The State of Living Standards

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The State of

Living StandardsThe Resolution Foundation’s annual

audit of living standards in Britain

February 2014

James Plunkett

Alex Hurrell

Matthew Whittaker


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The State of Living Standards: Introduction

For the first time in fiveyears the economic horizonis brightening. Te UK

economy remains 2.1 per centsmaller than it was in 2008 but oursuccessive quarters o economic

growth have significantly narrowedthe gap. Tis return to growth startsthe third chapter in a story that beganin 2008: first the immediate crisis,then a long downturn, and now aprocess o rebuilding.

New questions are now at theheart o political debate: will therecovery quickly eed into risingliving standards or most working

households? And, not unrelated, willtoday’s recovery be sustained?

Tis report parses the latest data todescribe the state o living standardsin Britain. Te picture it presents iscomplex. Some things are clear: it isbeyond doubt that the best measureso living standards have allen sharplyand to an unprecedented degreesince 2009. Yet it remains unclear atwhat point in the recovery they willrise again. And while some indicatorso importance to living standards,such as employment, have greatlyoutperormed expectations, others,

like wages, have seriously under-perormed. And the impacts o the

downturn—and the likely benefits othe recovery—are spread unevenlyacross groups: by income, gender,region and particularly by age.

As well as mapping livingstandards, the report helps us

understand how long the rebuildingwill take. Te answer depends partlyon how much o the damage causedby the crash proves to be permanent.But it also depends on the extent towhich today’s squeeze on incomesis cyclical, and the extent to whichit is structural, pre-dating the crash.Our evidence suggests that thedecline since 2008 has indeed been

steep but that some o our problemsstarted beore the crash. In importantrespects it has become harder to live acomortable lie on a modest or eventypical income in modern Britain.

Finally, the report considers whatmay happen to living standards overthe medium term given recent signs oimprovement as well as the headwindsthat are blowing against a sharedrecovery. Forecasts or wage growthremain surprisingly weak and ongoingreductions in state support will definethe recovery or a large swathe oBritain, dragging on householdincomes. Tis raises concerns aboutthe level o debt that still sits withhouseholds who are already close tothe edge, suggesting problems wheninterest rates start to normalise.

Chapter 1 starts by comparing the

story o GDP and living standardsover the last five years, asking how

It has become harder tolive a comfortable life ona modest or even typical

income in modern Britain

Introduction


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The State of Living Standards: Introduction

Britain’s macroeconomic healthdiffers rom that o households.Chapter 2 dissects these trends toshow how different groups ared rom2008 to 2013. Chapter 3 details a driftowards a polarised labour marketbeore 2008, a transition that hasonly quickened since. And Chapter

4 shows how an unprecedenteddecline in incomes and earnings,together with shifs in relative prices,is changing the kind o lie a typicalworking household can afford to live.Finally, Chapter 5 sets out projectionsor real incomes in the recovery,exploring the likely path o livingstandards in the coming years andthe implications or household debt.

Te report draws on the latest dataavailable, but with an importantcaveat: much o this data is alreadysignificantly out o date. Tis is a

perennial challenge, and one that thisyear is more noteworthy than ever asthe economic picture is changing sorapidly. Some o the data we reportrelates to late 2013, in other casesto 2011-12. Where we can do soaccurately, we extrapolate to showwhat the data are likely to mean or

living standards today and over themedium term.

It should also be said that thereare ongoing debates about how tomeasure living standards, includingwhich measure o inflation shouldbe used. In some instances we showtrends against more than one measureand, where we have to choose, we erron the side o measures that paint a

more optimistic picture (or exampleusing more conservative measures oinflation). Te box on p7 – MeasuresMatter – gives more detail.


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The State of Living Standards: Charting the squeeze

2013 2014

0%

1%

2%

3%

March 2013forecast

December 2013forecast

2013 outturn(provisional estimate)

0.6%

1.8%

1.4%

2.4%

1.9%

Figure 1: Latest GDP growth revisions

In the last year the UK economyhas returned to growth. Afer arapid contraction in 2009 and

a period o stagnation rom 2009to 2013, GDP has now risen orour successive quarters, growing inthe latest figures at an annualisedrate o 1.9 per cent. Even afer thisgrowth, the UK economy remains

2.1 per cent smaller than it was in2008, and ully 16 per cent smallerthan it was on course to be beorethe 2008-09 crisis struck. Yet anascent recovery has brought newoptimism to orecasts or the UKmacro-economy which is asteeding through into hope aboutliving standards.

GDP tells a dierent story to liv-ing standards…Te link rom GDP to livingstandards is ar rom simple. So howdoes the story o GDP over the lastfive years compare to the courseo the downturn or households?Te GDP story is as ollows: a steepslump in 2008/09, a brie rebound,several years o stagnation and nowa recovery. Living standards areollowing a different course. Te bestmeasures o household incomes showslow growth rom the mid-2000s,then resilience at the height o thedownturn, and a steep and sustainedslide in 2010-11 and 2011-12 as GDPstabilised. Data suggests that this

slide continued in 2012-13, meaningthat the squeeze on living standards

started earlier, and is lasting arlonger, than the recession or theoverall UK economy.

It is important to note, however,that there are different ways tomeasure household income. Figure2 compares trends in GDP over thelast 15 years with a ull set o ‘official’measures. Some give a misleadingpicture o how households arearing. For example, aside rom abrie interruption in 2011, totaldisposable household income hasrisen throughout the downturn. Tisis widely recognised as the wrongmeasure o living standards becausetotal income in the economy partlyreflects population growth. It does

not tell us how typical householdsare aring.


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When we turn to a ar more useulbut still flawed measure – disposableincome per capita – we get a differentpicture o living standards. Incomesper head have been essentially flatsince 2008, growing or alling onlymarginally in each o the last fiveyears. As a whole, rom 2008 to2012, disposable incomes per headell by just under 0.2 per cent. Tisollows a period o weak growth inper capita incomes starting in the

early 2000s. Tis measure o livingstandards is useul, and a legitimateway o understanding recenttrends, because it is the timeliestdata we have or incomes. But it isalso flawed because it representsall non-market, non-governmentincome and thereore includes partso the economy that do not reflectthe position o households, such asthe income o religious institutionsand universities.

