living standards and inequality - ifs€¦ · prospects for living standards and inequality •...

© Institute for Fiscal Studies

Living standards and income inequality Jonathan Cribb

16th July 2015

Where do we get our data?

• Family Resources Survey and predecessors from 1961 to 2013–14

– Currently a sample of around 20,000 households

– Subject to sampling error

• Figures using data prior to 2002–03 refer to Great Britain not UK

– Northern Ireland not included in the data until 2002–03

• We use the same definition of income as measured in “Households Below Average Income” which is produced by the Department for Work and Pensions


What do we mean by “income”?

• HBAI income is measured net of direct taxes and benefits and is measured at the household level

• Adjusted to account for household size and structure (“equivalised”)

– Cash amounts are equivalents for a childless couple

• Measure income both before and after housing costs have been deducted (“BHC” and “AHC”)

• Adjusted for inflation to allow comparisons over time

– Use variants of the Consumer Price Index, which we have constructed (available on the IFS website)

– Differs from the Retail Price Index used in DWP’s official statistics

– RPI known to significantly overstate inflation


Growth in average incomes since 2002–03

100

102

104

106

108

110

112

Inco

me

in

de

xe

d t

o 1

00

in

20

02

–0

3

Median income

Growth

2012–13 to

2013–14:

0.8%


Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015

Explaining growth in median income in 2013–14

• Income growth in latest year driven by recovering labour market

– Strong growth in employment (stronger than recorded in LFS)

– Flat real earnings of employees

– Also: large rise in income tax personal allowance

– However: cuts to working-age benefits and tax credits



100

102

104

106

108

110

112

Inco

me

in

de

xe

d t

o 1

00

in

20

02

–0

3

Median income

0.4% below

2007–08 level




100

102

104

106

108

110

112

Inco

me

in

de

xe

d t

o 1

00

in

20

02

–0

3

Median income

2.4% below

2009–10 peak




100

102

104

106

108

110

112

Inco

me

in

de

xe

d t

o 1

00

in

20

02

–0

3

Median income Mean income



Adjusting for inflation: CPI vs RPI


96

98

100

102

104

106

108

Re

al m

ed

ian

In

com

e i

nd

exe

d t

o 1

00

in

20

02

–0

3

Adjusting for inflation using CPI variant Adjusting for inflation using RPI

Source: Fig 2.2 of Living Standards, Inequality and Poverty in the UK: 2015

5.2% above

2002–03

level

Adjusting for inflation: CPI vs RPI


96

98

100

102

104

106

108

Re

al m

ed

ian

in

com

e i

nd

exe

d t

o 1

00

in

20

02

–0

3

Adjusting for inflation using CPI variant Adjusting for inflation using RPI

Real median BHC household income since 2002–03 (UK)


1.8% below

2002–03

level

Comparing income growth to previous recessions


80

85

90

95

100

105

-4 -3 -2 -1 0 1 2 3 4

Me

dia

n i

nco

me

in

de

xe

d t

o 1

00

in

pe

ak

ye

ar

Years since peak in median income

2009–10 1990 1980 1974


Comparing periods of falling incomes

• Profile of changes in living standards very different to previous recessions

• In 2013–14, median income 4 years after peak around same level as 7 years before (2006–07)

– Compared to between 13% and 17% higher for previous 3 recessions


Income inequality


The UK income distribution in 2013–14


0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Ne

t h

ou

seh

old

in

com

e

(£ p

er

ye

ar,

20

13

–1

4 p

rice

s)

Percentile point


Childless couple:

£23,600 p.a.

Couple with 2 young

children: £33,000 p.a.

Single person:

£15,800 p.a.



0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Ne

t h

ou

seh

old

in

com

e

(£ p

er

ye

ar,

20

13

–1

4 p

rice

s)

Percentile point


Median:

£23,600 p.a.

90th percentile:

£47,000 p.a.

10th percentile:

£12,400 p.a.

Expressed as equivalent living standards for a childless couple



0

25,000

50,000

75,000

100,000

125,000

150,000

10 20 30 40 50 60 70 80 90

Ne

t h

ou

seh

old

in

com

e

(£ p

er

ye

ar,

20

13

–1

4 p

rice

s)

Percentile point

99th percentile:

£123,700 p.a.


Median:

£23,600 p.a.

90th percentile:

£47,000 p.a.

10th percentile:

£12,400 p.a.

