Increasing inequality and improving insurance: house price booms and the welfare state in the UK

I examine a puzzle in the evolution of inequality in the UK over the late 90s and early 00s. Income inequality declined while consumption inequality increased and became dissociated from permanent income. Two opposing factors are needed to explain these movements. First the house price boom caused growth in consumption dispersion separate from income dispersion by exacerbating wealth inequality. Second, policies introduced by the new Labour government in 1997 reduced income inequality by raising incomes at the bottom end, but reduced consumption inequality less. Combined these factors explain around 35% of the excess growth in consumption inequality. Overall, the policy reforms more than offset the effect of the house price boom on consumption inequality for the low education group, but not for the high education group. The welfare gains from the reforms extended high up the income distribution because of the implied reduction in risk, even though the number of direct recipients was small.