progress report philip wales uksa monitoring review event, 2 nd july 2015 1

Progress Report

Philip Wales

UKSA Monitoring Review event, 2nd July 2015

Progress Report – twin aims

• To set out some of the changes that we’ve made since the Monitoring Review reported

1. Alternative measures of Real Households’ Disposable Income (RHDI)

2. Supplementary analysis of trends in earnings

3. Effects of Taxes & Benefits (ETB)

4. Nowcasts of median household income

5. Real income indices for different sub-groups

• To get user feedback on methods and data used to produce these outputs, with a view to formalising production methods

1. RHDI: concept and coverage

• Lots of interest in statistics on livings standards over the last few months – including debate over coverage and contents of RHDI

• Development of existing estimates of household disposable income as a means to improve user understanding and as a possible tool to develop more timely income estimates

• Some additional detail on RHDI has already been published: RHDI excluding Non-Profit Institutions Serving Households (NPISH) included in the Quarterly Economic Well-being release.

3Tom Evans (tom.evans@ons.gsi.gov.uk)

GDP & RHDI growth

RHDI per capita & GDP per capita, 2008=100

RHDI includes: (1) Earnings from employment (D1 & B.3g)(2) Net investment income and rent (D4)(3) Taxes & benefits (D5 & D6)(4) Other current transfers (D7)(4) Imputed social contrib. of emp. & HH (D61)(5) HH gross operating surplus (B.2g)

Tom Evans (tom.evans@ons.gsi.gov.uk)

RHDI growth, incl. & excl. NPISH

RHDI per capita, Incl. & Excl. NPISH, 2008=100

RHDI includes: (1) Earnings from employment (D1 & B.3g)(2) Net investment income and rent (D4)(3) Taxes & benefits (D5 & D6)(4) Other current transfers (D7)(4) Imputed social contrib. of emp. & HH (D61)(5) HH gross operating surplus (B.2g)

Alternative HHDI measures

Earnings from employment (D1 & B.3g)Net investment income and rent* (D4)Taxes & benefits (D5 & D6)Other current transfers (D7)

Imputed social contrib. of emp. & HH (D61)

HH gross operating surplus (B.2g)

Deflated by HHFCE implied deflator

Survey measures

Earnings from employmentGross investment income and rent

Taxes & benefitsOther current transfers

* Including net FISIM

Alternative measures of HH income

RHDI per capita, Excl. NPISH, various measures, 2008=100

Starting with RHDI per capita...

2008=100

... removing ‘imputed’ elements...

2008=100

...excluding FISIM from savings...

2008=100

... removing interest paid...

2008=100

... bringing it closer to ETB.

2008=100

• The NPISH sector and the imputed elements of income for households – in particular those related to employers pension contributions and imputed rentals – have an impact on the level of household income, but have had relatively little impact on growth rates since the downturn

• The treatment of interest payments in the National Accounts makes a much bigger impact, and brings the definition of this alternative, additional measure of household income closer to that captured by many surveys

• ONS is developing these measures with a view to regular publication: feedback on the use and contents of these indicators is welcome.

12Tom Evans (tom.evans@ons.gsi.gov.uk)

2. Themed analysis & explanation

• ONS has also responded to the suggestion of providing more themed analysis and explanation around data sources, making greater use of existing data.

• Analysis has focussed on the Annual Survey of Hours and Earnings (ASHE), helping to explain:

• Growth of earnings at different points in the income distribution• Median growth rates of earnings

13Fiona Massey (fiona. massey@ons.gsi.gov.uk) & Philip Wales (philip.wales@ons.gsi.gov.uk)

ASHE analysis

• Note published which analyses how the earnings distribution has changed through time, examining median earnings of the ‘full time continuously employed’ in particular. (18th May)

Fiona Massey (fiona.massey@ons.gsi.gov.uk)

ASHE analysis

• An alternative way of using ASHE is to examine the distribution of earnings growth rates each period.

• This approach answers the question ‘what is the average experience of earnings growth?’

• Also relates closely to questions of labour market spare capacity and wage growth: while the long run determinant of wages is productivity, the ‘tightness’ of the labour market is also important – especially in the short run.

