Income is a flow of earnings generated and received over a given time period. It can be gained from employment, pension funds or ownership of wealth. Between 1979 and 1990, the UK economy experienced a marked increase in income inequality. However, since 1997 when labour came into power, their social reforms such as tax credits and national minimum wage has narrowed that gap slightly. Although the gap still exists from a series of factors. A rise in earnings inequality can cause income inequality.
This is due to a fall in demand for unskilled and semi-skilled labour and a rise in demand for skilled labour because of deindustrialisation, where resources have been shifted from secondary to the tertiary and quaternary sectors, so thus, skilled labour is needed. In the UK this happened as we lost our wage and price competitiveness to developing countries, causing structural unemployment in the secondary sector industry. Therefore the income gap widens as skilled labour productivity widens, and thus, so do wages.
Over the years there has also been a rise in workless households where there is no income earner and are thus living off welfare benefits. Unemployment of unskilled and semi-skilled labour and generally being unemployable has caused this. Another reason is due to the benefit culture where the income into the household would be less if they worked than if they lived off benefits, due to taxes etc, therefore, it is more beneficial for them to stay on benefits. Health issues such as drug and alcohol abuse is also another factor contributing to this. Pre-1979, welfare benefits increased in line with earnings.
Typically, earnings rise more than the rate of inflation; even today earnings are rising at 4% whereas inflation is rising at 2%. However, Thatcher broke that gap by rising benefits in line with inflation instead of earnings, therefore widening the income gap. Therefore, post-1979, after the tax structure change, Thatcher reduced the top rate of income tax from 83% to 40% as an incentive to work. The basic rate of tax was also reduced from 35% to 25%, helping all income earners; however, top income earners benefitted proportionately more, and thus leading to a wider distribution of income across the UK.
Direct taxes are progressive (a higher proportion is paid as income rises, which is thought to be fair) and indirect taxes are regressive (a higher proportion is paid as income falls). Therefore when Thatcher raised VAT which is an indirect tax, this contributed further to the widened gap of income distribution. Therefore, I believe that the most significant cause of income inequality was the change in the UK tax structure in 1979, as this has affected everyone in the UK and thus contributed greatly to income inequality. However this inequality will always exist as it is an incentive to work and earn more.