Expressed as equivalent living standards for a childless couple

Inequality broadly unchanged in 2013–14


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Ch

an

ge

fro

m 2

01

2–

13

to

20

13

–1

4 (%

)

Percentile point


Note: Shaded area represents 95% confidence intervals

Real income growth by percentile point (BHC), 2012–13 to 2013–14

Inequality is lower than pre-recession levels


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cu

mu

lati

ve

in

com

e c

ha

ng

e

Percentile point

Income measured before housing costs

Income measured after housing costs

Real income growth by percentile point, 2007–08 to 2013–14


Trends in inequality since 2007–08

• Inequality is lower than prior to recession measured BHC

• Significantly smaller falls in inequality when measured AHC

– Poorer households did not benefit as much from falling mortgage interest rates


Explaining recent falls in inequality


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cu

mu

lati

ve

in

com

e c

ha

ng

e

Percentile point

All individuals

Non-pensioners

Non-pensioners in working households



Why did inequality fall for working households?


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cu

mu

lati

ve

in

com

e c

ha

ng

e

Percentile point

Non-pensioners in working households





-20%

-15%

-10%

-5%

0%

5%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cu

mu

lati

ve

in

com

e c

ha

ng

e

Percentile point

Net household income





-20%

-15%

-10%

-5%

0%

5%

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

Cu

mu

lati

ve

in

com

e c

ha

ng

e

Percentile point

Net household income

Pre-tax household income (including benefits)

Gross household earnings

Growth by percentile point (BHC), 2007–08 to 2013–14


Trends in inequality since 2007–08

• Falling inequality for working non-pensioners despite inequality-increasing trends in gross households earnings

– Benefits are a more important income source for low-earning households than for higher-earning households


Gini coefficient and 90/10 ratio,1961 to 2013–14


2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

0.40

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

90

:10

ra

tio

Gin

i co

eff

icie

nt

Gini coefficient (left-hand axis)

90:10 ratio (right-hand axis)


The 1% income share 1961 to 2013–14 (GB)



2%

3%

4%

5%

6%

7%

8%

9%

1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

To

p 1

% s

ha

re o

f in

com

e

Longer run trends in inequality

• But changes in inequality are also much larger than seen recently

• Changes in overall measures of inequality can mask important trends

– From 1990 to 2007–08 Gini coefficient rose 2 ppt

– This was driven by rises in inequality at the top of the distribution

– But inequality fell across most of the distribution (90/10 ratio fell)


Longer run trends in inequality

• Why has inequality fallen since 1990 over most of the distribution?

• In part, due to increases in incomes of some relatively poor groups:

– Pensioners

– Non-pensioners in workless households


Incomes of pensioners catching up with the rest...


60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Me

dia

n H

ou

seh

old

in

com

e o

f p

en

sio

ne

rs

rela

tive

to

no

n-p

en

sio

ne

rs

Before housing costs After housing costs

Median income of pensioners relative to that of non-pensioners, 1979 to 2013–14


Smaller improvement in relative position of workless households


Median income of non-pensioners in workless households relative to those in working households, 1979 to 2013–14


30%

35%

40%

45%

50%

55%

60%

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Ho

use

ho

ld i

nco

me

of

no

n-p

en

sio

ne

r w

ork

less

h

ou

seh

old

s re

lati

ve

to

wo

rkin

g h

ou

seh

old

s Before housing costs After housing costs

Prospects for living standards and inequality

• Expect to see continued (probably accelerated) growth in median income in 2014–15 HBAI data

– Rising employment rate (1.2ppt increase in 2014–15)

– Rapid fall in inflation (to 1.0% in 2014–15) prevents fall in real value of most benefits

– Modest real earnings growth (0.4% according to AWE)

• Higher real earnings likely to lead to rising living standards (and inequality) over next few years

– Earnings are more important income source for richer households

• Announced tax and benefit changes will act to increase inequality over the parliament


Impact of tax and benefit reforms between April 2015 and April 2019 (including universal credit)


-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Poorest 2 3 4 5 6 7 8 9 Richest All

Ch

an

ge

in

an

nu

al

ne

t in

com

e

Income Decile Group

Note: Assumes full take-up of means-tested benefits and tax credits.

Source: A. Hood (2015) ‘Benefit changes and distributional analysis’ IFS

Post-Summer Budget 2015 Analysis

Conclusion

• Modest median income growth in 2013–14

– Median income around pre-crisis level, but well below 2009–10 peak

• Overall measures of inequality since 1990 mask different underlying trends

– Rising inequality at the top from 1990 to 2007–08

– Falling inequality across most of the distribution since 1990 (and particularly since 2007–08)

– Driven in part by improving relative position of pensioners and workless households


living standards and inequality - ifs€¦ · prospects for living standards and inequality •...

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