Living Standards and Inequality
Jonathan Cribb (IFS)
15th June 2012
© Institute for Fiscal Studies
Outline
• Living Standards
– Changes in income in 2010-11 and the recent recession
– How did different components of income change?
• Inequality
– Changes in income across the income distribution
– Changes in measures of inequality
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How household income is calculated in HBAI
•
Income is measured net of direct taxes and benefits
–
We show some new analysis of private incomes (before direct taxes and benefits)
•
Measured at the household level
•
Adjusted for household size
•
Can be measured both before and after housing costs are deducted
•
Adjusted for inflation
•
Based on Family Resources Survey in 2010-11
•
–
25,000 households across the UK
–
Subject to sampling error
Any figures going back before 2002-03 refer to Great Britain not UK
–
Northern Ireland not included in the FRS until 2002-03
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Slow income growth before the recession
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
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Sharp fall in GDP per capita in recession...
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
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Peak to trough
fall in GDP per
capita of 7.9%
...But average incomes continue to rise
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
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Weak macroeconomic recovery in 2010-11
120
GDP per capita
grew 1.4% in
2010-11
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
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Large falls in average income in 2010-11
120
Quarter 2 2002 = 100
115
110
105
100
95
90
GDP per capita
Mean income
Median income
Source: ONS series IHXW and Family Resources Survey, various years
• Median income fell 3.1% to reach £ 419 per week
• Mean income fell 5.7% to reach £511 per week
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Historical perspective of 2010-11 falls
• Mean and median income now lower than their respective levels in
2004-05, reversing 5 years of slow growth in one year.
• The largest one-year fall in median income since 1981
• The largest one-year fall in mean income since at least 1961
– distorted by “forestalling”: introduction of 50p tax rate in April 2010
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Changes in income components in 2010-11
Gross Earnings
Benefits and Tax Credits
Gross savings and pensions
Gross Self Employment
Other
Taxes and other deductions
Total Income
-15% -10% -5%
0%
5%
Real growth in 2010-11
Source: Table: 2.3 of Living Standards, Poverty and Inequality: 2012
Notes: This is a very slightly different sample to the overall income statistics. Households with
negative incomes are dropped. This makes a small difference to falls in income
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10% 15%
Gross earnings drove income falls in 2010-11
Gross Earnings
-6.1
Benefits and Tax Credits
-0.3
Gross savings and pensions
-0.8
Gross Self Employment
-1.2
Other
0.3
Taxes and other deductions
2.3
Total Income
-5.9
-10
-5
0
5
Contribution to income growth
(in percentage points)
Source: Table: 2.3 of Living Standards, Poverty and Inequality: 2012
Notes: This is a very slightly different sample to the overall income statistics. Households with
negative incomes are dropped. This makes a small difference to falls in income
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10
What happened to earnings and benefits?
• Gross Earnings
– Employment was broadly stable
– Earnings of those employed did not keep pace with rising inflation
• Benefits and Tax Credits
– Benefits generally increased by inflation in the previous September
– With inflation rising to 5.1% in 2010-11, real value of benefits fell
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Benefits supported incomes during the recession
Gross Earnings
0.0
1.1
Benefits and Tax Credits
Gross savings and pensions
-0.4
Gross Self Employment
0.2
Other
0.1
Taxes and other deductions
0.1
Total Income
-1.0
1.2
-0.5
0.0
0.5
1.0
1.5
Contribution to annual income growth between 2007-08
and 2009-10 (in percentage points)
Source: Table: 2.3 of Living Standards, Poverty and Inequality: 2012
Notes: This is a very slightly different sample to the overall income statistics. Households with
negative incomes are dropped. This makes a small difference to falls in income
© Institute for Fiscal Studies
What happened to private incomes?
Median household income
(2003–04 = 100)
104
102
100
98
96
94
Median net income
Median private income
• Fall in median private income of 7.8% since peak in 2007-08
• Median private income fell 4.1% in 2010-11 alone
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Source: Figure 2.5 of Living Standards, Poverty and Inequality: 2012
Prospects for living standards
• Earnings
– 2011-12: Average earnings rose by 1.9%, below inflation of 4.8%
– OBR predicts negative real earnings growth in 2012-13
• Tax and benefit changes
– National Insurance rise (1 percentage point) in April 2011
– Cuts to welfare payments reach about £18 billion per year by 2014-15
• Recent IFS work projected that median income will fall in 2012-13
and 2013-14
•
In 2015-16 median income lower than in 2002-03
– But these are based on uncertain macroeconomic forecasts
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Inequality
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The UK income distribution 2010-11
Household income (£ per week)
2,500
2,000
1,500
90th percentile:
£846
50th percentile:
£419
1,000
10th percentile:
£216
500
0
10
20
30
40
50
60
70
Percentile point
Source: Figure 3.1 of Living Standards, Poverty and Inequality: 2012
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80
90
Income change by percentile point in 2010-11
4%
2%
Annual income change
0%
10
20
30
40
50
60
70
80
90
-2%
-4%
-6%
10th percentile: 1.1% fall
-8%
Median: 3.1% fall
-10%
90th percentile: 5.1% fall
-12%
-14%
Percentile point
Source: Figure 3.3 of Living Standards, Poverty and Inequality: 2012
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Income growth since 1979 (GB)
4%
Average annual income gain
Income growth: 1996–97 to 2009–10
3%
Income growth: 1979 to 1996–97
Income growth: 1996–97 to 2010–11
2%
1%
0%
10
20
30
40
50
60
Percentile point
70
80
-1%
-2%
Source: Figure 3.5 of Living Standards, Poverty and Inequality: 2012
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90
Gini coefficient: 1979 to 2010-11 (GB)
0.40
1996-97 to 2009-10 Gini rose
from 0.33 to 0.36
Gini coefficient
1979 to 1990 Gini increased
from 0.25 to 0.34
0.35
0.30
• Gini fell from 0.36 to 0.34 in 2010-11
• Largest one year fall since at least 1961
• Returns Gini to below its 1997-98 level
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Source: Figure 3.7 of Living Standards, Poverty and Inequality: 2012
2010–11
2008–09
2006–07
2004–05
2002–03
2000–01
1998–99
1996–97
1994–95
1992
1990
1988
1986
1984
1982
1979
0.25
Inequality ratios: 1979 to 2010-11 (GB)
6.0
5.5
Ratio
5.0
4.5
4.0
3.5
3.0
99/50 ratio
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90/10 ratio
99/50 ratio fell to 5.1
90/10 ratio fell to 3.9
(still higher than 2008-09)
(lower than in 1987)
Source: Figure 3.9a of Living Standards, Poverty and Inequality: 2012
Prospects for inequality
• Evolution of earnings and employment very important, and very
uncertain
• Welfare cuts unsurprisingly will hit lower income households
proportionately more
• Decrease in top rate of tax from April 2013 likely to increase top
household incomes
• At top of distribution, temporary effects of “reverse forestalling”
will make it difficult to observe “underlying” income inequality
until at least 2014-15, and possibly until 2016/17
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Summary
• Effect of the recession was finally felt on average household
incomes in 2010-11
• Median income fell by 3.1%, the largest fall since 1981
• Median private income has now fallen 7.8% since 2007-08
• The falls in income were proportionately larger for richer
households which meant that inequality fell sharply in 2010-1
– Inequality measures unaffected by “forestalling” also fell sharply
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