Abstract
We study household income inequality in both Great Britain and the United States and the interplay between labour market earnings and the tax system. While both Britain and the US have witnessed secular increases in 90/10 male earnings inequality over the last three decades, this measure of inequality in net family income has declined in Britain while it has risen in the US. To better understand these comparisons, we examine the interaction between labour market earnings in the family, assortative mating, the tax and welfare-benefit system and household income inequality. We find that both countries have witnessed sizeable changes in employment which have primarily occurred on the extensive margin in the US and on the intensive margin in Britain. Increases in the generosity of the welfare system in Britain played a key role in equalizing net income growth across the wage distribution, whereas the relatively weak safety net available to non-workers in the US mean this growing group has seen particularly adverse developments in their net incomes.
Highlights
Over recent decades, substantial changes in the distribution of incomes in both Great Britain (GB) and the United States (US) have placed increased pressure on government budgets.6 Declining employment and stagnant wages – each of which have affected both countries, to different extents and at different times translate into reduced tax collections, while increased eligibility for and generosity of social insurance, means-tested transfer payments and work-based credits result in greater expenditures
We develop an approach to study how the intensive margin of labour supply, family structure and the tax and transfer system have interacted over time to affect the link between wages and net family incomes right across the male and female wage distributions
Up until the 1990s this was accompanied by similar increases in 90/10 inequality in net household incomes in both countries but since trends have diverged with inequality in net family income declining in Britain while continuing to rise in the US
Summary
Substantial changes in the distribution of incomes in both Great Britain (GB) and the United States (US) have placed increased pressure on government budgets. Declining employment and stagnant wages – each of which have affected both countries, to different extents and at different times translate into reduced tax collections, while increased eligibility for and generosity of social insurance, means-tested transfer payments and work-based credits result in greater expenditures. Declining employment and stagnant wages – each of which have affected both countries, to different extents and at different times translate into reduced tax collections, while increased eligibility for and generosity of social insurance, means-tested transfer payments and work-based credits result in greater expenditures The latter trend has been reinforced by the interplay between the labour market and the family, with increased inequality in family earnings and in assortative mating. Even though there were sharp declines in hours of work among men in Britain, and some increase in assortative mating, the British welfare state has stabilized the economic inequality of tax units across the most of the net income distribution over the past two decades.
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