Inequality in Scotland: trends, drivers, and implications for the independence debate

Abstract

What is the level of income inequality in Scotland? How does income inequality in Scotland compare to the rest of the UK, and to other OECD countries? How has income inequality in Scotland changed over time? What has caused inequality to change, and how effective is the tax and benefit system at mitigating inequality? This paper seeks to answer these questions, and draw messages for the Scottish independence debate.  Key points  1. By international standards, the inequality of gross earned income (measured before the effects of taxes and benefits) in Scotland is relatively high. Inequality is much higher in Scotland than in the Nordic countries, although there is some evidence that inequality in the Nordic countries has increased slightly more rapidly than in Scotland since the mid-1990s.  2. Since the mid-1990s there has been relatively little increase in inequality in Scotland across most of the distribution.  3. However, inequality at the extreme ends of the distribution has increased in the last decade. The incomes of the top 1-2% of earners have increased compared to the average. At the same time, those in the bottom 5-10% of the earnings distribution have fallen further behind the average.  4. Much of the increase in inequality has been driven by increased variability in working time. This is particularly the case in lower-paying occupations, where there has been a significant increase in part-time working. Although this has increased inequality, the welfare implications are unclear because some workers may prefer shorter hours.  5. The Scottish labour market became increasingly polarised between 2001 and 2010. This means there while the share of higher paying and lower paying jobs increased, the share of middle-wage jobs fell, contributing to inequality growth.  6. There has been virtually no increase in net income inequality in Scotland (after taxes and benefits are taken into account) since 1997. Increased government transfers, particularly to families with children and the elderly, have offset the small increases in earned income inequality that occurred.