Belfast Telegraph

Fears over inequality of incomes

By John Simpson

Economic policy in Northern Ireland faces bigger challenges than have been recognised. The ‘playing field’ is tilting the wrong way.

In addition to the existing earnings gap, the prosperity gap is widening because market forces in western European countries are favouring the areas which have more advanced technology, greater capital endowment, and more wealthy entrepreneurs.

The catch-up process needs an even faster rate of improvement here than in other regions.

The macro-economic evidence compiled by French economist Thomas Piketty points to serious concerns across the western world that market forces are accelerating an increase in the degree of inequality in incomes and wealth. As economies have grown, the returns to capital (with a link to the impact of technology changes) have increased faster than the gains in earnings by employees. Piketty has issued a serious challenge to western governments on whether (and how) they might cope with this clash: growing economies which also greater degrees of inequality in incomes and personal wealth.

This evidence has relevance for Northern Ireland partly because it adds to our understanding of these significant wider trends which lie outside local control. The evidence is, however, not a valid excuse for a fatalistic response. If inequality in western European countries is not to increase, stronger and better corrective policies will be needed, including their application in and by a region like Northern Ireland.

At a UK level there is independent evidence of a continuing and widening degree of inequality of income and wealth. There is also partial evidence that Northern Ireland is vulnerable to these trends.

In 2011-12, an analysis of weekly household incomes across the UK found that 37% of households were in the four lowest income groups with weekly income of less than £400. In Northern Ireland 43% were in the same four low income groups.

In 2005-06, the earliest year for which comparable data is readily available, for the UK 45% were in the four lowest income groups whilst, in Northern Ireland, there were 49% in these groups.

At first sight, that comparison, in two periods, points to an upward shift in overall average household incomes partly disguised by inflation. However, whilst the UK average improved by eight percentage points, the Northern Ireland average only improved by six percentage points. Relatively speaking Northern Ireland slipped further behind.

Using the same type of comparison, the proportion of households on high weekly incomes shows that Northern Ireland is also falling behind.

In 2011-12, only 13% of households in Northern Ireland had a weekly income of over £1,000. In a comparison with all other UK regions, only the North East of England, with 12%, compared to Northern Ireland.

The significant gap was that the UK average was 20% and Scotland 18%. The gap in higher incomes, at a difference of seven percentage points, is striking.

The gap has increased in the last six years. In 2005-06, 12% of Northern Ireland households had average weekly income of over £1,000. In that year, the UK average was 15%. The proportionate change in the six years means that the Northern Ireland gap widened from three percentage points to seven.

Professor Piketty has dramatically drawn attention to the way in which market economies are evolving. He has posed a very difficult policy question. If market economies are tending to increase the rewards and incomes more for people who are already high earners, is this a welcome and unavoidable consequence of the existing concentration of economic wealth? Does this causally coincide with the dramatic but unpopular increases in earnings for top managers?

Northern Ireland figures on the widening gap between highest and average earnings are not available. However, there are examples of a parallel trend.

Piketty has identified difficult questions on why some regional economies are making progress but also generating greater degrees of inequality. Now, what?

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