100

105

110

115

120

125

130

135

140

1997 2008 2012

34%

32% 33%

24%

23%

15%

14%

21%

25%

37%

Meanhouseholdincome

RDHIper head

Median

household

income

Real DisposableHousehold Income

Real Gross

Domestic

Product

Real GDPper head

2008-

2011

2008-

2012

-0.2%

3.5%

-2.3%

-5.8%

-5.0%

-1.0%

1.2%

-2.5%

-4.6%

-3.8%

although GDPis recovering,householdincome isstill falling

Figure 2: Recent trends in GDP and net household income growth

On the most accurate measures,living standards have fallensteeply…

By ar the best, i less timely, accounto trends in living standards comesrom large scale surveys that measureincomes directly. Tese provide themost accurate measure o what reallyhappened to households throughout thedownturn. Te Family Resources Survey,recognised as the best source o data onUK household incomes, is the one wepresent here. Te results tell a ar more

pessimistic story about living standardsthan the official and widely-reported

measures o disposable income thatsometimes dominate debate.

Mean net household income in theUK ell 5 per cent rom 2008-09 to2011-12. In the same years, medianhousehold income – the incomeo the typical household – ell 3.8per cent (or 5.2 per cent i gross),continuing to all ast in 2011-12 asGDP stagnated. Median incomesalso saw a clear slowdown in growthbeore the crisis struck, starting inthe early 2000s. When this period

o weak income growth is added tothe subsequent slump, we see that


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real median household incomes in2011-12 are back to the level theywere in 2004-05. (On the basis o RPIinflation, household incomes wouldbe back to their level in 2001-02.)

One way to understand the ullcosts o the crisis is to compare thislost decade to the long-run trend rateo income growth. I median incomes

had continued to grow at their raterom 1997-98 to 2008-09 (a periodthat included years o strong growth aswell as much weaker years), the typicalhousehold in Britain would have been8 per cent better off than they in actwere in 2011-12. Tis is equivalentto £1,800 a year or a couple withno children.

As the continuing squeezeon incomes has pulled livingstandards to the heart of UKpolitical debate, there hasbeen growing scrutiny over

how incomes are measured.These debates matter, oftenchanging the story signifi-cantly, and so it is importantto choose measures carefullyand to be open about whichmeasures are being used.

Some arguments overmeasuring living standardsare clear cut; some measuresare simply the wrong way tounderstand how households

are faring. Perhaps the mostcommon error is to useaggregate statistics for the UK asa whole, for example the ‘totalquantity of household income’or the ‘number of people inemployment’. These measuresare unhelpful in a debate aboutliving standards because theypartly reflect population growth.Instead, what matters for livingstandards is how much incomethere is per household, or whatpercentage of people are inemployment. When politiciansor commentators use totalmeasures they often mistakethe country getting bigger foran improvement in standardsof living.

A trickier question is: whatmeasure best reflects the waypeople actually receive andspend their money? Whenlooking at living standards

overall, we favour householdmeasures over individualones because people typicallyshare their incomes withinhouseholds. As is standard,we ‘equivalise’ these incomes,meaning that we adjust themfor household size. This isfor the simple reason that asingle person is better off thana family of four on the sameincome. And we generally

favour net incomes over grossincomes because the formercaptures both the losses frombenefit cuts and the gainsfrom tax cuts. Of course,sometimes gross measures aremost appropriate, for examplewhen trying to understand aphenomenon like our changinglabour market.

Perhaps the mostcontentious debate is overhow best to measure inflation.Historically there have beentwo official measures ofinflation: the Consumer PricesIndex and the Retail PricesIndex. Choosing one or theother can alter results dramati-cally, with the CPI historically

showing lower inflation thanthe RPI. Neither is a perfectmeasure of the changing pricesfaced by consumers. The RPI isbased on a faulty formula that

many think makes it artificiallyhigh, yet the CPI excludesmortgage costs – a large partof many people’s budgets anda particularly volatile one inrecent years given dramaticcuts in interest rates. Tocounteract these problems theONS has built a new measure,the RPI-J, which maintains thecoverage of RPI but attemptsto fix the formula.

Our preference is to use theRPI-J measure where possible.But, because no forecasts areavailable for this new measure,we are required to make achoice between RPI and CPIwhen producing projections.In these instances we chooseto err on the side of optimismby using CPI. With the gapbetween CPI and RPI setto increase as interest ratesrise, this means that we aremore likely to understate thanoverstate inflation, making theprospects for real incomes orearnings look better. For thisreason some people may saywe understate the hit to livingstandards.

Measures matter


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+13

1980

2008

1990

90

100

110

0 4 8 1612 20

Quarters since start of recession

-1

+15

This downturn has been unusu-ally bad for living standards …Sustained alls in real income o thekind seen in the last five years areunprecedented in modern times—including in past downturns. Teafermath o the 2008 recession, stillongoing, has already squeezed incomesar more severely than either the 1980sor 1990s recessions. Based on RDHI– the only available measure or this

comparison – at the equivalent pointafer the 1980s and 1990s recessions,per capita disposable incomes were13 and 15 per cent above theirpre-recession peak respectively. Realdisposable income per head is today 1per cent down on its 2008 level. As weshow in Chapter 3, these figures hidesubstantial variation, with some groupsaring ar better and some aringsignificantly worse.

Figure 3: Disposable incomes in recent recessions

As the UK’s economicprospects have improved, anearly controversy has arisenover the performance ofwages. Some have claimedthat wages are already risingfaster than prices for manyworkers, while others claimthat they continue to fall inreal terms. Some aspectsof this debate are spurious,reflecting the way that partial

statistics such as ‘take-home

pay’ flatter the performanceof wages (take-home paymakes wage growth lookhigher by taking into accounttax cuts but not cuts tobenefits or tax credits).However, other parts of thedebate raise a genuine anduseful question about what isreally happening to wages inthe labour market.

At the heart of this puzzle

is a gap between the two

key datasets that are usedto measure UK earnings: themonthly publication AverageWeekly Earnings (AWE) andthe Annual Survey of Hoursand Earnings (ASHE). Thelatest AWE data show thataverage earnings rose just0.7 per cent in the year toNovember 2013 to £475a week, an historically lowgrowth rate that is far below

CPI inflation of 2.1 per cent.

Are wages already rising?