Philip Wales (philip.wales@ons.gsi.gov.uk)

ASHE analysis

Distribution of Gross Weekly Nominal Earnings Growth, %% of continuously employed who received within 0.5pp of the stated earnings growth

Fraction of employees who received 0%

nominal earnings growth

ASHE analysis

Distribution of earnings growth

Proportion of Cont. FT employees by real earnings growth rate

Philip Wales (philip.wales@ons.gsi.gov.uk)Source: ONS Economic Review, March 2015 edition

3. Effects of Taxes & Benefits

• Provides a detailed assessment of the income experience of households at different points in the income distribution, including analysis of income levels and impact of taxes & benefits on household income

• Some work has already been carried out to reflect recommendations of Monitoring Review, including:

• More information for users on unique strengths of ETB and how it fits with other sources

• Improved and extended analysis of coherence of ETB with other sources• Summary of methodology in bulletin in addition to detailed methodology report• Extended focus on income inequality

Richard Tonkin (richard.tonkin@ons.gsi.gov.uk)

Headlines: Effects of Taxes & Benefits

28Richard Tonkin (richard.tonkin@ons.gsi.gov.uk)

*ETB uses the HHFCE implied deflator

Coherence: Effects of Taxes & Benefits

Average earned income from ETB and AWE: four quarter moving average, £/wk

The main UK statistics on income distribution currently published around 15 months after reference period. Measures such as RHDI are timely, but do not reflect distribution

In response to user feedback, ONS investigating ‘nowcasting’ techniques to provide early estimates of key ETB indicators (e.g. median equivalised disposable income, distributional measures)

Initial methodological article was published 1 July 2015. ONS is seeking user views on this paper.

4. Nowcasts of median household income

Richard Tonkin (richard.tonkin@ons.gsi.gov.uk)34

Proposed nowcasting methodology involves:

•Uprating income microdata to account for changes such as growth in average wages•Incorp. changes to benefits and direct taxes resulting from new rates, thresholds etc. •Adjusting for labour market participation and demographic structure through calibration weighting.

2008/11 data used for 2013/14 nowcasts in initial report in order to provide robust test of methodology. Future editions would use more up to date base data where available.

Nowcasting methodology

Median equivalised disposable income – published & nowcast estimates (2013/14 prices)

Nowcasting results

1 Using the modified-OECD scale.

2 All income figures have been deflated to 2013/14 prices using an implied deflator for the household sector.36

Quintile shares & S80/20 ratio: Published and nowcast estimates

Nowcasting results

User demand for more timely data on the distribution of household income.

Nowcast based estimates cannot perfectly reflect changes in distribution, particularly for small population subgroups

Next steps:• Intend to enhance methodology further over summer through user feedback

• Subject to feedback, intend to publish experimental early estimates for 2014/15 later in year

Nowcasting

5. Sub-group real income measures

• Common inflation rates is a key assumption of many household income analyses. Work undertaken to relax this assumption following the Johnson Review:

“ONS should develop an annual analytical publication that produces inflation indices as experienced by a range of different household types, along with appropriate advice on what income measures these analytical indices can be compared to”

(Johnson (2015), p95)

• To which the UKSA linked one of their key recommendations:

“We note that one of our principal recommendations – that there should be an annual summary or compendium drawing together a coherent picture from the range of income and earnings statistics – aligns well with the findings of the [Johnson Review]. [...] Addressing the second part of [Johnson’s recommendation] could be facilitated by an annual analytical publication that includes comparable income and earnings data.”

(UKSA (2015) p5)

Sub-group real income measures

• User consultation over the exact content of price indicators: Need income measures to ‘match’. Consequently, several price/income measures being developed

• Johnson argues that deflators and income measures must be consistent in their treatment of prices which affect both household costs and household incomes, including costs of interest, insurance and housing.

• If gross (net) costs of interest/insurance are included in the deflator, then gross (net) receipts from these sources should be included in the income measure as well.

