Living standards and inequality
Wenchao Jin, IFS
May 13th, 2011
© Institute for Fiscal Studies
What’s coming up
Living standards
• Household income data from the last financial year of
the recent recession
• How household incomes evolved during the 13 years of
Labour’s government
Income inequality
• How has the gap between rich and poor evolved?
How incomes are calculated
• Net of direct taxes and benefits
• Measured at the household level
• Adjusted for household size (equivalised)
• Both before and after housing costs
• Adjusted for inflation
• Based on Family Resources Survey (FRS)
– All statistics subject to sampling error
• UK figures from 2002-03, GB only in earlier years
– Report income trends on a GB basis
GDP per head shrank substantially
1.10
1.08
1.06
2003 Q1=1
Real quarterly GDP per head
1.12
1.04
1.02
1.00
0.98
GDP per head
0.96
0.94
2003
Q1
2003
Q4
2004
Q3
2005
Q2
2006
Q1
Source: ONS, Economic and Labour Market Review
2006
Q4
2007
Q3
2008
Q2
2009
Q1
2009
Q4
2010
Q3
How does the GDP growth compare with
household income growth?
Annual changes in average real incomes (GB)
Real percentage increase
6%
4%
1.6%
0.9%
2%
0%
-2%
GDP per head
Mean (BHC)
Median (BHC)
-4%
Source: ONS and HBAI data
2009–10
2008–09
2007–08
2006–07
2005–06
2004–05
2003–04
2002–03
2001–02
2000–01
1999–00
1998–99
1997–98
-6%
Income growth by different periods
Annualised changes in average real incomes (GB)
2.5%
2.1%
2.0%
1.9%
1.6%
1.6%
1.5%
1.0%
0.5%
0.0%
Conservatives 1979 to 1996-97
Mean BHC
Source: HBAI data
© Institute for Fiscal Studies
Labour 1996-97 to2009-10
Median BHC
Did growth differ during Labour’s 13 years?
Annualised changes in average real incomes (GB)
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
3.4%
2.9%
1.3%
0.9% 0.8%
96-97 to 01-02
01-02 to 07-08
Mean BHC
Source: HBAI data
© Institute for Fiscal Studies
Median BHC
0.8%
07-08 to 09-10
So why did household incomes grow in 2009-10
and during the two recession years?
• Not due to earnings
– Official statistics imply household incomes from earnings
stagnated or fell slightly between 2007-08 and 2009-10
• Partly due to a methodological change
– Mean income growth = 1.2% rather than 1.6% if use old
methodology
– little difference in median income growth => little impact
on poverty statistics
© Institute for Fiscal Studies
So where did growth in 2009-10 come
from?
% of total income
in 2009-10
Earnings
65%
Benefits
21%
Savings, pensions
10%
Self employment
8%
Other
3%
Payments
-6%
Total
-4%
-2%
0%
2%
4%
6%
8%
Real growth in components of income (GB) 2009-10
Note: excluding households whose incomes were adjusted under HBAI methodology
How did the change in each income component
affect total growth in 2009-10?
Contribution to growth by income component in 2009-10
Earnings
-0.7%
Benefits
1.3%
Savings, pensions
0.0%
Self employment
0.3%
Other
0.0%
Payments
0.1%
Total
-1.0%
1.1%
-0.5%
0.0%
0.5%
1.0%
Note: excluding households whose incomes were adjusted under HBAI methodology
1.5%
And during the recession?
Contribution to annualised growth by income component,
between 2007-08 and 2009-10
Earnings
0.0%
Benefits
Savings, pensions
1.1%
-0.2%
Self employment
0.0%
Other
0.1%
Payments
0.1%
Total
-1.0%
1.1%
-0.5%
0.0%
0.5%
1.0%
Note: excluding households whose incomes were adjusted under HBAI methodology
1.5%
Why did income from benefits and tax credits rise
so significantly?
• Income from benefits and tax credits rose by 6.7% in
2009-10 in real terms; and 5.6% per year between
2007-08 and 2009-10
• Why?
– Uprating rules and falling inflation during the
recession
– Discretionary changes
– Rising unemployment
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So far so good.....
