Income inequality and the labour market in Britain and the US

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 has declined in Britain while it has risen in the US. We examine the interaction between labour market earnings in the family, assortative mating, the tax and 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.