• Sub-group income and inflation measures must meet this standard

• Four price measures developed, as well as four ‘matched’ income measures

• Article which explores these issues will be published over the summer

‘Matched’ prices and income measures

41Philip Wales (philip.wales@ons.gsi.gov.uk)

Price measure Price indicator contents

Starting point Interest payments OO Housing

CPI CPI

CPIH CPI + Imputed rentals

CPI & MIPS CPI+ (Gross) Mortgage interest payments

CPIH & MIPS CPI+ (Gross) Mortgage interest payments

+ Imputed rentals

‘Matched’ prices and income measures

Price measure Income indicator contents

Starting point Interest payments OO Housing

CPI ETB Disp. Income Net interest received

CPIH ETB Disp. Income Net interest received + Imputed rentals

CPI & MIPS ETB Disp. Income(Gross interest

received)

CPIH & MIPS ETB Disp. Income(Gross interest

received)+ Imputed rentals

Preliminary: Alternative price measures: inflation by equivalised income decile, %

Alternative sub-group price indices

CAAGR = 2.8% CAAGR = 2.7% CAAGR = 2.6%

CAAGR = 2.8% CAAGR = 2.6% CAAGR = 2.4%

Sub-group nominal income indices

Preliminary: Alternative income definitions, all households, average £/wk

Interest Paid

Average imputed rentals

Interest Paid

Preliminary: Alternative income definitions growth by equivalised income decile, 2005-2013, %

Interest Paid

Imputed rentals

Sub-group real income indices

Preliminary: Alternative real income definitions growth by equivalised income decile, average 2005-2013, %

Conclusion

• Work has been started to address the themes of the Monitoring Review. In particular:

• Work to improve and explain NA measures of income has been started• More themed analysis has been undertaken• Effects of Taxes & Benefits has been published, taking into account some of the

Monitoring Review’s recommendations• Work to improve the timeliness of key income measures • Links to the Johnson Review’s central recommendation have been established,

and a set of proto-type indices will be made available over the summer.

• In particular, we’d welcome comments and suggestions on the published ‘nowcasts’ paper. Following the publication of our article on alternative price and income measures, we would welcome user feedback on their contents and approach.

Question & Answers

Appendix

RHDI growth, incl. & excl. NPISH

RHDI per capita, Incl. & Excl. NPISH, Quarter on same quarter a year ago, %

Starting with RHDI per capita...

RHDI per capita, various measures, 2008=100

... removing ‘imputed’ elements...

RHDI per capita, incl. NPISH, various measures, 2008=100

...excluding FISIM from savings...

... removing interest paid...

...excluding interest altogether.

2008=100

ASHE analysis

Distribution of weekly earnings: 2013

ASHE analysis

Distribution of Gross Weekly Nominal Earnings Growth, Public & Total, 2013 %% of continuously employed who received within 0.5pp of the stated earnings growth

ASHE analysis

Distribution of Gross Weekly Nominal Earnings Growth, Public & Total, 2014 %% of continuously employed who received within 0.5pp of the stated earnings growth

Drivers of earnings growth

Contributions to average nominal earnings growth by average earnings quantile: 2014

Note: Quantiles of earnings growth for the continuously full-time employed population

Movers and stayers

*The 5th quantile contains those with 0% earnings growth, who make up more than 5% of the continuously employed population.

Job-movers and stayers among the cont. emp. pop. by quantile of earnings growth, 2014%

Gini coefficient: All households – equivalised disposable income: Published and nowcast estimates

Nowcasting results

1 Households are ranked by their equivalised disposable incomes, using the modified-OECD scale.

Sub-group price indices

Preliminary: CPIH consistent inflation rates by income decile, %

Sub-group price indices

CPIH consistent price indices by equivalised income decile, 2005=100

Preliminary: Contributions to inflation by equivalised income decile, % & p.p.

Decile 2 Decile 9

Preliminary: Contributions to inflation by equivalised income decile, % & p.p.

Decile 2 inflation less decile 9 inflation

Preliminary: Alternative real income measures: income by equivalised income decile, 2013 £/wk

Sub-group income indices

Preliminary: Alternative income definitions by equivalised income decile, average £/wk

Preliminary: Alternative real income definitions, all households, average 2013 £/wk

-OFFICIAL SENSITIVE- 82

Preliminary: Alternative income growth, all households, average 2013 £, %

Preliminary: Alternative real income growth: income by equivalised income decile, %

progress report philip wales uksa monitoring review event, 2 nd july 2015 1

rhdi earnings

various measures

timely income

gdp rhdi growth

g tom evans

g net investment income

alternative hhdi measures

real income indices

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