From the TUC

If you’re not rich, you’re not Middle Class, says the FT

05 Jan 2010, by in Labour market

Well actually that’s not exactly how they put it in their feature on pay disparity this morning, but it might as well have been. What they actually said was “Middle-class workers richer than they think”. But it does depend what you mean by ‘middle class’ – what they mean is people who start their careers on more than most people earn, and keep getting richer, which is a strange use of the term “middle”. But it is a reflection of just how unequal our society has become since the 1970s (inequality rose fastest in the 80s, less fast in the 90s, and the last decade has seen ambiguous data but no reverse in the trend). Given that brief historical summary, it is surprising that the FT concludes that it is difficult to say why inequality has grown in this way, and why it has grown more in the US, UK and New Zealand than in countries like France and Germany. Er, it’s because growing inequality was the policy of UK governments in the 80s and 90s (as well as in different times in the US and New Zealand) and constraining that growth in inequality has been government policy in France and Germany, isn’t it?

All this has been explored in greater depth and with greater erudition in TUC Touchstone pamphlets like Life in the Middle, but it’s all worth revisiting – what we need is Government policies aimed at restoring equality in earnings, and non-Governmental tools like stronger trade unions and more collective bargaining to back them up.

The figures that the FT quote indicate that the richest people at work (let alone the idle rich who don’t work at all) are so rich that the mean average wage of £487 a week is nearly 25% more than the most that the poorer half of the population earn (half the population earn below the median wage of £393 a week). What the FT reported was that middle class people – remember, that’s people who start their careers earning more than most other people earn and actually get richer as they get older, I can’t emphasise this enough – actually earn far more than most (the poor, or working class), and only appear poor because they don’t earn the staggering sums of the super-rich – such as the top 0.1% of the population whose earnings are above £7,000 a week!

What has led to this increasing inequality is politics, and it can be changed if people want it to. Although this is of course complex territory, and different causes (which all interact with each other) have indeterminate impact on the outcome. But, fundamentally, inequality derives from policies like non-progressive taxation (eg abandoning higher rates of income tax as people earn more, or increasing the use of generalised consumption taxes like VAT) and the restriction of unions’ ability to negotiate better wages for the majority of workers (a mechanism which counterbalances the tendency of market economies to reward elites or the most skilled workers).

My colleague Nigel Stanley blogged months ago about the abuse of the term “middle class” in British journalism. It usually means professionals, and has all sorts of cultural implications, whereas in the US it means “ordinary workers”. Fairly clearly, it often means “us”, as opposed to “them” – them being people significantly poorer or richer than “us”.

Postscript: there’s a sad piece of evidence in the article about how confusing some people find statistics. It says “separate work by IFS, using 2004/05 tax data, calculated recently that there were 4.7 million adults in the richest 10% of the population.” That is because there are 47 million adults in Britain, and wherever there are 47 million adults, regardless of what tax data tells us, 4.7 million of them are going to be in the richest 10% of the population. It’s, like, an iron law, or something. Doh!

4 Responses to If you’re not rich, you’re not Middle Class, says the FT

  1. Tim Worstall
    Jan 10th 2010, 4:26 pm

    Yes, statistics can be a confusing subject.

    “The figures that the FT quote indicate that the richest people at work (let alone the idle rich who don’t work at all) are so rich that the mean average wage of £487 a week is nearly 25% more than the most that the poorer half of the population earn (half the population earn below the median wage of £393 a week).”

    In a distribution with a lower bound of zero and an upper one of infintity you’ll tend to find that the mean is higher than the median.

    ‘Coz we’ve got no negative incomes, see?

    “But, fundamentally, inequality derives from policies like non-progressive taxation (eg abandoning higher rates of income tax as people earn more,”

    Given that all the incomes being measured are pre-tax this is an unlikely explanation.

  2. Owen Tudor

    Owen Tudor
    Jan 10th 2010, 4:56 pm

    Not to people who’ve done maths.

    I see what you mean about medians and means, but actually what you say is wrong: means AREN’T always above medians, only in number series where there are significant quantities of numbers way above the average (whether mean or median). Only in societies with large numbers are on low wages and much smaller numbers on much, much higher wages is the mean above the median, which is the point I was making (consider a number series like 20,20, 20, 20, 15, 10 and 5 – the median is 20 but the mean is just under 16. Societies with wage distributions like that are of course rare (although in individual companies they are less uncommon) – most are the inegalitarian sort where the mean is above the median.

    You got me on the second point, but I plead mild linguistic, rather than mathematical, confusion – I had moved on to talk of inequality generally, rather than inequality of pre-tax income – as you say, if we’re talking pre-tax incomes, then neither progressive nor regressive taxation can have a direct impact on pre-tax income distribution (but theoretically they could have an indirect impact – I can go into detail if necessary). But it DOES make a difference to spending power, which is what most people would consider was the basis of inequality – at its most progressive, taxation could deliver exactly equal post-tax incomes which would clearly be more egalitarian than the current system!

  3. Tim Worstall
    Jan 10th 2010, 5:07 pm

    Note that I didn’t say “always”.

    “In a distribution with a lower bound of zero and an upper one of infintity you’ll tend to find that the mean is higher than the median.”

    Tend to find. As in, in most real world economies that is what you’ll find with the wage distribution…as you get around to admitting.

    “at its most progressive, taxation could deliver exactly equal post-tax incomes which would clearly be more egalitarian than the current system!”

    It would also be lunacy. Who would bother to go to work if post tax incomes were exactly equal?

    But here’s a thing for those who would design nice social democratic tax systems. Why not go and look at those countries which are successful social democracies and study their tax systems? Sweden’s for example, in totality (ie direct and indirect plus company taxation) is slightly less progressive than ours.

    Their benefits system is markedly more progressive, making the whole system more progressive.

    For they’ve understood the point that it is consumption that matters for equality: not incomes. However, it’s incomes that matter for incentives necessary to keep an economy growing.

  4. Owen Tudor

    Owen Tudor
    Jan 10th 2010, 6:58 pm

    I shouldn’t have replied in such detail over what was not the main issue at stake – apologies Tim! I still maintain that a society where mean incomes are 25% higher than the median is a society with fairly high levels of inequality – that was really the only point I was making about medians and means. My main point was that we have a society where inequality is so huge that the definition we use of “middle” has to be so far away from the “average”, because the disparities between top and bottom are so embarrasing. The US usage (where middle class tends to mean people who are in between rich and poor) is more honest, at least.

    I wasn’t advocating a perfectly progressive (by which I mean in the technical, not ideological sense), taxation system, just using it to demonstrate the effect taxation can theoretically have.

    More importantly, I agree with Tim that taxation is not the best way to produce equality, although the uses to which it can be put (eg high transfer payments, generous welfare states, unemployment benefits that actually provide a trampoline back into employment rather than a safety net protecting against destitution) are quite important as I think Tim would recognise.

    I’m not even sure that the state is the best way to reduce inequality – I think strong trade unions are, in general, a better and more sustainable tool – in that case, the state IS a safety net, where trade unions are not strong enough.

    I’m not, though, conceding that pre-tax income inequality (still less as gross as the UK or US has) is required for a growing economy – plenty of economies that have lower levels of pre-tax income inequality have higher levels of growth than ours (indeed the OECD evidence suggests that our level of inequality are actually dysfunctional), and I don’t see why bankers need such higher levels of incentive to work productively than people doing dangerous or physically demanding jobs. And it was Lord Turner, not me, who called some finance jobs socially useless – the implication being that we should actually disincentivise them!