Strongest employment growth in twenty five years in 2014-15 pushed average incomes above previous peak

Median household income in the UK rose by 3% in 2014–15 after adjusting for inflation. This was the fastest rise in average incomes since the early 2000s, finally taking median income 1% above its previous peak, and was accompanied by income growth right across the distribution. These are the most striking findings from today’s release of the latest official statistics on the distribution of household income by the Department for Work and Pensions (DWP). This short observation sets out some of the reasons for the strong income growth, and highlights some of the other things we learn from the new statistics. On 19^th July, IFS researchers will launch a detailed report, funded by the Joseph Rowntree Foundation, which will provide a much more comprehensive analysis using the data underlying the statistics.

Strong income growth was driven by a recovering labour market

Median income – the net household income of the person in the middle of the distribution - fell following the recession by a total of 4% between 2009–10 and 2011–12. Since then, median income has grown by 5%, with weak growth in 2012–13 and 2013–14, and robust growth of 3% in 2014–15. This leaves median income 1% above its 2009–10 peak.

The robust average income growth in 2014–15 was driven by a strong recovery in the labour market, and in particular by rising numbers of people in work. According to the Labour Force Survey, the employment rate of working-age people (aged 16-64) rose by 1.3ppt to reach 73.2% in 2014–15, the highest employment rate of any financial year since data began in 1971. This was the largest increase in the employment rate for over 25 years; the last time employment grew faster was in 1988–89. It was driven by the private sector, and was disproportionately growth in full-time work: according to the ONS, full time work accounted for 73% of employment in 2013-14, but for 81% of the employment growth between 2013–14 and 2014–15. Low inflation also meant that the average real earnings of employees grew slightly in 2014–15 - by between 0.4% and 0.8% depending on the measure used.

Income growth for rich and poor leaves inequality little changed

Incomes grew right across the income distribution in 2014–15: by 1% at the 10^th percentile, 3% at the median (middle) and 3% at the 90^th percentile. The differences between these growth rates are not statistically significant. Income inequality has been broadly stable since the recovery from recession began in 2011–12, with the widely-cited measure of inequality known as the Gini coefficient unchanged (at 0.34) since then. This also means that income inequality remains lower than before the recession: the large falls in earnings between 2009–10 and 2011–12 tended to hit higher-income households most, because they get a bigger share of their total income from earnings than lower-income households. Looking further back inequality remains no higher than in 1990 – though far higher than before the rapid rise in inequality during the 1980s.

 Absolute income poverty falls significantly in 2014–15

The government’s statistics include a measure of ‘absolute low income’ poverty, which counts the number of people in a household with an income below a poverty line which is fixed in real terms over time. Hence, falling absolute poverty means rising real incomes for low-income households.

Measuring incomes after deducting housing costs (as we believe is preferable when measuring poverty), the statistics reveal a statistically significant decrease in absolute poverty in the UK in 2014–15, from 22% to 20%. There were also falls in absolute poverty for all major demographic groups: children, working-age adults, and pensioners. The bigger picture, though, is that overall absolute poverty is only slightly below its level a decade ago in 2004–05. That is an unusually long period over which to see such little income growth for low-income households, though it does follow a period in the late 1990s and early 2000s when incomes grew particularly rapidly for low-income households. There are differences between groups though. In particular, absolute poverty rates for pensioners have continued to fall significantly over the past decade - and we have shown previously that they now have the lowest poverty rate of all the major demographic groups.

The other headline measure of income poverty is known as “relative poverty”: an individual is said to be in relative poverty if their household income is less than 60% of contemporaneous median income. This means that relative poverty rises (or falls) if the gap between low-income and middle-income households rises (or falls), regardless of changes in absolute income levels. Similar growth in income across the income distribution means that relative poverty was broadly unchanged in 2014–15. As with changes in absolute poverty, there have been only quite small fluctuations in relative poverty rates over the last 10 years, with relative poverty in 2014–15 the same as its level in 2004–05.

Note: On 19 July, IFS researchers will present 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 will analyse the official data on the distribution of household income in the UK, up to and including the latest year of data for 2014-15. Register here.