How pay inequality has soared

Over the last 25 years, the top one per cent have seen their pay increase by a massive 117 per cent.

The Office for National Statistics released a report today detailing increases in real wages across the pay distribution. It chose to lead on the fact that real wages have, on average, increased by 62 per cent over the 25 years from 1986 to 2011 (an annual rate of increase of 1.9 per cent).

What is more interesting though is the pattern of increases in real wages across the pay distribution. The very lowest paid – those in the bottom one per cent of the pay distribution did a little better than the average, seeing their real wages increase by 70 per cent, in no small part due to the introduction of the national minimum wage. But the biggest gains are to be found among those with the highest pay. Someone at the 90th percentile of the pay distribution (i.e. just in the top 10 per cent or earners) saw their real pay increase by 81 per cent, while for the top one per cent real pay increased by a massive 117 per cent - over 3.1 per cent a year.

In fact, apart from the bottom seven per cent of the pay distribution, the further up the pay distribution a person is, the greater has been the increase in their real pay. Apart from the bottom seven per cent, pay inequality has increased, particularly at the very top of the scale.

The report also looks at what happened between 1986 and 1998 – before the introduction of the National Minimum Wage – and between 1998 and 2011. The contrast between the two periods is perhaps the most interesting finding of the report.

In the first period, real pay gains were larger the further up the pay scale you were, and those at the very top – especially the highest one per cent of earners did exceptionally well. Remember also that these figures are all for pay before tax and national insurance contributions. The cut in the top rate of tax from 60 per cent to 40 per cent in 1988 means that in after tax terms, the gap between the gains of those at the top and the rest of the distribution will have been even greater.

Between 1998 and 2011, however, the biggest gains in real pay went to those in the very bottom 2% of the pay distribution – those who benefited directly from the introduction of the national minimum wage. For much of the rest of the pay distribution, the increase in real pay over the period was much the same. Only the top few percent did better.

For 90 per cent of the pay distribution, wage inequality was unchanged between 1998 and 2011. But those at the very top of the pay scale still managed to secure bigger gains than everyone else.

This suggests any attempt to tackle inequality in pay needs to start by halting, and then reversing this tendency for pay at the very top to increase faster than pay for the rest of the workforce.

Tony Dolphin is chief economist at IPPR

The City of London sprawls out, as seen from the under construction 20 Fenchurch Street. Photograph: Getty Images.

Tony Dolphin is chief economist at IPPR

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.