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Why has in-work poverty risen in Britain?

IFS Working Paper W19/12

We examine the reason for the increased in-work relative poverty rate in Britain over the last 25 years, which has risen by almost 5 percentage points from 13% to 18%. We identify two reasons that are actually due to positive trends in British society: the catch up of pensioner incomes (driven by higher state and private pensions), and falls in worklessness bringing low earning types of households (such as lone parents) into work. We show that increases in household earnings inequality since 1994 explain 1.4 percentage points of the rise. The fact that housing costs have risen much more for low income households than for higher income households explains 2.4 percentage points of the rise. Working against this, increases in re-distribution towards low-income working families pushed down relative in-work poverty by 2.1 percentage points. This was due to benefit changes in the early 2000s and between 2007 and 2010 which acted to reduce relative in-work poverty, though this has been partially reversed by reductions to benefit entitlements since 2010.