This is your exam paper on income inequality. There are three multiple choice questions. You have three minutes. Good luck!
Instructions to candidates: All questions refer to household incomes in 2014/15. Household income is measured after direct taxes and benefits (“disposable income”), but before deducting housing costs. Income figures are scaled to account for differences in the number of adults and children in the household.
The share of total income going to the richest 20% of households in the UK is:
a) 2 times the share going to the poorest 20% of households
b) 5 times the share going to the poorest 20% of households
c) 12 times the share going to the poorest 20% of households
d) 19 times the share going to the poorest 20% of households
Stan has income higher than the bottom 90% of the UK population (but lower than the other 10%). Ollie has income higher than the bottom 10% of the population (but lower than the other 90%). Stan’s income is:
a) 4 times higher than Ollie’s income
b) 7 times higher
c) 10 times higher
d) 12 times higher
Herman and Lily live together as a couple. Both work full time, each earning £26,000 per year. They have no children, do not receive income from other sources and pay council tax of £1,300 per year.
How does their income compare to the rest of the population?
a) They are in the richest 20%
b) They are in the richest 30% (but not the top 20%)
c) They are in the richest 40% (but not the top 30%)
d) They are in the richest 50% (but not the top 40%)
Finished? Now see how you did.
For Question 1, the right answer was (b).
The share of income going to the richest 20% of households was 5 times the share going to the poorest 20%. If you want the exact figures, the richest 20% received 42% of total income, compared to 8% of total income going to the poorest 20%. These shares have been fairly flat since the early 1990s.
For Question 2, the right answer was (a).
Stan’s income is 4 times higher than Ollie’s. If that’s less than you expected, it’s among the group of people richer than Stan that inequality becomes more accentuated. Suppose James has income higher than 99% of the population (putting him on the cusp of the richest 1%). His income is more than twice that of Stan and ten times that of Ollie.
There is a common perception that inequality has increased in recent decades you can try these out. But inequality between people like Stan and Ollie has actually fallen slightly since the start of the 1990s. Stan’s income is 3.9 times higher than Ollie’s in 2014/15, but in 1990 it was 4.4 times higher.
By contrast, the gap between Stan and Ollie and people like James has widened over the same period. The share of income going to the richest 1% increased from 5.7% in 1990 to 7.9% in 2014/15. So the reality is more complex than often thought – inequality has reduced among some parts of the population but among other parts, it has widened.
For Question 3, the right answer was (a).
Herman and Lily are in the richest 20% of the population. They have a weekly income of £767 after deducting tax, beating the £741 they need to enter the richest 20%.
It makes a big difference that they are both in employment: suppose one of them was not working and they still had no income from other sources. Then their weekly income of £371 after tax would put them in the poorest 40% of the population.
As mentioned at the start, income figures are scaled according to the number of adults and children in the household – a process called ‘equivalisation’. We do this because a larger household is likely to need a higher income than a smaller household in order to have the same standard of living. If Herman and Lily have a son, Eddie, the scaling process means their equivalised income is a sixth lower than their actual income – and they drop in to the richest 30%. But they would also be entitled to Child Benefit which would provide some additional income.
Why did the question tell me about their council tax? Income inequality is measured based on disposable income, meaning income after taxes and benefits. Tax includes council tax as well as Income Tax and National Insurance contributions (but not VAT).
How did you get on?
If you got 2 or 3 correct, congratulations! You have a keen grasp of the UK income distribution.
If you got 0 or 1, oh dear. The Library’s briefing paper on Income inequality in the UK can help you get up to speed.
All questions are based on data from DWP’s Households below average income report for 2014/15. Additional data on inequality trends are taken from Institute for Fiscal Studies report, Living Standards, Poverty and Inequality in the UK: 2016, Chapter 3.
Readers may be interested to know that new data for 2015/16 was published by the Office for National Statistics on 10 January 2017. Although the ONS analysis is more up to date than the DWP report, it contains less detail and is based on a smaller number of survey respondents so is more susceptible to survey error.