Why are households that report the lowest
incomes so well-off? Measuring living
standards with income and consumption
Mike Brewer (University of Essex & IFS)
Based on:
“Measuring living standards with income and consumption: evidence
from the UK”, Brewer and O’Dea,
http://ideas.repec.org/p/ese/iserwp/2012-05.html
“Why are households that report the lowest incomes so well-off?”,
Brewer, Etheridge and O’Dea,
http://ideas.repec.org/p/esx/essedp/736.html
Outline
1. In the UK household budget survey (LCFS), there is a considerable
mismatch between reported income and reported spending for
households with low resources
–
This is well-known. We show that seems likely due to underreporting of income rather than over-reporting of spending, or
consumption-smoothing
2. The level and inequality of living standards in GB look different if
we assess using household consumption, not income
3. Our impression of who is “poor” changes if we identify such with
low consumption, rather than income
£490
0.7
£420
0.6
£350
0.5
£280
0.4
£210
0.3
£140
0.2
£70
0.1
Median expenditure
£0
£0
£100
£200
£300
Income
Notes: LCFS 2009; Great Britain only
£400
CDF
0
£500
Fraction of households with income below …
Median Expenditure given income
Those with the lowest cash incomes do not have
the lowest cash outlays... (call this a “tick”)
...but those with the lowest cash outlays do have
the lowest cash income
Median Expenditure (given income) or
Median income (given expenditure)
£490
£420
£350
£280
£210
Median expenditure
£140
£70
Median income
£0
£0
£100
£200
£300
Income or Expenditure
Notes: LCFS 2009; Great Britain only
£400
£500
...and is not solely due to the self-employed...
...and is true for each non-pensioner family type
What explains the tick?
Income = spending + net saving
Low income, high spending means:
• Over-reporting saving
• High values of dis-saving
• Under-reporting income
What explains the tick?
• Over-reporting spending?
– Unlikely
– In any case, get similar tick-charts if we plot income vs other
measures of living standards
Material deprivation score (0=not deprived)
Deprivation and income for children in UK
35
30
25
20
15
10
5
0
Weekly net income
Source: Brewer, O’Dea, Paull, Sibieta (2009). Households with children only. Based on FRS 2004/5 to
2006/7
What explains the tick?
• Over-reporting spending?
– Unlikely.
– In any case, get similar tick-charts if we plot income vs other
measures of living standards
• Dis-saving?
– Hard to say: no good direct measure of saving in UK, and no data on
saving, income and consumption for the same individuals
– However, very hard to reflect size of tick using simulated data where
income fluctuates and people borrow/save to smooth (produced by
intertemporal consumption-saving model with dynamic income
process calibrated to match longitudinal income data)
What explains the tick?
• Over-reporting spending?
– Unlikely.
– In any case, get similar tick-charts if we plot income vs other
measures of living standards
• Dis-saving?
– Hard to say: no good direct measure of saving in UK, and no data on
saving, income and consumption for the same individuals
– However, very hard to reflect size of tick using simulated data where
income fluctuates and people borrow/save to smooth (produced by
intertemporal consumption-saving model with dynamic income
process calibrated to match longitudinal income data)
• Under-reporting income
– Yes! Income from some cash benefits substantially under-reported
– But suspect very lowest incomes due to omission of private income
How well is income from benefits captured in LCFS?
Coverage
Spend (£m/yr)
Retirement pension
95%
66,480
“Other”
52%
27,970
Working and child tax credits
50%
21,270
83%
18,930
Income support & pension credit
68%
16,580
Child benefit
96%
11,880
Incapacity benefit
74%
6,670
119%
1,900
Jobseekers allowance
80%
1,200
War pensions
33%
1,020
Student support
236%
970
Rent rebates and allowances
Maternity/Statutory maternity
pay
Notes: based on Barnard (2011) analysis of LCFS 2009 and 2010
"Missing" income from state benefits and tax credits as %
household disposable income in UK,LCFS/EFS/FES
5.0%
4.5%
4.0%
Tax credits
3.5%
3.0%
Non-means-tested
2.5%
2.0%
Means-tested
1.5%
1.0%
0.5%
0.0%
1999/0
2000/1
2001/2
2002/3
2003/4
2004/5
2005/6
2006/7
2007/8
2008/9
2009/10
"Missing" income from state benefits and tax credits as %
household disposable income in GB, FRS
5.0%
4.5%
4.0%
Tax credits
3.5%
3.0%
Non-means-tested
2.5%
2.0%
Means-tested
benefits
1.5%
1.0%
0.5%
0.0%
1999/0
2000/1
2001/2
2002/3
2003/4
2004/5
2005/6
2006/7
2007/8
2008/9
2009/10
Relative poverty rate (<60% of median household
income)
0.24
HBAI Inc
(LCFS)
0.22
Consumption
0.20
0.18
0.16
0.14
0.12
0.10
1978
1982
1986
1990
1994
1998
2002
2006
2010
Relative poverty rate, income (<60% of median
