Living Standards, Poverty and Inequality in the UK

161 Pages·2013·6.72 MB·English

Living Standards, Poverty and
Inequality in the UK: 2013
IFS Report R81
Jonathan Cribb
Andrew Hood
Robert Joyce
David Phillips
Living Standards, Poverty and Inequality
in the UK: 2013
Jonathan Cribb
Andrew Hood
Robert Joyce
David Phillips
Institute for Fiscal Studies
Copy-edited by Judith Payne
Institute for Fiscal Studies
7 Ridgmount Street
London WC1E 7AE
Publishedby
TheInstituteforFiscalStudies
7RidgmountStreet
LondonWC1E7AE
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Preface
TheJosephRowntreeFoundationhassupportedthisprojectaspartofitsprogramme
ofresearchandinnovativedevelopmentprojects,whichithopeswilbeofvalueto
policymakers,practitionersandserviceusers.Thefactspresentedandviewsexpressed
inthisreportare,however,thoseoftheauthorsandnotnecessarilythoseofthe
Foundation.Neitheraretheviewsexpressednecessarilythoseoftheotherindividuals
orinstitutionsmentionedhere,includingtheInstituteforFiscalStudies,whichhasno
corporateview.Co-fundingfromtheESRC-fundedCentrefortheMicroeconomic
AnalysisofPublicPolicyatIFS(grantnumberRES-544-28-0001)isalsoverygratefully
acknowledged.DatafromtheFamilyResourcesSurveyweremadeavailablebythe
DepartmentforWorkandPensions,whichbearsnoresponsibilityforthe
interpretationofthedatainthisreport.TheauthorswouldliketothankPaulJohnson
andLukeSibietafortheirhelpfulcomments.Anyerrorsandalviewsexpressedare
thoseoftheauthors.
Contents
ExecutiveSummary 1
1. Introduction 9
2. LivingStandards 10
2.1TheUKincomedistribution 11
2.2TrendsinUKlivingstandards 13
2.3Whydidlivingstandardsfal? 18
2.4Inflationandchangesinlivingstandards 23
2.5Prospectsforlivingstandards 26
2.6Conclusion 28
3. Inequality 29
3.1Incomechangesacrosstheincomedistribution 30
3.2Summarymeasuresofinequality 35
3.3Thedistributionofearningsandprivateincomes 40
3.4Prospectsforincomeinequality 48
3.5Conclusion 50
4. IncomePoverty 52
4.1Relativeincomepoverty 55
4.2Absoluteincomepoverty 73
4.3Prospectsforpoverty 76
4.4Conclusion 79
5. TheIncomeDistributionovertheLongRun 81
5.1Changesbyfamilytype 82
5.2Changesbyage 94
5.3Conclusion 107
6. TheChangingFace(s)ofPoverty 109
6.1Changesinrelativepovertybyindividualtypeandage 110
6.2Explainingthelong-termfalinpensionerpoverty 116
6.3Explainingthelong-termriseinpovertyamongworking-ageadults 122
6.3withoutchildren
6.4Theriseandfalinchildpoverty 127
6.5Conclusion 134
AppendixA.TheHouseholdsBelowAverageIncome(HBAI)methodology 136
AppendixB.Benefitandtaxcreditincome:comparingHBAIand 140
AppendixB.administrativedata
AppendixC.ThedecompositionoftheGinicoeficient 142
AppendixD.Materialdeprivation 144
AppendixE.After-housing-costanalysis,supplementarytoChapter5 145
AppendixF.Non-pensionerincomesinfamilieswithandwithoutchildren: 149
AppendixF.quantileregressionanalysis
References 151
Executive Summary
Howhavehouseholdincomesevolvedsincetheonsetofthefinancialcrisis?Howhas
thegapbetweenrichandpoorchanged?Howmanypeopleareinpovertyandwhat
groupsaremostlikelytofacepoverty?Howhavelivingstandardschangedovertime
fordifferentpartsofthepopulation?
