During the first half of the 1980s disposable income inequality was fairly stable. The second half of the 1980s was then characterised by an increase. During the first half of the 1990s inequality fell slightly, but since then it appears to have risen slightly. So that in 2001-02, the Gini coefficient was back to its 1990 level.

Inequality of original income (before taking account of taxes and benefits) has followed a different pattern. It rose fairly steadily throughout the 1980s and has been relatively stable since then.

The Institute for Fiscal Studies (IFS) has investigated some of the possible explanations for the changes in inequality seen over the last two decades, and in particular why the trends are different over the economic cycles of the 1980s and 1990s.

Wage growth played a part: inequality tends to rise during periods of rapid wage growth because the poorest households are the most likely to contain non-working individuals.

The economic recovery in the 1980s was characterised by large increases in wages in each of the years from 1984 to 1988 matching the period when inequality increased rapidly. In contrast wage growth was very slow to return in the recovery of the early to mid-1990s – a time of stable or falling inequality. Growth in self-employment income and in unemployment were also found to be associated with periods of increased inequality.

Demographic factors, such as the growth in one person households, make a relatively unimportant contribution compared with labour market changes.

The IFS have found that changes in the tax and benefit system have an impact in accordance with what economic theory would suggest. The income tax cuts of the 1970s and early 1980s worked to increase income inequality while direct tax rises in the early 1980s and 1990s - together with the increases in means-tested benefits in the late 1990s - produced the opposite effect.