free education for pupils aged 5-16, as well as having government funded universities for tertiary education; incentivizing undertaking these endeavors by providing concessions to reduce cost of living. However, as another steppingstone, increased government funding to allow university graduates greater access to internships and other beneficial CV ventures allow access to a greater supply of more educated workers, increasing the overall wage rate to reduce income inequality.

The cons regarding increased investment to promote high skill education, leads to a skills shortage with trades and hands on occupation such as plumbers, carpenters and electricians. Without inequality existing, everyone would have high technology-based skills, with no one to cater to the basic needs to society that generally require lower cognitive inputs, but still fundamental for societal wellbeing. Furthermore, the desire for the ‘’elites’’ to separate themselves from the masses leads to cyclical issue of educational inequality as they aim to maintain educational relationships with those in similar income streams through private institutions. Additionally, the time lag for fiscal policies to take full effect can last a decade or more, combined with increasing bureaucratic hindrances, where politicians serve their own interests rather than the greater good, leads to unnecessary budget deficits.

Nevertheless, education is the fundamental way for profitable returns on investment with people, as more educated individuals can undertake higher levels of vocational training to further their industry specific skills on the job. Active labour market policies to reduce unemployment amongst low earners such as re training schemes will also help to reduce income inequality by bridging the skills gap to nullify the effects of frictional unemployment when workers have a mismatch of skills compared to jobs available in the workforce.

Conclusion

In summary, income inequality is a fierce talking point amongst economic and political debate and a thorough examination of all fiscal possibilities, it can be ascertained that education has the greatest positive trickle down effects if targeted towards low income earners. The return on educational investment in the long run will far outweigh short run budgetary deficits, through greater economic output from a more skilled and dynamic labor force, through a bridging of the income gap. Ultimately, increased school quality leads to decreased intergenerational inequality as it creates a more cultivated and productive workforce that can maximise output given the adequate resources to do so.

Reference

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