Eachyear,thegovernmentproducesstatisticsaboutthedistributionofincomeinthe
UK(‘HouseholdsBelowAverageIncomes’orHBAI)whichhelpanswerthesequestions
andmanymore.ThisreportisthetwelfthinanannualseriespublishedbytheInstitute
forFiscalStudies(IFS)thatanalysesthesestatisticsanddigsdeepertoexplorethe
drivingforcesbehindkeytrendsinlivingstandards,inequalityandpoverty.Ourfirst
suchreportin2002showedapictureofrobustyear-on-yeargrowthinlivingstandards
andfalinglevelsofpoverty,whileinequalitywascreepingup.Thislatestreportcovers
datauptoandincluding2011–12.Thepictureisstrikinglydifferent.Intheaftermathof
therecession,averageincomeshavefalenfortwoconsecutiveyears.Inequalityhas
falenbacktolevelslastseeninthemid-1990s.Andwhilstrelativepovertyheldsteady
inthelatestyearofdata,thiswasonlybecausethepovertylinefelasaverageincomes
fel:onaverage,thepoorhavebecomeworseofinabsoluteterms,justasotherincome
groupshave.
Themainmeasureofincomeusedinouranalysisishouseholdnetincome,whichis
then‘equivalised’totakeaccountofdiferencesinhouseholdsizeandcomposition.We
measureeachhousehold’stotalincomefromallsources(includingearnings,self-
employmentincome,pensions,benefitsandtaxcredits)minuscounciltaxandany
directtaxespaidonthesesources.Wethenapply‘equivalencescales’toeach
household’sincome,accountingforthefactthat(forexample)anetincomeof£200per
weekwilmeanahigherstandardoflivingforasingleindividualthanitwilfora
couplewithfourchildren,allelseequal.
Chapter 2 – Living Standards
Averageincomestendtogrowovertimeastheeconomyexpands.Sinceourconsistent
dataseriesbeganmorethan50yearsagoin1961,meanhouseholdnetincomeshave
grownbyabout1.6%peryearininflation-adjustedterms.Analternativemeasureof
‘averageincome’ismedianincome,whichistheincomeoftheindividualrightinthe
middleoftheincomedistribution.Medianhouseholdnetincomehasgrownbyan
annualaverage1.4%since1961.However,incomegrowthhastendedtofluctuateover
time.Forinstance,therewasstronggrowthinthelate1990s,butweakgrowth
between2002and2007,evenbeforethefinancialcrisishit.
Keyfindingsonlivingstandardsfromthisyear’sreportinclude:
 AverageincomesintheUKfellin2011–12.Afteraccountingforinflation,official
HBAIstatisticsrecordedafalof2.8%inmedianhouseholdincome,from£440per
weekto£427perweek(bothin2011–12prices),andafalof1.6%inmean
householdincome,from£537to£528.Theselatestfallscameontopoflargefalsin
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© Institute for Fiscal Studies
Living standards, poverty and inequality: 2013
2010–11;by2011–12,realmedianincomewas5.8%belowits2009–10leveland
realmeanincomewas7.2%lower.
 Thistwo-yearfalinaverageincomeswasprecededbyaslightriseinaverage
incomesduringtherecessionbetween2007–08and2009–10.Twokeyfactors
explainthispattern.First,averagegrossearningswereremarkablystablebetween
2007–08and2009–10despiteincreasesinunemployment.However,gross
earningsthenfelby6.6%between2009–10and2011–12.Second,whileincome
frombenefitsandtaxcreditsgrewsignificantlybetween2007–08and2009–10,it
felby5.3%overthefolowingtwoyears.Thiswaspartlytheresultofdiscretionary
increasestobenefitsduringtherecessionanddiscretionarycutsmadesince.
Changinginflationalsoplayedanimportantrole.Falinginflationduringthe
recessionhelpedsupportrealearningsandbenefitrates,whilerisinginflationsince
hasexacerbatedthereal-termsfallsinearningsandbenefits.
 Usingdiferentmeasuresofinflationtocompareincomesovertimecan
substantiallyalterthepictureofchangesinlivingstandards.Thisisparticularly
significantgiventhattheHBAIstatisticscontinuetousetheretailpriceindex(RPI),
whichisgeneralyagreedtooverstateinflation.Comparisonswithtrendsin
averageincomesaccordingtotheOficeforNationalStatistics(ONS)’snewinflation
measures,RPIJandCPIH,suggestthatusingtheRPIleadstheHBAIstatisticsto
understatethegrowthinlivingstandardsovertime.WhiletheRPIsuggeststhat
realmedianincomewasaful4%lowerin2011–12thanin2005–06,usingthe
RPIJtoadjustincomesgivesafalof1.1%andusingtheCPIHgivesafalofonly
0.3%.Inlightofthis,thegovernmentshouldconsiderchangingthemeasureof
inflationusedtoensurethattheHBAIstatisticsgiveanaccuratepictureofchanges
inlivingstandards.
