living standards and inequality - ifs€¦ · prospects for living standards and inequality •...
TRANSCRIPT
© Institute for Fiscal Studies
Living standards and income inequality Jonathan Cribb
16th July 2015
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
100
102
104
106
108
110
112
Inco
me
in
de
xe
d t
o 1
00
in
20
02
–0
3
Median income
Growth
2012–13 to
2013–14:
0.8%
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Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
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
100
102
104
106
108
110
112
Inco
me
in
de
xe
d t
o 1
00
in
20
02
–0
3
Median income
0.4% below
2007–08 level
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Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
Growth in average incomes since 2002–03
100
102
104
106
108
110
112
Inco
me
in
de
xe
d t
o 1
00
in
20
02
–0
3
Median income
2.4% below
2009–10 peak
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Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
Growth in average incomes since 2002–03
100
102
104
106
108
110
112
Inco
me
in
de
xe
d t
o 1
00
in
20
02
–0
3
Median income Mean income
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Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
Adjusting for inflation: CPI vs RPI
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96
98
100
102
104
106
108
Re
al m
ed
ian
In
com
e i
nd
exe
d t
o 1
00
in
20
02
–0
3
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
5.2% above
2002–03
level
Adjusting for inflation: CPI vs RPI
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96
98
100
102
104
106
108
Re
al m
ed
ian
in
com
e i
nd
exe
d t
o 1
00
in
20
02
–0
3
Adjusting for inflation using CPI variant Adjusting for inflation using RPI
Real median BHC household income since 2002–03 (UK)
Source: Fig 2.2 of Living Standards, Inequality and Poverty in the UK: 2015
1.8% below
2002–03
level
Comparing income growth to previous recessions
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80
85
90
95
100
105
-4 -3 -2 -1 0 1 2 3 4
Me
dia
n i
nco
me
in
de
xe
d t
o 1
00
in
pe
ak
ye
ar
Years since peak in median income
2009–10 1990 1980 1974
Source: Fig 2.4 of Living Standards, Inequality and Poverty in the UK: 2015
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
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0
25,000
50,000
75,000
100,000
125,000
150,000
10 20 30 40 50 60 70 80 90
Ne
t h
ou
seh
old
in
com
e
(£ p
er
ye
ar,
20
13
–1
4 p
rice
s)
Percentile point
Source: Fig 3.1 of Living Standards, Inequality and Poverty in the UK: 2015
Childless couple:
£23,600 p.a.
Couple with 2 young
children: £33,000 p.a.
Single person:
£15,800 p.a.
The UK income distribution in 2013–14
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0
25,000
50,000
75,000
100,000
125,000
150,000
10 20 30 40 50 60 70 80 90
Ne
t h
ou
seh
old
in
com
e
(£ p
er
ye
ar,
20
13
–1
4 p
rice
s)
Percentile point
Source: Fig 3.1 of Living Standards, Inequality and Poverty in the UK: 2015
Median:
£23,600 p.a.
90th percentile:
£47,000 p.a.
10th percentile:
£12,400 p.a.
Expressed as equivalent living standards for a childless couple
The UK income distribution in 2013–14
© Institute for Fiscal Studies
0
25,000
50,000
75,000
100,000
125,000
150,000
10 20 30 40 50 60 70 80 90
Ne
t h
ou
seh
old
in
com
e
(£ p
er
ye
ar,
20
13
–1
4 p
rice
s)
Percentile point
99th percentile:
£123,700 p.a.
Source: Fig 3.1 of Living Standards, Inequality and Poverty in the UK: 2015
Median:
£23,600 p.a.
90th percentile:
£47,000 p.a.
10th percentile:
£12,400 p.a.