»


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The latest ASHE data for theyear to April 2013 suggestedthat average weekly earningsgrew 2.2 per cent in the yearto £502, much closer to the 2.4per cent inflation prevailing atthat time. Under AWE, wagescontinue to fall steeply, underASHE wage growth appears tobe broadly flat.

Some of the differencebetween the two datasets isexplained simply by timing,particularly in 2013. ASHE isconducted annually in April. InApril 2013, the ASHE data islikely to have been influencedby a temporary spike from

bonus payments and attemptsto take advantage of anincome tax cut for the highestearners in April of that year.

The same spike can be seen inthe AWE data for April.

Even so, AWE appears toshow lower wage growththan ASHE over the longerterm. Technical differencesmay explain this. While bothAWE and ASHE are officialdatasets, published by theOffice for National Statisticsand drawn from large-scaleemployer surveys, the ASHEsurvey is thought to give amore accurate estimate ofwages. It is taken directlyfrom questions aboutindividual employees whilethe AWE is instead derived

by asking employers separatequestions about their totalpay-bills and their employeeroles, and dividing the two

to calculate wages peremployee. This can lead todistortions, particularly whenemployers are increasingtheir headcount, pushingdown the apparent wages peremployee.

It is also important tonote that both datasets, andtherefore much of Britain’sdebate about wages, suffersfrom an important weakness:neither AWE nor ASHEincludes the UK’s 4.4 millionself-employed workers. Self-employment has risen rapidlyin the last five years at thesame time as the income of

the self-employed has fallensharply. Including theseworkers would drag down theoverall figures.

-2

-1

0

1

2

1980 1982 1984

1980 recession

1990 1992 1994 1996

1990 recession

2008 2010 2012

2008 crisis

Business Investment

Household Spending

spendingleads, whileinvestment

lags

Weak incomes are worrying be-cause the recovery is so far builton spending…Recent trends in household incomesraise concerns about the day to day

pressures acing Britain’s households.But they also raise wider economicquestions about the sustainability andstability o the recovery. As Figure4 shows, the recent growth in GDPhas come mainly rom consumerspending. Tis is similar to past

recessions, afer which the engineo household spending has alwaysrestarted first, restoring economicmomentum. Business investment hasollowed soon afer. Te difference

this time around, so ar at least, is thatbusiness investment has remainedstagnant—something that was notthe case at this point afer the 1980sor 1990s recessions. oday’s nascentrecovery is flying on the single engineo household spending power.

Figure 4: Household spending and business investment after recessions


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overall workers’ compen-sation. Second, there was arise in non-wage costs, mainlyemployer pension contributionsas employers sought to clearlarge pension fund deficits, butalso rising employer NationalInsurance payments, squeezingthe amount of compensationleft over for pay. Third, strongearnings growth for the veryhighest earners meant thebottom half received a fallingshare of overall earnings.This triple squeeze helps toexplain the stagnation of

median earnings while GDPgrew strongly in the 2000s. Itmeant that the state, throughrising tax credits, providedthe biggest source of incomegrowth in low to middleincome households from 2003to 2008.

This unusual period followeda much longer-term weakeningof the link between GDPgrowth and the wages of atypical worker. Over a periodof decades, a falling share ofUK GVA has found its way intothe pay packets of workers in

the bottom half. Three factorsaccount for this change. Therise in wage inequality explainsnearly three quarters (72 percent) of the decline in theshare of GVA reaching wagesin the bottom half. A slight fallin the labour share since 1977accounts for 13 per cent. Andrising non-wage employer costsaccount for 15 per cent. Sincelast year, these results show asmaller effect from the labourshare because the profit sharehas recently fallen, as is usual ina downturn.

1977-2012

growingwage inequality

72%

increasingprofit share

13%

risingemployer costs

15%

Figure 6: What accounts for the falling share of GVA going to wages in the bottom half


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Chapter 2

Sharing the pain?

The State of Living Standards

12


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The State of Living Standards: Sharing the pain

We have seen that a newyear o data confirms thisto be an historic moment

or living standards. Te last five yearsnow stand out even more starklythan was previously understood. Butwe also now know more than we didabout how the impacts o the crisishave been shared. Te immediateallout rom the crisis has been morebroad-based than many anticipated,with incomes alling widely acrossthe spectrum. As we look to the nextew years there are concerns thatinequality will increase. We also showin this chapter the extent to which

the state o living standards differs orpeople o different regions, gendersand ages.

The crisis and early recoveryhave made the UK moreregionally imbalanced…Te most immediate sign ounevenness in the UK economycomes in the geography o the

downturn. From 2008 to 2012,overall UK Gross Value Added ellby £40 billion in real terms. Despitebeing the largest economic regiono the UK, constituting 22 per cento UK GVA, London accounted or

just 1 per cent o this decline. Scotlandmade up a disproportionately large 19per cent, despite being just 8 per cent othe total UK economy. Yorkshire andthe Humber meanwhile accountedor 16 per cent o the decline in GVArom 2008 to 2012 while the NorthWest accounted or 12 per cent. Inthe South East, excluding London,GVA actually grew slightly inthis period.

Tis measure o total GVA reflectsoverall economic output but tells uslittle about living standards. For thisit is more useul to look at GVA perhead, taking account o changes in

regional populations. Here we seeby ar the biggest alls in NorthernIreland, where GVA per head ell10 per cent rom 2008 to 2012. InScotland we see an 8 per cent all.Yorkshire and the East o Englandalso saw big declines while London’ssmall all in overall GVA translatedinto a relatively large all in GVA perhead – 6 per cent rom 2008 to 2012– due to ongoing growth in London’s

population at this time. On this basis,even while overall UK GVA flat-linedin 2012, in all but three geographicareas o the UK (the South East,North West and Wales), GVA perhead was still alling. In essence, atthis per capita level, the remainingten regions and nations o the UKeconomy remained in recession in2012.

Inequality at-lined in the crisisbut is now set to rise again…Tere has been much debate since2008 about how broadly the pain othe crisis has been shared. Tis hasbeen motivated, in part, by the actthat the UK is one o the developedworld’s most unequal societies. Telatest data confirm this. In 2011-12,a tenth (11 per cent) o all originalincome in the UK went to the top1 per cent and a third (34 per cent)to the top 10 per cent. Te richestten per cent o the UK working-agepopulation now have nearly twice theoriginal income between them o theentire bottom hal (18 per cent).

