Introduction

Scotland has a highly unequal distribution of income both by international and historical standards. The UK as a whole experienced a substantial increase in inequality in the 1980s and 1990s and the experience in Scotland largely mirrored that trend. Nevertheless, there have been some significant differences in the evolution of income inequality between Scotland and the rest of the UK (RGB), particularly since the mid-1990s.

The British Household Panel Survey (BHPS) offers a unique insight into these changes, particularly due to its ability to follow income variations among the same group of individuals through time. Unlike the Family Resources Survey, Family Expenditure Survey and Scottish Household Survey, it is not restricted to regular snapshots of different groups of individuals. The potential policy benefits of using longitudinal data are now recognised by UK government. They are succinctly paraphrased by HM Treasury (1999):

With only two waves of the boosted sample for Scotland currently available, and only one complete wave of income data, it is too early to construct dynamics models of net income for Scotland of the form that Cappellari and Jenkins (2002) have done for the UK as a whole. We therefore supplement the BHPS data with data from another longitudinal survey: the New Earnings Survey (NES).

In the future, it may be possible to estimate transition models, which are able to predict levels of ‘state dependence’ in low-income states. That is, conditional on a household's observed and unobserved characteristics, the models estimate how much the probability of having a low income in one year is affected by the experience of low income in previous years.