living standards and inequality - ifs€¦ · prospects for living standards and inequality •...
TRANSCRIPT
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© Institute for Fiscal Studies
Living standards and income inequality Jonathan Cribb
16th July 2015
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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
© Institute for Fiscal Studies
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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
© Institute for Fiscal Studies
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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%
© Institute for Fiscal Studies
Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
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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
© Institute for Fiscal Studies
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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
© Institute for Fiscal Studies
Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
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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
2.4% below
2009–10 peak
© Institute for Fiscal Studies
Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
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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 Mean income
© Institute for Fiscal Studies
Source: Table 2.1 of Living Standards, Inequality and Poverty in the UK: 2015
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Adjusting for inflation: CPI vs RPI
© Institute for Fiscal Studies
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
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Adjusting for inflation: CPI vs RPI
© Institute for Fiscal Studies
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
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Comparing income growth to previous recessions
© Institute for Fiscal Studies
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
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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
© Institute for Fiscal Studies
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Income inequality
© Institute for Fiscal Studies
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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
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.
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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
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
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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
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Inequality broadly unchanged in 2013–14
© Institute for Fiscal Studies
-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
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Inequality is lower than pre-recession levels
© Institute for Fiscal Studies
-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
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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
© Institute for Fiscal Studies
-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
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Why did inequality fall for working households?
© Institute for Fiscal Studies
-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
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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
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
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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
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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
© Institute for Fiscal Studies
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Gini coefficient and 90/10 ratio,1961 to 2013–14
© Institute for Fiscal Studies
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
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The 1% income share 1961 to 2013–14 (GB)
© Institute for Fiscal Studies
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
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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)
© Institute for Fiscal Studies
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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
© Institute for Fiscal Studies
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Incomes of pensioners catching up with the rest...
© Institute for Fiscal Studies
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
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Smaller improvement in relative position of workless households
© Institute for Fiscal Studies
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
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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
© Institute for Fiscal Studies
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Impact of tax and benefit reforms between April 2015 and April 2019 (including universal credit)
© Institute for Fiscal Studies
-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
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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
© Institute for Fiscal Studies