Te UK tax and benefit systemsignificantly moderates theseinequalities. Afer taxes and

benefits, the share o the top 1 percent alls to 8 per cent o all post-tax

The richest ten per centnow have nearly twice the

income between them ofthe entire bottom half


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Yorkshire& Humber

East of England

North

West

SouthWest

WestMidlands

NorthernIreland

EastMidlands

NorthEast

Wales

London

SouthEast

8%

6%

0%

5%

2%1%

9%

9%

12%

12%

16%

8%

8%

9%

7%

7%

2%

6%

3%

3%

22%

14%

7%

share of decline intotal real Gross Value Added

2008-2012

share of totalGross Value Added2008

share of GVA

>share of

GVA decline

share of GVA

decline>

share of GVA

key:

Scotland

19%

Figure 7a: Share of decline in gross value added by region


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Yorkshire& Humber

Scotland

NorthernIreland

East of England

London

WestMidlands

South West

EastMidlands

NorthEastNorth

West& M’side

South East

Wales

-7.4%

Yorkshire & Humber

2008£18,960

2013£17,560

-10.0%

Northern Ireland

2008£17,910

2013£16,130

-6.6%

East of England

2008£21,050

2013£19,660

-6.1%

London

2008£39,650

2013£37,230

-5.5%

West Midlands

2008£18,450

2013£17,430

-5.4%

South West

2008£20,100

2013£19,020

-4.9%

East Midlands

2008£18,360

2013£17,450

-5.3%

North East

2008£16,990

2013£16,090

-4.7%

North West & Merseyside

2008£19,340

2013£18,440

-3.3%

South East

2008£24,000

2013£23,220

-3.0%

Wales

2008£15,870

2013£15,400

-5.8%2008£25,100

2013£23,640

UK (GDP per head)

-7.6%

Scotland

2008£21,650

2013£20,010

Change in GVA per head

Figure 7b: Decline in gross value added per head by region


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the top 1% of the population

received 14% of growthtaking their

share of incomefrom 7% to 11%

even share

16% 45% 11% 13%14%

19%18%

52%48%

10%

11%

11%

12%

7%11%

share of income1994-95

share of income growth between

1994-95 and 2011-12

share of income2011-12

A

the top 10%

take almostdouble what thebottom 50% of

the populationreceives

B

population by income

top 1%

top 10%

95-99%90-95%50-90%bottom 50%

income. Yet because original marketincome is so unequal in the UK, thetax and benefit system has to workhard to moderate these high levelso inequality.. Even afer redistri-

bution through taxes and benefitsthe top ten per cent o Britain’sworking age population have asmuch income as the bottom halcombined (27 per cent).

Figure 8: Share of income and income growth

In the early years o the crisisinequality appeared to all slightly,a pattern that is common inrecessions because householdswith lower incomes are ofen moreprotected by the welare state whilethose on middle and higher incomes

are more exposed to a weakeninglabour market.

Te latest data, however, addsto the suspicion that part o theapparent all in inequality in 2010-11was the result o earnings beingmoved between financial years. Te50p rate o income tax introducedin April 2010 may have incentivised

the highest paid to ‘reduce’ theirearnings in 2010-11 by bringing


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orward earnings into 2009-10,distorting data over a number oyears. Te subsequent reduction othe 50p rate to 45p rom April 2013may have incentivised artificial ‘cuts’in top earnings, this time in 2012-13,and led to corresponding increasesin 2013-14. Stepping back, it nowseems likely that general measures oinequality were airly flat rom 2010to 2013, perhaps alling slightly.

In the last two decades, a biggershare of growth went to the top 1per cent than to the bottom halfcombined…

Te changes in inequality that tookplace during the downturn look smallagainst long-term trends. Te GINIcoefficient, widely used as a measureo general inequality, grew throughoutthe 1980s and more slowly in the1990s beore flatlining in the 2000swhile incomes at the very top—partic-ularly the top 1 per cent and even moreso the top 0.1 per cent—accelerated

away. Even afer the slight moderatingeffect o the crisis, around 14 per cento the growth in household incomesrom 1994-95 to 2011-12 went to the

top one percent. Tis is just slightlyless than went to the entire bottomhal o working-age households (16per cent). It is now highly likely thatinequality will resume its rise as the

recovery takes hold, with welare cutshitting lower income households,while a strengthening labour marketfirst benefits those higher up.

The weak labour market has hityoung people hardest…Aside rom tax and benefit decisions,much o the uneven impact o thecrisis can be attributed to changes inthe labour market. Unemployment

has risen quite evenly or men andwomen: the unemployment rateor both being around 50 per centhigher in late 2013 than in 2008(unemployment rose rom 5.5 percent to 8.3 per cent or men and rom4.7 to 7.2 per cent or women). Menhowever have seen ar larger allsin earnings. Male median weeklyearnings ell 7.3 per cent rom 2008

to 2013 compared to 3.2 per cent orwomen. Tis continues a longer-termtrend that is slowly narrowing thegender pay gap.

Figure 9: Weekly wage growth from low to higher earners

-8%

-6%

-4%

-2%

0%

2%

Mean 10 20 30 40 Median 60 70 80 90

2008-2013 2012-2013

Lowest paid Highest paid


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Te all in wages has been relativelyeven across the earnings spectrum.From 2008 to 2013, weekly earningsell most at the 20th percentile (7.9 percent) and by slightly more or higherearners than at the median. Relativelysmall alls at the 10th percentile maybe explained by a limited degreeo protection rom the NationalMinimum Wage, which ell sharplyin these years but rose slightly relativeto median earnings. In the latest dataor the year to April 2013, earningsgrowth was close to zero across thespectrum but mildly progressive on aweekly basis – rom plus 0.6 per cent at

the 10th percentile to minus 0.8 per centat the 80th, though this reflects a dispro-portionate increase in working hours atthe bottom o the distribution rather

than any improvement in hourly pay.Te biggest differences in labour

market perormance, however, playout by age. Youth unemployment(or under-25s) stands at 20.0 percent compared to 7.1 per cent or thepopulation as a whole. And when itcomes to pay, the young have sufferedhardest again. Focusing on the 18 to21 year old age group, median weeklywages ell staggeringly – by a quarter(25 per cent) – in real terms rom 2008to 2013. Tis group is unusual in thatit is strongly affected by changes incomposition, as some young peopledecide to remain in education or take

different routes into work, leaving adifferent group o young people inthe labour market in 2013 to the onein 2008.

