Household incomes stabilised in 2012–13

The Department for Work and Pensions (DWP) has today published its annual statistics on the distribution of household income in the UK. The latest data cover years up to and including 2012–13. On 15^th July, IFS researchers will publish a detailed report, funded by the Joseph Rowntree Foundation, on what these data tell us about living standards, poverty and inequality in the UK, putting this in the context of the recent recession and post-recession period as a whole, and the longer-term. This observation briefly highlights some of the key findings from DWP’s report.

Average incomes

Average incomes were relatively stable in 2012–13, in comparison with the sharp falls recorded between 2009–10 and 2011–12. Official statistics recorded no change at the median (middle) and a small and statistically insignificant fall at the mean, after accounting for inflation.

The official figures still show median and mean incomes in 2012-13 6% and 9% below their 2009–10 peaks respectively. The large post-recession falls in incomes followed a period of slow income growth that began in the early 2000s, far pre-dating the recession. The net result is that the official measure shows both measures of average income no higher in 2012–13 than in 2001–02.

However, these headline statistics compare real-terms living standards over time using an inflation measure based on the retail prices index (RPI). This is generally agreed to overstate inflation, and has been stripped of its “National Statistics” status. Because it overstates inflation it will overstate real income falls and understate real income rises. An Annex in the DWP report shows that figures using the Office for National Statistics’ improved RPIJ measure of inflation paint a slightly less sobering picture. According to those figures, real median income actually grew slightly, by 1%, between 2011–12 and 2012–13 (though this is not statistically significant). On this basis, the level of real median income in 2012–13 was around the same level as it was in 2005–06 (rather than 2001–02 according to RPI) and 4% lower than its 2009–10 peak (rather than 6% according to the RPI).

Income inequality

Income inequality barely changed between 2011–12 and 2012–13. However, inequality was substantially lower in 2012–13 than it was before the recession (measuring incomes before deducting housing costs). This is largely because between 2007–08 and 2011–12 the pay of workers grew much less quickly than prices, while benefit entitlements tended to grow roughly in line with prices. Benefits account for a relatively large share of household income towards the bottom, whereas earnings account for a relatively large share further up. After almost two decades in which inequality had changed little, this was enough to return inequality to its lowest level since 1996–97. We would, however, expect to see recent falls in inequality start to unwind in future releases of data for 2013–14 and beyond, as real earnings stop falling while cuts to working-age social security entitlements accelerate.

The DWP also present an alternative set of figures which measure incomes after housing costs have been deducted. Recorded falls in inequality were smaller on this measure. This is to be expected, because mortgage interest rates have fallen substantially and it tends to be higher-income households which have large mortgages.

Income poverty

In 2012–13, 10.6 million individuals (17%) had a household income below the official absolute poverty line (e.g. below £272 per week for a childless couple, net of taxes and inclusive of benefits), measuring incomes before deducting housing costs. This was about 200,000 individuals fewer than the previous year, and a poverty rate no higher than before the recession. However, when incomes are measured after deducting housing costs, the number below the poverty line (e.g. below £235 per week for a childless couple) rose by about 600,000 in 2012–13 to 14.6 million (23%). This is about 2.0 million (2ppts) higher than in 2007–08. The difference is explained by the fact that housing costs have fallen by less for those around the poverty line than for the population as a whole – only the after-housing-costs measure accounts for this.

Using a relative measure of poverty, which instead uses a poverty line of 60% of median income, the figures show significant falls between 2007–08 and 2012–13. This reflects the fact that the incomes of low-income households were hit less hard (proportionately, as well as in cash terms) over that period than the incomes of middle-income households, and again this is explained by rapidly falling earnings and relatively stable benefits. Measuring incomes before deducting housing costs, relative poverty fell by 1.3 million (3ppts) between 2007–08 and 2012–13, to 9.7 million (15%). Measuring incomes after deducting housing costs, relative poverty fell by 400,000 (1ppt) to 13.2 million (21%).