household income), LCFS
0.45
Children
Working-age
0.40
Pensioners
0.35
0.30
0.25
0.20
0.15
0.10
0.05
1978
1982
1986
1990
1994
1998
2002
2006
2010
Relative poverty rate, consumption (<60% of
median household income)
0.45
Children
Working-age
0.40
Pensioners
0.35
0.30
0.25
0.20
0.15
0.10
0.05
1978
1982
1986
1990
1994
1998
2002
2006
2010
Bottom decile by age and cohort, income, LCFS
0.20
1910-1919
0.18
1920-1929
0.16
1930-1939
1940-1949
0.14
1950-1959
0.12
1960-1969
0.10
1970-1979
0.08
0.06
0.04
0.02
0.00
25
30
35
40
45
50
Age
55
60
65
70
75
Bottom decile by age and cohort, consumption
0.20
1910-1919
0.18
1920-1929
0.16
1930-1939
1940-1949
0.14
1950-1959
0.12
1960-1969
0.10
1970-1979
0.08
0.06
0.04
0.02
0.00
25
30
35
40
45
50
Age
55
60
65
70
75
Relative poverty rate by age and time, cash
income
0.30
1978-1982
0.25
0.20
2003-2008
0.15
0.10
0.05
0.00
25
30
35
40
45
50
Age
55
60
65
70
75
Relative poverty rate by age and time,
consumption
0.30
0.25
1978-1982
0.20
0.15
0.10
2003-2008
0.05
0.00
25
30
35
40
45
50
Age
55
60
65
70
75
Which characteristics are associated with being in
bottom decile group? Couples
Income (1)
Cons’n (2)
(1)/(2)
One in work (rel. workless)
0.50***
0.42***
1.19
Two in work (rel. workless)
0.12***
0.13***
0.92
Self-emp. (rel. not self-emp )
1.28***
0.72***
1.78***
One kid (rel. no kids)
1.12
1.84***
0.61***
Two kids (rel. no kids)
1.05
2.15***
0.49***
Three kids (rel. no kids)
1.41***
3.07***
0.46***
Education <=16 (rel. 17/18)
1.24***
1.72***
0.72**
Education >=19 (rel. 17/18)
0.94
0.9
1.04
Note: *** indicates significant at 1% level, ** indicates significant at 5% level, * indicates significant at 10% level.
Also control for age & region, LCFS 2006-2009.
Summary
1.
Big mis-match in the UK household budget survey (LCFS) between
reported income and reported spending for households with low
resources
–
–
2.
3.
4.
More likely due to under-reporting of income than over-reporting of
spending or consumption-smoothing
In line with well-documented findings for US
Composition of households with low living standards changes if we
identify such with consumption, or broad measure of income, rather
than cash income
–
Poverty grew by less in 1980s and has fallen by less since
–
Baby boomers are not poor, partly due to home ownership
Consumption gives complementary, perhaps preferable, impression
of who is poor and of trends in poverty
Would be great to have
–
–
More surveys measuring expenditure
Richer measures of housing quality or property values
–
Larger samples in LCFS
Income and expenditure “coverage” of LCFS
LCFS totals as % National Accounts
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
© Institute for Fiscal
Income
Expenditure
Household saving ratios
16%
14%
Corr
=
-0.7
12%
Saving Rate
10%
8%
6%
4%
2%
0%
-2%
© Institute for Fiscal
National Accounts
LCFS
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Coverage
Coverage: groups (1)
120%
100%
80%
60%
40%
Food
Household fuel
20%
Motoring running costs
0%
Year
© Institute for Fiscal
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Coverage
Coverage: groups (2)
120%
100%
80%
60%
40%
© Institute for Fiscal
Catering
Alcohol
20%
Tobacco
Clothing
Public transport
0%
Year
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Coverage
Coverage: groups (3)
120%
100%
80%
60%
40%
© Institute for Fiscal
Household services
Personal services
Vehicle purchase
Durable leisure
20%
0%
Year
Where in the distribution of household expenditure
(or of income) is this under-recording happening?
• There must be serious under-recording at the top of the expenditure
distribution (these are aggregate numbers so are dominated by effect of
those who spend the most)
• But is there more happening at the bottom of the expenditure
distribution?
• Look at expenditure coverage by category
• Those items with the ‘best’ coverage are those that those with the least
expenditure spend more on than those with the most expenditure
– Suggestive that under-reporting of expenditures is greater among those
with the most resources
Expenditure Decile
1
Budget share of ‘best three’
0.39 0.33 0.31 0.30 0.27 0.26 0.23 0.23 0.19 0.15
© Institute for Fiscal
2
3
4
5
6
7
8
9
10
Relative poverty rate, broad income (<60% of
median household income)
0.45
Children
Working-age
0.40
Pensioners
0.35
0.30
0.25
0.20
0.15
0.10
0.05
1978
1982
1986
1990
1994
1998
2002
2006
2010
Bottom decile by age and cohort, broad income
0.20
1910-1919
0.18
1920-1929
0.16
1930-1939
1940-1949
0.14
1950-1959
0.12
1960-1969
0.10
1970-1979
0.08
0.06
0.04
0.02
0.00
25
30
35
40
45
50
Age
55
60
65
70
75
Relative poverty rate by age and time, broad
income
0.30
0.90
0.80
1978-1982
0.25
0.70
0.20
0.60
2003-
0.50
0.15
0.40
0.10
0.30
1978-1982
housing
(RH axis)
0.20
0.05
0.10
0.00
0.00
25
30
35
40
45
50
Age
55
60
65
70
75
2003housing
(RH axis)