A l l e m

p l o y e e s

-5.2%

F u l l - t i m e

-4.5%

P a r t - t

i m e

-3.7%

M e n

-7.3%

F u l l - t i m e

-5.8%

P a r t - t

i m e

-3.2%

W o m e n

-3.2%

F u l l - t i m e

-1.6%

P a r t - t

i m e

-3.1%

2 2 - 2 9

-10.5%

3 0 - 3 9

-7.1%

4 0 - 4 9

-5.0%

5 0 - 5 9

-4.6%

6 0 +

-4.0%

Figure 10: Earnings growth by employee group (2008-13)


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Figure 12a: Net incomes for pensioner and working-age households

Figure 12b: Growth in net income for pensioner and working-age households

among working-age households ell6.2 per cent rom its peak in 2008-09to 2011-12, the incomes o pensionerhouseholds rose 1.1 per cent. Onaverage, these changes equate toa real terms loss or working-agehouseholds o over £1,500 andan average gain or pensionerhouseholds o £200. Te result isthat working age households have

in effect lost many years o incomegrowth while pensioner householdshave seen a ar smaller adjustment.Pensioner incomes are 31 per centabove their level in 1997-98 in realterms and remain at a level last seenin 2008-09. By contrast, the incomeo a typical working age householdwas no higher in 2011-12 than it wasa decade earlier in 2001-02.


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Figure 13: Changes in net worth since the crisis

Finally, it is important to considerhow the crisis has reshaped the distri-bution o wealth. In this respect thecrisis has unambiguously increasedinequality. Among mortgagors, networth – savings, shares and propertywealth – ell across the bottom 80per cent o people rom 2005 to 2013but rose or the top 20 per cent. In

the bottom hal o the distribution,these alls have been substantial,wiping upwards o £30,000 off theaverage net worth o householdsacross much o the bottom hal. Akey question in 2014 will be whetheror not these trends accelerate on theback o unequal regional trends inthe housing market.


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Chapter 3

The new labour market:Jobs rich, pay poor


22


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The State of Living Standards: The new labour market: Jobs rich, pay poor

We have seen that anunprecedented downturnhas altered the course o

living standards. And with incomeshaving allen unevenly across regionsand groups o workers, the past fiveyears have also reshaped the sociallandscape. But to understand thestate o living standards in contem-porary Britain, and the prospectsor households in the recovery, weneed to step back to consider moreundamental ways in which the UKeconomy has changed. Te surprisingperormance o the UK labour markethas been a defining eature o the

downturn. Understanding our newpolarised labour market is key to antic-ipating what will happen next.

Employment has outperformedwhile concern about job qualityhas grown…Even beore 2013, the balance oconcern had shifed away rom thequantity o jobs being created by the

UK economy towards the quality othose jobs. Tis shif intensified in thepast year. Te pace o jobs growth in2013 was remarkable. Unemploymentell aster than the most optimisticorecasts, employment rose sharplyand inactivity rates hit historic lows.Jobs boomed in some high paidsectors. Yet, or typical workers,real wages continued to decline orat best stagnate, underemploymentremained high and new orms oinsecurity continued to take hold. Tismixed picture raises the prospect oa polarised labour market in whichsome thrive while many struggle.

Te single most striking eature otoday’s UK jobs market is an unpar-

alleled collapse in real wages. In themost accurate large-scale survey data,the median wage o UK employeeswas £23,800 in 2007-08. Five yearslater in 2012-13 it was £21,900, a all

o 7.8 per cent. A drop in wages o thismagnitude has not been seen beore,including in recessions. Tis in partreflects a sharp decline in produc-tivity since the start o the crisis. Teunprecedented all in wages has madeaccurate orecasting problematic. Asrecently as 2010, the Office or BudgetResponsibility thought average wageswould all 1.5 per cent and recover totheir pre-recession level by late 2012.

Teir most recent assessment nowsays average wages will all 5.1 per centrom 2010 to 2013 and not recovertheir previous level until mid-2017,extending the squeeze rom our yearsto nine. Official orecasts look dramat-

ically worse under the RPI measure oinflation (see box on p7).

Te surprising all in wages since2008 cannot solely be attributed to thedepth o the downturn, although thisis clearly a big actor. It is also likelyto reflect a shif in the relationshipbetween real wage growth andunemployment that occurred prior tothe financial crisis. Tis change meansthat a given level o unemployment hasa greater chilling effect on real wagegrowth than was the case in previousdecades. It helps to explain why wagegrowth has continually disappointedin recent years.

The surprising performanceof the UK labour market hasbeen a defining feature of

the downturn


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24


Peak earnings = £23,760

G a p : - £ 2 , 8

6 0

- £ 1 , 8

6 0

- £ 1 , 7

3 0

£20,000

£22,000

£24,000

1998-99 2008-09 2012-13

RPIJ-adjusted earnings

CPI-adjusted earnings

£20,900

£21,900

- £ 1 ,

2 5 0

Figure 14: Fall in median annual wages since the crash

Figure 15: UK productivity, growth in output per hour


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25


Figure 16a: Changing prospects for wage growth

94

96

98

100

102

104

106

2010 2014 2018

99

100

102

104

106

108

2010 2014 2018

NOV2010

NOV2010

MAR2012

MAR2012

DEC2012

MAR2013

DEC

2013

DEC2013

MAR2013

DEC2012

Figure 16b: Changing prospects for growth in the employment rate


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26


-1m

-500k

0

500k

2009 2010 2011 2012 2013

Jobs gap afterpopulation growth

has been taken intoconsideration

Rawnumberof jobs

Even with strong employment,the road to a jobs recoveryremains long…Te flip-side o the collapse in wageshas been exceptional growth inemployment. Tis pattern becameeven more sharply defined in 2013.Falls in unemployment begansteadily in early 2013 and quickenedlater in the year. Latest data show anunemployment rate o 7.1 per centin September to November 2013,suggesting that the Bank o England’s7 per cent threshold was likely passedin October to December 2013 (dataor this period is released on 19

February). Tis is just three monthsafer the Bank orecast that theunemployment rate would remainabove 7 per cent until 2016. Moreimportantly, the employment rate isalso now rising, driven by an uptickin ull-time jobs. Inactivity is at itslowest rate since 1991.