But,
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Pain is yet to come (or to appear in data):
• Inflation measured by RPI averaged 5.0% in 2010-11 =>
but most benefits and tax credits uprated by around
2% in April 2010
• Real average earnings fell by 3.8% while employment
rate stagnated in the first 11 months of 2010-11
• Previous IFS work forecast a real-terms 2.2% fall in
median income between 2008-09 and 2010-11
– implies a real fall by 3.1%, greatest since 1981
• Planned welfare cuts and tax rises to take effect
gradually over the parliament
Living standards: summary
• Average household incomes continued to grow in
2009-10, despite the recession
• Robust growth in income from benefits and tax
credits during the recession
• Significant fall in average incomes in 2010-11
looks likely
Inequality
Picture source: the New York Times
The UK income distribution in 2009-10
Number of individuals (millions)
2.0
Median, £413
1.5
Mean, £517
1.4 million
individuals with
household
income above
£1,500 per week
1.0
0.5
0.0
0
100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,4001,500+
Equivalised household income BHC, £ per week, 2009-10 prices
Source: HBAI data
Income growth by percentile group: 2009-10
(GB)
10%
Real income gain (%)
8%
6%
4%
2%
0%
-2%
-4%
10
20
30
40
50
60
70
80
Percentile point
st
nd
th
Notes: The changes in income at the 1 , 2 and 99 percentiles are not shown on this graph
due to very high levels of statistical uncertainty. Incomes have been measured before housing
costs have been deducted.
Source: Authors’ calculations using Family Resources Survey, 2008–09 and 2009-10.
90
Top percentile income growth highest in a decade
Real income growth
14.0%
12.0%
10.0%
Top percentile
Median
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
Note: incomes are measured before housing cost.
Source: HBAI data
© Institute for Fiscal Studies
Old methodology
Average annual income gain (%)
Income changes by percentile group: from
1996-97 to 2009-10 (GB)
5%
4%
3%
2%
1%
0%
10
20
30
40
50
60
70
80
-2%
Percentile point
-3%
st
Notes: The change in income at the 1 percentile is not shown on this graph due to very high level of
statistical uncertainty.
Source: HBAI data
90
Average annual income gain (%)
Income changes by percentile group: from
1996-97 to 2009-10 (GB)
5%
4%
3%
2%
1%
0%
10
20
30
40
50
60
70
80
-2%
Percentile point
-3%
st
Notes: The change in income at the 1 percentile is not shown on this graph due to very high level of
statistical uncertainty.
Source: HBAI data
90
Average annual income gain (%)
Income changes by percentile group: from
1996-97 to 2009-10 (GB)
5%
4%
3%
2%
1%
0%
10
20
30
40
50
60
70
80
-2%
Percentile point
-3%
st
Notes: The change in income at the 1 percentile is not shown on this graph due to very high level of
statistical uncertainty.
Source: HBAI data
90
Average annual income gain (%)
Income changes by percentile group: from
1996-97 to 2009-10 (GB)
5%
1979-1996-97
4%
3%
2%
1%
0%
10
20
30
40
50
60
70
80
-2%
Percentile point
-3%
st
Notes: The change in income at the 1 percentile is not shown on this graph due to very high level
of statistical uncertainty.
Source: HBAI data
90
The Gini Coefficient:1979 to2009-10 (GB)
Gini Coefficient
0.40
0.35
0.30
0.25
Thatcher
Major
0.20
Source: HBAI data and Family Expenditure Survey, various years
Blair/Brown
Did Labour increase the rich-poor gap?
• Gini has gone up from 0.33 in 1996-97 to 0.36 in
2009-10
• Many possible reasons; and IFS analysis suggests:
– Gini would be 0.03 higher if the tax and benefit
system had simply been uprated in line with RPI
– Gini would be 0.01 higher had the system simply
been uprated in line with GDP
• Labour’s changes to the tax and benefit system
acted to mitigate the rise in inequality
Looking ahead
• New tax measures including the 50p tax rate from April
2010 will reduce income growth at the very top of the
distribution
• Changes to the income tax personal allowance will have
ambiguous impact on inequality
• Significant cuts to welfare spending likely to increase
inequality year after year; especially the switch to CPI
indexation
© Institute for Fiscal Studies
Inequality: summary
• Robust income growth towards the bottom of the
distribution in 2009-10, but also exceptional growth
among the richest
• Significant increase in Gini under Labour; but mitigated
by their benefit and tax policies
• Uncertain future for inequality