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How has stalling income growth affected different parts of the population?

Observation

Between 2011–12 and 2016–17, median incomes grew at a rate of 1.6% a year – faster than the 1.2% growth rate seen immediately before the recession (2002–03 to 2007–08).

However, median household income growth stalled in 2017–18, making it only the fourth year (and second non-recession year) in the last 30 where median income did not grow (Figure 1). This stalling is in large part because real earnings fell, due to a rise in inflation following the depreciation of the pound after the UK voted to leave the European Union. Rising inflation meant that the freeze in working-age benefits hit poorer households harder than if inflation had not risen.

All this means that median income in 2017–18 was only 5.6% higher than it was 10 years earlier, before the Great Recession.

In this short observation, we set out new research about the recent changes to household incomes, and who has been most affected by the recent slowdown in household income growth. The research on which this observation is based is a pre-released chapter that is part of our annual report on living standards, poverty and inequality in the UK, which will be launched on Wednesday and is produced with funding from the Joseph Rowntree Foundation.

Figure 1 Median household income growth in the last 30 years

Earnings are the most important source of household incomes on average and they fell in real terms. Although nominal (cash-terms) earnings growth was similar to the previous year’s, inflation rose from 0.9% to 2.7% as a result of the lower sterling exchange rate following the EU referendum. Conversely, the employment rate continued to increase over 2017–18, offsetting at least some of the negative growth impacts of the fall of real earnings.

Stalling income growth has not affected everyone equally. The black diamonds of Figure 2 present average growth rates of average net household income for the bottom, middle, and top income fifths of the population, as well as for all individuals, between 2016–17 and 2017–18. Total net household income fell by 1% for the poorest fifth of the population, was unchanged for the middle fifth and grew by 1% for the highest income fifth over the year. Although these differences are modest, they do show a different pattern from the previous years of recovery, in which income growth was stronger for individuals living in middle income households than for individuals in high or low income households.

The coloured bars of figure 2 show how much various components of income contributed to overall income growth. These show that the difference in income growth across the distribution was partially due to rising income from employment, (averaged across all individuals so including effects of rise in employment), which pushed up incomes among higher income households (shown by the light green bars).

Meanwhile, falls in benefit incomes due to cuts to working-age benefits and tax credits have pushed down the incomes of low-income households while they barely affected the incomes of the middle and the top (dark green bars).

Figure 2 Contributions to mean net income growth, by quintile 2016–17 to 2017–18

Trends in household income not only differ across the income distribution, but also for different groups, such as those who are younger and older. Figure 3 presents the trajectories of real median income from 2007–08 to 2017–18 by age group, each indexed to their levels in 2007–08. Incomes are measured before housing costs are deducted but are similar when measured after housing costs are deducted.

In the aftermath of the crisis, median income growth was lowest for younger adults aged 22-30. However, since the beginning of the recovery period (2011–12) their incomes have been recovering and in 2017–18 were just below their 2007–08 level. This has been driven by a strong recovery in their labour market prospects, with strong employee earnings growth for this group in recent years.

The middle age groups (31-49 and 50-64), also saw their incomes fall in the aftermath of the recession, and their incomes have also recovered since 2012–13. However, incomes for these age groups stalled or even fell slightly in 2017–18. For pensioners aged 65 and above, average income since 2007–08 has grown by over 18%, though this growth seems to have come to a halt in 2017–18. Overall, the pattern of income growth across the age groups has been much more similar in the last 5 years than it was in the aftermath of the financial crisis.

Figure 3 Index of real median income (BHC) by age, indexed to 2007–08 = 100

What might be on the cards for the future? Now more than ever it is very hard to say. At the Spring Statement in March, the Office for Budget Responsibility’s macroeconomic forecasts were for modest but steady GDP growth, which would usually translate into modest but steady household income growth. But those forecasts were predicated on the UK avoiding a disorderly exit from the European Union and entering a transition period on 29 March 2019. Given that did not happen, and we are none the wiser about our future relationship with Europe, it would seem foolish to offer any predictions about the future.

Pascale Bourquin, a Research Economist at IFS, and an author of the report said:

 “Real median income growth was essentially zero in 2017–18 after having grown at a reasonable rate of 1.6% from 2011–12 to 2016–17. The stalling of income growth was mainly due to employees’ earnings growth being lower than (rising) inflation. A continued freeze to most working-age benefits and tax credit entitlements meant that the incomes of lower income households performed slightly worse than those of middle or high income households. But the bigger picture is that these differences were not large enough to change overall UK income inequality which in 2017–18 remained at more or less the same level it has been since the early 1990s - but much higher than it was in the 1970s.”

This observation sets out findings from a pre-released chapter of our 'Living standards, poverty and inequality in the UK: 2019' report. We will launch the report at Church House Conference Centre, London from 10:00 - 12:00 on Wednesday 19 June 2019.

Today's research updates and expands our initial analysis of the 2019 Households below average income (HBAI) statistics, 'No growth in household incomes last year – for only the fourth time in the last 30 years', released on 28 March 2019.

Find out more

Book chapter
This chapter analyses trends in average incomes and income inequality between UK individuals. We also explore the determinants of trends in income growth and how they have evolved over time, on average and for different groups.
IFS Working Paper W19/12
Our new research examines 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%.
Presentation
IFS researchers presented the key findings from the latest in the series of flagship IFS annual reports on living standards, poverty and inequality in the UK. Funded by the Joseph Rowntree Foundation, the report analysed the latest data on living standards, while setting this in the context of ...