Tese figures all compare well with theUK’s main international competitors.

But impressive employment growthshould not obscure how ar the UK

jobs recovery still has to run. As anindicator o the work still lef to do, wecalculate the UK jobs gap, the numbero additional jobs the UK needs tocreate to restore the employment rateo 2008. For the population aged 16-64,the jobs gap is now all but closed,with the employment rate back to itspre-recession level.

But with an ageing population,employment or those over 65 alsomatters. For the UK population aged16 and over, the UK jobs gap stillstands at 650,000. Even now, in its

latest, more optimistic, orecasts, theOBR anticipates that this gap will nothave closed by 2019. Teir orecastsleave the UK with a lower employmentrate or workers aged 16 and over inearly 2019 than in 2008. Tis helps toshow not only how ar the UK ell inthe crisis, but also how hard it will beto climb back against the pull o anageing workorce.

Figure 17: The UK jobs gap


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27


Proportionworkingpart-time axis

Averageweekly

hoursaxis

30

31

32

33

34

20%

22%

24%

26%

28%

30%

1993 2008 2013

Proportionof part-timersrose during

crisis

Workinghoursrising

Figure 18: Average weekly working hours and part-time work

Underemployment remains aproblem, but it is widely misun-derstood…Te UK’s persistent jobs gap dentsthe sanguine view that a jobsrecovery is already with us. But thebasic point holds: the jobs picture isar better than anticipated and thepicture or wages ar worse. Yet allsin wages only explain part o the shifin concern away rom the quantity o

jobs in the UK economy towards jobquality. Another major explanation isunderemployment—people workingewer hours than they would like.Tis remained an important eature

o the UK economy in 2013 althoughsome parts o the picture have nowbegun to improve. Full-time jobs havedriven recent employment growth,

redressing a shif to part-time workin the downturn. Working hourshave also perormed strongly o late.

Tese recent improvements onlyunderline the act that underem-ployment has been widely misun-derstood throughout the downturn.In recent years, including in 2013, ithas ofen been asserted that workinghours have allen. In act averageworking hours are already backto pre-crisis levels and did not allunusually ast in 2008-09. On thecontrary, the last five years endeda long-running decline in workinghours that typified Britain’s more

prosperous years. Far rom alling,average working hours are nowhigher than they were on course tobe without the crisis.

Te true story o underemploymentis more complicated, reflecting amixture o pressures on workers.First, evidence suggests that it is thehistoric wage squeeze, rather thancuts in hours, that accounts or thehigh share o people who say theywant more work. Tis explainshow involuntary part-time work

can be at double its pre-crisis rateeven while average working hours

among part-time workers are up.People are being paid less, so theyneed to work more.

Second, where there have beencuts in hours, these have comemostly rom a shif rom ull-timeto part-time work (one that haslately begun to reverse)—not ingeneral rom part-timers having

their hours cut. Tird, new orms oinsecurity, most prominently zero


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28


hour contracts, have been embracedby employers in some sectors, andare being abused by a minority. Suchchanges may help to explain highlevels o sel-reported job insecurity.

Yet perhaps the most overlookedeature o our new labour marketis a transormation in the scale andnature o sel-employment. Sel-employment continued its long-termrise throughout 2013. In only fiveyears since 2008 more than a thirdo a million (370,000) people have

moved into sel-employment andnearly 1 million (940,000) since 2000.Tis historic migration o employeesinto sel-employment runs alongsidea slump in the earnings o the sel-employed. Te median annualearnings o sel-employed peopleell 20 per cent in the last ten years,rom £15,000 to £12,000. Tis datahighlights a growing phenomenono ‘odd jobs’, in which low pay isaccentuated by the income insecurity osel-employment.

Figure 19: Trends in under-employment and self-employment

2008crisis

Involuntarilyin part-time work

Total proportionin temporary work

Involuntarilyin temporary work

0%

1%

2%

3%

4%

5%

6%

7%

1992 2012

2008crisis

2008crisis

Proportion of all workerswho are self-employed

10%

12%

14%

1997 2000 2012

Medianweekly earnings

£200

£300

1997 2006 2010

earningsdown

20%

almost1m more

self-employed


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29


Britain’s drift toward a polar-ised labour market pre-dates thecrisis…As these surprising trends in the UK

jobs market have materialised, thequestion arises as to whether theyare structural or cyclical. Te recentrise in ull-time work is reassuring,suggesting that one o the pressuresbehind underemployment maystart to ease. But indicators o jobquality—the median pay o new

jobs, and their temporary status—have proven more stubborn.

Certainly Britain has a chronicproblem o low pay. One in five (21

per cent) workers in the UK earnbelow £7.50 an hour, two thirds othe UK median wage, putting themunder the official OECD definitiono low pay. Over a quarter (26per cent) o women are low paidand one in six men (16 per cent),not least because 43 per cent opart-time workers—overwhelm-ingly women—are low paid. Swathes

o the UK economy depend onpaying wages too low to sustain aamily. In hotels and restaurants,two thirds (68 per cent) o workersare low paid. Tese figures help toexplain the transormation that hasoccurred in the nature o poverty inBritain in the last two decades. Tisyear or the first time the majority opeople living in poverty in Britainare rom working amilies.

While the most extreme lowpay has been countered by the

National Minimum Wage, whichalso appears to have protected thelowest paid workers to a degreesince 2008, this protection toohas eroded. he real value o the

minimum wage has now allen orive years in a row, putting it backto a level last seen in 2004. hereis now an apparent consensusthat this decline should reverse inthe recovery, with the Chancellorannouncing in early 2014 his viewthat the UK minimum wage shouldrestore its lost value as economicgrowth picks up.

For many, low pay proves hard toescape …Te extent o low pay in Britain wouldbe less worrying i low pay was atemporary state, affecting workersat the start o their careers. But bytracking Britain’s low paid workers in2002 over ten years we know that onlyone in five (18 per cent) escaped lowpay over the decade. Just under hal (46

per cent) cycled in and out o low paywhile a quarter (27 per cent) remainedstuck, being low paid in every yearthey worked. While this suggests lowlevels o earnings mobility, it representsan improvement. Te proportion oworkers stuck on low pay or a decaderose in the late 1970s but then stabilisedor the next 15 years and has sinceallen. In the decade rom 1991 to 2001,35 per cent o the low paid remainedstuck compared to 27 per cent in thedecade rom 2002-2012.


