Measuring living standards: developing quick expenditure questions
Wednesday 23 April 2014
Nuffield Foundation - 28 Bedford Square, London, WC1B 3JS
Programme
09:30
Registration
10:00
Welcome and introduction
10:15
Why are households that report the lowest incomes so well-off? Measuring living
standards with income and consumption. Presented by Mike Brewer (ISER, University of
Essex and Institute for Fiscal Studies)
11:00
Break
11:15
Measuring living standards: developing quick expenditure questions. Presented by
Margaret Blake (NatCen Social Research), Thomas Crossley (University of Essex and
Institute for Fiscal Studies) and Joanna D’Ardenne (NatCen Social Research)
12:00
Questions and discussion
Chair: Sharon Witherspoon MBE (Director, Nuffield Foundation)
12:30
Finish
Summary
Researchers from the Institute for Fiscal Studies, NatCen Social Research and the University of Essex will
present two pieces of work on measuring household living standards. First, we will summarise the UK
evidence that consumption is a superior measure of household living standards.
Much research is concerned with the living standards of households, how equally distributed are these
living standards, and whether the level of or the inequality in living standards are becoming more or less
unequal over time. When making these assessments, it is common to use the net income of a
household as a proxy for its standard or living; indeed, in the UK, there are statutory measures of child
poverty against which the government of the day has to report progress annually, all of which define
“poverty” in terms of a low household income; similar targets exist at the level of the European Union.
An alternative, long-favoured by economists, is to use a household’s consumption as a proxy for its
standard of living, where “consumption” is defined as a household’s expenditure, plus the benefits it
derives from durable goods, including housing. At any point in time, consumption and income will differ
because households can borrow or save and will benefit from their stock of accumulated durable goods,
but current consumption should be a better guide to a household’s long-term standard of living than
current income.
Furthermore, some have argued that income in household surveys is under-reported for households
with low resources, giving a practical reason to use consumption rather than income. This paper uses
data from the UK household budget surveys (the Living Cost and Food Survey and its predecessors) to
construct four decades of consistent micro-data on households’ income and consumption. A key step in
this is to estimate the consumption flow (or the imputed income) from housing. Adding an imputed
income (or consumption flow) from housing to a measure of household resources makes a substantial
difference to average annual growth rates in living standards, and particular so for elderly households.
This reflects that housing has risen in value faster than other goods, and home-ownership rates have
risen over time. Inequality and relative poverty grew less rapidly when measured with consumption.
In recent years, the relative position of elderly households in the distribution of living standards
improves markedly if we assess living standards by consumption or a measure of income that includes
an imputed income from housing, compared to using the usual measure of near-cash income. And there
are clear cohort effects when considering this broader measure of income or consumption that are not
seen with the usual measure of near-cash income, with each successive cohort of adults aged 65 being
less likely to be in the bottom decile group of living standards than their predecessors.
The paper recommends that official measures of the relative living standards should take account of the
value of housing, either by imputing the income stream or consumption flow. This in turn may require
surveys to collect better information about the quality – and, ideally, value – of housing in UK household
surveys. And this should be informed by further consideration of how one should value housing (in
welfare terms) given the existence of large financial and, arguably, psychological transaction costs to
moving house.
Second, we will report on research (funded by the Nuffield Foundation) towards developing quick,
reliable expenditure questions for general social surveys. That research involved an innovative mix of
focus groups, cognitive testing and early results from an experiment in the innovation panel of
Understanding Society.
Measuring households’ living standards has long been a fundamental concern of social science.
However, the UK’s most widely-used measure of material wellbeing – household disposable income –
has many well-known limitations. Households with identical incomes may enjoy widely differing living
standards, due to differing savings or other assets, and access to credit. Moreover, having a low income
in a household survey is surprisingly poorly related to being a deprived household in a more general
sense.
Despite these limitations, virtually all major UK household surveys include questions regarding income,
while few contain questions regarding household consumption expenditure – arguably a less noisy,
more accurate gauge of living standards. The reason is simple: there is no proven, reliable approach to
collecting expenditure information, quickly and accurately, in the context of a general purpose survey.
This event is funded by the Nuffield Foundation and the ESRC Centre for the Microeconomic
Analysis of Public Policy at IFS.