 Whatdothedataavailablesuggesthappenedtolivingstandardsin2012–13?Real
averageearningscontinuedtofal,butemploymentlevelsrose.Andwhilstthere
werefurtherdiscretionarycutstobenefitandtaxcreditentitlements,faling
inflationmeantthatthedefaultupratingofbenefitsandtaxcreditsresultedin
increasesintheirvalue.Takentogether,thesefactorspointtobroadlystable
averageincomesinthelastfinancialyear.Lookingatthefollowingcoupleofyears,
therearegoodreasonstoexpectfurtherfalsinlivingstandards.Realaverage
earningsareforecasttocontinuefalinginto2014–15,andtherearefurthercutsto
benefitsandtaxcredits,includingthebelow-inflation1%upratingofmost
working-agebenefitsandtaxcreditsforthreeyearsfromApril2013toApril2015.
Chapter 3 – Inequality
Inequalityisoftendescribedasthegapbetweenrichandpoor,butmoregenerallyit
referstodifferencesinincomebetweendifferentpartsofthepopulation.Forthis
reason,westresstheimportanceoflookingatarangeofinequalitymeasures.
Themostwidely-usedmeasureofincomeinequalityistheGinicoefficient.Thisranges
from0to1,withhighernumbersindicatinghigherinequality.Duringthe1960sand
1970s,theGinifluctuatedaround0.26.Duringthe1980s,itincreasedsubstantially,
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Executive summary
reaching0.34by1990.Thiswasthelargestincreaseinincomeinequalityseeninrecent
Britishhistoryandwaslargerthantherisethattookplaceinothercountriesatthe
sametime.AsmeasuredbytheGinicoefficient,inequalityreacheditshighestlevel
sinceatleast1961between2007–08and2009–10,beforefalingbacksharplyin
2010–11.
Keyfindingsoninequalityfromthisyear’sreportinclude:
 IncomeinequalityintheUKwasbroadlyunchangedbetween2010–11and2011–
12.Realincomesfelbysimilaramountsacrosstheincomedistribution–by2.5%
atthe10thpercentile,2.8%atthemedianand2.6%atthe90thpercentile.
 Althoughinequalitywasunchangedin2011–12,itwassubstantialylowerthan
beforetherecession.TheGinicoefficientstoodat0.34in2011–12,comparedwith
0.36in2007–08.Thiswasaresultofincomechangesrightacrossthedistribution,
notjustaconsequenceoffallingincomesattheverytopofthedistribution.
Whereasincomeatthe10thpercentileroseby1.4%inrealtermsbetween2007–08
and2011–12,thecumulativefallinincomeatthe90thpercentilewas5.9%.
InequalityasmeasuredbytheGiniwaslowerthanatanypointduringthe2000s,
butstilmuchhigherthanitwasbeforethedramaticwideningoftheincome
distributionthatoccurredinthe1980s.
 Thesefallsinincomeinequalitycamedespiteincreasesinearningsinequality.Real
weeklyearningsfelforeveryonebetween2007–08and2011–12,andthe
percentagefalswerelargestforthosewithmodestearnings,althoughthosewith
theverylowestweeklyearningsfaredalittlebetter.Householdincomesbefore
taxesandbenefitsthereforebecamemoreunequal,butthiswasoutweighedbythe
effectofthetaxandbenefitsystem,whichledtoreductionsininequalityofnet
incomes.
 Thereweretwokeyreasonsforthefalininequalitybetween2007–08and2011–
12.First,becauseearningsmakeupalargerfractionofoverallincomeatthetopof
theincomedistributionthanatthebottom,falingrealearningshadabigger
negativeimpactonincomesforricherhouseholds,despitetheincreaseinearnings
inequality.Second,realincreasesinincomefrombenefitsandtaxcreditssupported
householdincomestowardsthebottomoftheincomedistribution.
 Lookingforward,areturntorealearningsgrowthandcutstobenefitandtaxcredit
entitlementsimplyanupwardtrajectoryforincomeinequality.Thereductionin
inequalityasaresultoftherecessionislikelytoproveatemporaryratherthan
permanentphenomenon.Intheshortrun,however,year-on-yearmovementsin
inequalitywillbeaffectedbythefactthatongoingchangestothetaxationofvery-
high-incomeindividualsinfluencewhentheychoosetorealisetheirincomes.This
islikelytocontinueuntilatleast2013–14.
Chapter 4 – Income Poverty
Themostwidely-quotedmeasureofincomepovertyintheUKandtherestofthe
EuropeanUnionistheproportionofindividualswithhouseholdincomeslesthan60%
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