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30


5,080,000

3,118,000

1,962,000

969,000

890,000

504,000

363,000

369,000

454,000

469,000

402,000

323,000

209,000

127,000

2,946,000

2,134,000

TOTAL

GENDER

Women

Men

AGE

16-20

21-25

26-30

31-35

36-40

41-45

46-50

51-55

56-60

61-65

66+

HOURS

Part-time

Full-time

21%

26%

16%

78%

38%

18%

13%

13%

14%

15%

15%

17%

20%

33%

43%

12%

Share of groupthat is low-paid

Number of low-paidin group

Figure 20a: Low pay by gender, age and hours


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31


INDUSTRY SECTOR

0%Electricity & gas 0

830,000Hotels & restaurants 68%

1,501,000Wholesale & retail 41%

523,000Admin & support services 36%

172,000Arts, entertainment & recreation 36%

43,000Agriculture & fishing 35%

120,000Other service activities 30%

10,000Households as employers 20%

569,000Health & social work 17%

530,000Education 14%

318,000Manufacturing 14%

36,000Real estate 12%

14,000Water supply & waste management 11%

90,000Transportation & storage 9%

84,000Construction 10%

112,000Professional & technical 8%

61,000Information & communications 7%

37,000Financial & insurance services 4%

22,000Public admin & defence 2%

Share of sector that is low-paid

Number of low-paidin sector

Figure 20b: Low pay by sector


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32


Figure 21: Earnings mobility over time

Escapers

Cyclers

Stuck

0%

10%

20%

p r o p o r t i o n o f a l l e m p l o y e e s

30%

40%

50%

1975 2002

Exiters

(retired, etc)

2002

46%

18%

27%

9%

The crisis has accentuated thepolarisation of the UK labourmarket…o better understand whether recentshifs in the UK labour market arehere to stay, we can look at changesin the types o jobs the UK economyis creating. Resolution Foundationresearch had already shown that theUK labour market was polarising beore

the crisis struck. In common with othermature economies, middle-skilledoccupations have been alling as a shareo employment while low and high-skilled jobs were expanding. We nowknow the crisis accelerated these trends.From 2008 to 2012 Britain’s low- andhigh-skilled jobs expanded their share oemployment while middle-skilled jobsdeclined aster than they had previously.


33/62


34/62

34


Figure 23: Labour market polarisation in the crisis

H o t e l s a

n d

R e s t a u r a n t s

A g r i c u l t u r e , h u n t i n g

a n d f o r e s

t r y

W h o l e s a l e a

n d

r e t a i l t r a

d e

F i s h i n g

C o m m u n i t y , s o c i a l ,

p e r s o n a l s e r v i c e s

H e a l t h a

n d

s o c i a l w o r k

T r a n s p o r t , s t o r a g e a

n d

c o m m u n i c a t i o n

C o n s t r u c t i o n

R e a l e s t a t e a

n d

r e n t i n g a c t i v i t

i e s

M a n u f a c t u r i n g

E d u c a t i o n

P u b l i c a d m i n i s t r a t i o n

a n d d e f e n

c e

E l e c t r i c i t y , g a s a

n d

w a t e r s u p p l y

B u s i n e s s

a c t i v i t

i e s

F i n a n c i a l

i n t e r m e d i a t i o n

M i n i n g a

n d

q u a r r y i n g

-400k

-200k

0

+200k

+400k

+600k

High-paying sectorsMiddle-paying sectorsLow-paying sectors

C h a n g e i n e m p l o y m e n t

( 2 0

0 8 - 2 0 1 2 )

M e a n h o u r l y p a y

( 2 0 0 8 )

+139,000

-169,000

+190,000

£5

£7

£9

£11

£13

£15

£17

£19


35/62

Chapter 4

Life on a low tomiddle income


35


36/6236

The State of Living Standards: Life on a low to middle income

Aaron & Sophie3 children 3, 5 and 7single-earner (35hr/wk)

Ben & Mandie

2 children under 1 and 4dual-earners (42hr/wk total)

GROSS

EARNINGS

POST-TAX

EARNINGS

WORKING

TAX CREDIT

CHILD

TAX CREDIT

CHILD

BENEFIT TOTALINCOMEWAGE

SQUEEZE

TAX/BENEFIT

SQUEEZE CHANGE

CHANGE FROM 2010-11

£35,034

£35,402

£35,907

£26,572

£26,890

£27,234

£0

£0

£0

£1,259

£891

£498

£2,389

£2,360

£2,336

£30,220

£30,141

£30,068

- £2,564

- £2,197

- £1,692

+ £1,279

+ £833

+ £254

- 4.4%

- 4.6%

- 4.9%

2013-14

2014-15

2015-16

£31,030

£31,356

£31,803

£26,558

£26,870

£27,200

£5,838

£5,764

£5,701

£5,838

£5,764

£5,701

£5,062

£4,576

£4,081

£3,496

£3,141

£2,776

£1,709

£1,688

£1,671

£39,166

£38,898

£38,652

- £2,271

- £1,945

- £1,498

- £1,739

- £2,333

- £3,026

- 9.2%

- 9.9%

- 10.4%

2012-13

2013-14

2014-15

Nikki2 children 3 and 17 (in education) single parent (32½hr/wk total)

£24,023

£24,275

£24,622

£19,084

£19,325

£19,561

INCOME TAX

& NICS PAID

£8,462

£8,511

£8,672

£4,473

£4,486

£4,603

£4,939

£4,951

£5,061

£1,709

£1,688

£1,671

£30,128

£29,917

£29,708

- £-1,758

- £1,506

- £1,160

- £1,609

- £2,072

- £2,626

- 10.1%

- 10.7%

- 11.3%

2012-13

2013-14

2014-15

So ar our account o livingstandards has ocused on trendsin earnings and incomes taking

account o inflation. How do thesechanges eel or the households livingthrough them? In important ways, thesqueeze has changed the kind o lie atypical working amily can afford to livein modern Britain. o understand thisin more detail we need to consider not

just changes in real wages and incomesbut also shifs in the prices o importantgoods and services.