Expressed as equivalent living standards for a childless couple
Inequality broadly unchanged in 2013–14
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-10%
-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 80 85 90 95
Ch
an
ge
fro
m 2
01
2–
13
to
20
13
–1
4 (%
)
Percentile point
Source: Fig 3.2 of Living Standards, Inequality and Poverty in the UK: 2015
Note: Shaded area represents 95% confidence intervals
Real income growth by percentile point (BHC), 2012–13 to 2013–14
Inequality is lower than pre-recession levels
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-10%
-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 80 85 90 95
Cu
mu
lati
ve
in
com
e c
ha
ng
e
Percentile point
Income measured before housing costs
Income measured after housing costs
Real income growth by percentile point, 2007–08 to 2013–14
Source: Fig 3.9 of Living Standards, Inequality and Poverty in the UK: 2015
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
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-10%
-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 80 85 90 95
Cu
mu
lati
ve
in
com
e c
ha
ng
e
Percentile point
All individuals
Non-pensioners
Non-pensioners in working households
Real income growth by percentile point (BHC), 2007–08 to 2013–14
Source: Fig 3.9 of Living Standards, Inequality and Poverty in the UK: 2015
Why did inequality fall for working households?
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-10%
-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 80 85 90 95
Cu
mu
lati
ve
in
com
e c
ha
ng
e
Percentile point
Non-pensioners in working households
Real income growth by percentile point (BHC), 2007–08 to 2013–14
Source: Fig 3.9 of Living Standards, Inequality and Poverty in the UK: 2015
Why did inequality fall for working households?
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-20%
-15%
-10%
-5%
0%
5%
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
Cu
mu
lati
ve
in
com
e c
ha
ng
e
Percentile point
Net household income
Real income growth by percentile point (BHC), 2007–08 to 2013–14
Source: Fig 3.10 of Living Standards, Inequality and Poverty in the UK: 2015
Why did inequality fall for working households?
© Institute for Fiscal Studies
-20%
-15%
-10%
-5%
0%
5%
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
Cu
mu
lati
ve
in
com
e c
ha
ng
e
Percentile point
Net household income
Pre-tax household income (including benefits)
Gross household earnings
Growth by percentile point (BHC), 2007–08 to 2013–14
Source: Fig 3.10 of Living Standards, Inequality and Poverty in the UK: 2015
Trends in inequality since 2007–08
• Falling inequality for working non-pensioners despite inequality-increasing 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
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2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
4.1
4.3
4.5
0.20
0.22
0.24
0.26
0.28
0.30
0.32
0.34
0.36
0.38
0.40
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
90
:10
ra
tio
Gin
i co
eff
icie
nt
Gini coefficient (left-hand axis)
90:10 ratio (right-hand axis)
Source: Fig 3.4 of Living Standards, Inequality and Poverty in the UK: 2015
The 1% income share 1961 to 2013–14 (GB)
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Source: Fig 3.5 of Living Standards, Inequality and Poverty in the UK: 2015
2%
3%
4%
5%
6%
7%
8%
9%
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
To
p 1
% s
ha
re o
f in
com
e
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...
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60%
65%
70%
75%
80%
85%
90%
95%
100%
105%
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Me
dia
n H
ou
seh
old
in
com
e o
f p
en
sio
ne
rs
rela
tive
to
no
n-p
en
sio
ne
rs
Before housing costs After housing costs
Median income of pensioners relative to that of non-pensioners, 1979 to 2013–14
Source: Fig 3.6 of Living Standards, Inequality and Poverty in the UK: 2015
Smaller improvement in relative position of workless households
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Median income of non-pensioners in workless households relative to those in working households, 1979 to 2013–14
Source: Fig 3.6 of Living Standards, Inequality and Poverty in the UK: 2015
30%
35%
40%
45%
50%
55%
60%
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Ho
use
ho
ld i
nco
me
of
no
n-p
en
sio
ne
r w
ork
less
h
ou
seh
old
s re
lati
ve
to
wo
rkin
g h
ou
seh
old
s Before housing costs After housing costs
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)
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-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
Poorest 2 3 4 5 6 7 8 9 Richest All
Ch
an
ge
in
an
nu
al
ne
t in
com
e
Income Decile Group
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
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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