Living standards and income inequality
Jonathan Cribb
16th July 2015
© Institute for Fiscal Studies
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
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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
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Growth in average incomes since 2002–03
Median income
Income indexed to 100 in 2002–03
112
110
108
106
Growth
2012–13 to
2013–14:
0.8%
104
102
100
Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
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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
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Growth in average incomes since 2002–03
Median income
Income indexed to 100 in 2002–03
112
110
108
0.4% below
2007–08 level
106
104
102
100
Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
© Institute for Fiscal Studies
Growth in average incomes since 2002–03
Median income
Income indexed to 100 in 2002–03
112
110
108
2.4% below
2009–10 peak
106
104
102
100
Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
© Institute for Fiscal Studies
Growth in average incomes since 2002–03
Median income
Mean income
Income indexed to 100 in 2002–03
112
110
108
106
104
102
100
Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
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Adjusting for inflation: CPI vs RPI
Real median Income indexed to 100 in 2002–03
108
106
104
5.2% above
2002–03
level
102
100
98
96
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
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Adjusting for inflation: CPI vs RPI
Real median BHC household income since 2002–03 (UK)
Real median income indexed to 100 in 2002–03
108
106
104
102
1.8% below
2002–03
level
100
98
96
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
© Institute for Fiscal Studies
Comparing income growth to previous recessions
Median income indexed to 100 in peak year
2009–10
1990
1980
1974
105
100
95
90
85
80
-4
-3
-2
-1
0
1
2
Years since peak in median income
Source: Fig 2.4 of Living Standards, Inequality and Poverty in the UK: 2015
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3
4
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
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Income inequality
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The UK income distribution in 2013–14
Net household income
(£ per year, 2013–14 prices)
150,000
125,000
100,000
Single person: Childless couple: Couple with 2 young
£15,800 p.a.
£23,600 p.a.
children: £33,000 p.a.
75,000
50,000
25,000
0
10
20
30
40
50
60
70
Percentile point
Source: Fig 3.1 of Living Standards, Inequality and Poverty in the UK: 2015
© Institute for Fiscal Studies
80
90
The UK income distribution in 2013–14
Expressed as equivalent living standards for a childless couple
Net household income
(£ per year, 2013–14 prices)
150,000
125,000
100,000
75,000
10th percentile:
£12,400 p.a.
Median:
£23,600 p.a.
90th percentile:
£47,000 p.a.
50,000
25,000
0
10
20
30
40
50
60
70
Percentile point
Source: Fig 3.1 of Living Standards, Inequality and Poverty in the UK: 2015
© Institute for Fiscal Studies
80
90
The UK income distribution in 2013–14
Expressed as equivalent living standards for a childless couple
Net household income
(£ per year, 2013–14 prices)
150,000
99th percentile:
£123,700 p.a.
125,000
100,000
75,000
10th percentile:
£12,400 p.a.
Median:
£23,600 p.a.
90th percentile:
£47,000 p.a.
50,000
25,000
0
10
20
30
40
50
60
70
Percentile point
Source: Fig 3.1 of Living Standards, Inequality and Poverty in the UK: 2015
© Institute for Fiscal Studies
80
90
Inequality broadly unchanged in 2013–14
Real income growth by percentile point (BHC), 2012–13 to 2013–14
10%
Change from 2012–13 to 2013–14 (%)
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
Percentile point
Source: Fig 3.2 of Living Standards, Inequality and Poverty in the UK: 2015
Note: Shaded area represents 95% confidence intervals
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80
85
90
95
Inequality is lower than pre-recession levels
Real income growth by percentile point, 2007–08 to 2013–14
10%
Income measured before housing costs
8%
Cumulative income change
Income measured after housing costs
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
Percentile point
Source: Fig 3.9 of Living Standards, Inequality and Poverty in the UK: 2015
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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
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Explaining recent falls in inequality
Real income growth by percentile point (BHC), 2007–08 to 2013–14
10%
Cumulative income change
8%
All individuals
6%
Non-pensioners
4%
Non-pensioners in working households
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
Percentile point
Source: Fig 3.9 of Living Standards, Inequality and Poverty in the UK: 2015
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Why did inequality fall for working households?
Real income growth by percentile point (BHC), 2007–08 to 2013–14
10%
Cumulative income change
8%
6%
4%
Non-pensioners in working households
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
Percentile point
Source: Fig 3.9 of Living Standards, Inequality and Poverty in the UK: 2015
© Institute for Fiscal Studies
Why did inequality fall for working households?
Real income growth by percentile point (BHC), 2007–08 to 2013–14
Cumulative income change
5%
0%
-5%
-10%
Net household income
-15%
-20%
5
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
Percentile point
Source: Fig 3.10 of Living Standards, Inequality and Poverty in the UK: 2015
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Why did inequality fall for working households?
Growth by percentile point (BHC), 2007–08 to 2013–14
Cumulative income change
5%
0%
-5%
-10%
Net household income
Pre-tax household income
(including benefits)
-15%
Gross household earnings
-20%
5
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
Percentile point
Source: Fig 3.10 of Living Standards, Inequality and Poverty in the UK: 2015
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Trends in inequality since 2007–08
• Falling inequality for working non-pensioners despite inequalityincreasing trends in gross households earnings
– Benefits are a more important income source for low-earning
households than for higher-earning households
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Gini coefficient and 90/10 ratio,1961 to 2013–14
0.40
4.5
Gini coefficient (left-hand axis)
0.38
4.3
0.36
4.1
0.34
3.9
0.32
3.7
0.30
3.5
0.28
3.3
0.26
3.1
0.24
2.9
0.22
2.7
0.20
2.5
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Source: Fig 3.4 of Living Standards, Inequality and Poverty in the UK: 2015
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90:10 ratio
Gini coefficient
90:10 ratio (right-hand axis)
The 1% income share 1961 to 2013–14 (GB)
9%
Top 1% share of income
8%
7%
6%
5%
4%
3%
2%
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Source: Fig 3.5 of Living Standards, Inequality and Poverty in the UK: 2015
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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)
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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
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Incomes of pensioners catching up with the rest...
Median income of pensioners relative to that of non-pensioners, 1979 to 2013–14
Median Household income of pensioners
relative to non-pensioners
105%
Before housing costs
After housing costs
100%
95%
90%
85%
80%
75%
70%
65%
60%
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Source: Fig 3.6 of Living Standards, Inequality and Poverty in the UK: 2015
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2009
2012
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
Household income of non-pensioner workless
households relative to working households
60%
Before housing costs
After housing costs
55%
50%
45%
40%
35%
30%
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Source: Fig 3.6 of Living Standards, Inequality and Poverty in the UK: 2015
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2009
2012
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
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Impact of tax and benefit reforms between April
2015 and April 2019 (including universal credit)
1%
Change in annual net income
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
Poorest 2
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3
4
5
6
7
8
Income Decile Group
9 Richest
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
All
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
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