Te work o the Resolution Foundationocuses in particular on those living onlow to middle incomes. Tese 5.8 million

households, not the very poorest insociety but below the middle and ofenstruggling to get by, are a barometer othe economic health o working Britain.

Te average post-tax income in lowto middle income household ell 7.4 percent in real terms between 2008-9 and

2011-12 but these figures vary signifi-cantly or different households. able 1brings these experiences to lie and caststhese figures orward with three casestudies o how amily incomes are being

affected by the downturn. Most strikingis the scale o alls that are typical, withincomes in these cases set to drop bybetween 4 and 11 per cent rom 2010-11to 2015-16. Across these amilies, thesqueeze on earnings has been substantial,though some amily types – particularlythose who earn enough to pay tax andtoo much to receive substantial statesupport – have seen an overall gain romthe increased personal allowance. Te

amilies hit hardest are those affectedby both an earnings squeeze and cutsto state support. In some o these case,amilies lose as much as £4,500 over thelie o the parliament, with the gains romtax cuts easily outweighed by reductionsin tax credit support.

Table 1: How family budgets have been aected—three case studies


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Households on low to middleincomes are defined by theResolution Foundation asthose of working age relyingprimarily on earned resources

but with incomes belowthe median in the UK. Thisexcludes the poorest 10 percent of households and thosewho receive more than onefifth of their gross householdincome from means-testedbenefits, excluding tax credits.

To define households onlow to middle incomes we

follow the standard practice of‘equivalising’ incomes, whichmeans adjusting incomes forhousehold size. This accountsfor the simple fact that families

have to share their incomesacross more people, and soenjoy a lower standard of livingcompared to someone living ontheir own, for the same income.

In practice, the working-agepopulation living on low tomiddle incomes includescouples without children livingon a gross annual household

income of between £13,000and £30,000. Couples withtwo children fall into the groupif their gross incomes arebetween £18,000 and £42,000.

The group is overwhelminglyin work and around half ofthe households in the grouphave dependent children. Intotal, 5.8 million households,including 10.4 million adultsand 5.1 million children –roughly a third of the UKworking-age population – liveon low to middle incomes.

Households on low to middle income

Figure 24: Low to middle income households in the income distribution

0

0.5m

1m

£0k £20k £40k £60k £80k £100k £120k £140k £160k £180k £200k+

h o u s e h o l d s p e r £ 2 , 0

0 0 e q u i v a l i s e d a n n u a

l i n c o m e b a n d

Benefit-reliant

LMIs

Higher income

160,000households withannual income

in excess of £200k

Spikes in the price of essentialshave hurt lower income house-holds…An unusual eature o the long

downturn rom 2008 to 2013 hasbeen the way weak income growth

has coincided with sharp rises in theprices o certain goods. ogether,these trends mean that low to middleincome households now spend 44

per cent o their income on the keycategories o housing – not including


38/6238


2001-2 2011 2001-2 2011LMI households Higher income households

0%

10%

20%

30%

40%

Transport

Food and drink

Housing, fuel & power

0%

10%

20%

30%

40%

Transport

Food and drink

Housing, fuel & power13%

13%

16%

7%

7%

14%

9%

7%

12%

19%

13%

13%

Figure 25: Share of income spent on essentials

mortgages – uel, ood and transport,up rom 41 per cent in 2004-05,leaving many with less discretionaryincome. Spending on essentialswould have increased urther i not

or amilies cutting back in someareas, or example transport.Te impact o particular price

rises can be seen by digging beneathheadline inflation (which at 2.0 percent in December 2013 is back in linewith the Bank o England’s target).Over the five years rom 2008 to2013, as the post-crisis hit to incomesstarted to bite, average prices acrossthe UK economy rose 20 per cent—

aster than in the 1990s and early2000s but still well below the inflationspikes o earlier decades. Yet in thesame years the price o electricity,gas and other uels rose 61 per cent,ood prices 31 per cent, and transportprices 25 per cent. Other categorieslike education saw price spikes asgovernment policy changed, risingby 67 per cent. Meanwhile the price

o clothing ell 8 per cent and theprice o audio-visual equipment

plummeted 41 per cent. echnologyhas also become dramatically cheaperover the last decade.

Te double effect o weak wagesand rising prices is clear in the

number o hours o work it takesto pay or essential items althoughthese are not the ull range requiredto meet the minimum standard oliving. In 2007, a minimum wageworker required 96 hours o workto pay an average household gas bill,even assuming they earned too littleto pay any direct tax. In 2013 this had

jumped by 43 per cent to 138 hours.Te hours needed to pay or the

typical electricity bill rose 20 per centrom 68 to 82 in the same period. Fora better paid, median wage worker,the hours o salary needed to pay ora gas bill rose rom 50 to 73 and oran electricity bill rom 36 to 44 hours,increases o 46 and 23 per cent respec-tively. While or some householdsthese figures are improved by recenttax cuts, or most working amilies

benefit and tax credit cuts outweighthese upsides.


39/6239


32%

61%

25%

5%

26%

29%

38%

31%

- 41%

- 8%

5%

13%

18%

21%

16%

19%

42%

67%

Housing, water & fuels…

Electricity, gas & other fuels

Transport…

Vehicles, spare parts & accessories

Passenger transport by road

Fuels & lubricants

Passenger transport by railway

Food & non-alcoholic beverages

Audio-visual goods

Clothing & footwear

Recreation & culture

Miscellaneous goods & services

Furniture, household equipment & home repair

Hotels, cafes & restaurants

Communication

Health

Alcoholic beverages, tobacco & narcotics

Education

20% ALL ITEM CPI INDEX

cost decrease cost increase

ESSENTIALS

OTHER ITEMS

Figure 26: The changing price of key goods (2007-13)


40/6240


67%

nearly three-quarters of low-to-middle incomeworking-age adults who have had a job

have no pension

two-thirds of low-to-middle incomefamilies have less than one month’s

net income in savings

71%

Figure 27: Savings and pensions among low to middle income households

After childcare costs, many sec-

ond earners barely benet fromgoing to work …It is also the case that certain pricerises directly erode work incentives.Nowhere is this more obvious thanin the case o childcare. Te price ochildcare has risen 11 per cent in thelast 2 years. Many second earners,overwhelmingly women, barelybenefit rom going to work. I a typical

second earner in a middle incomehousehold with two young children

takes a ull-time job paying £24,000a year, she takes home just £1,700 othat salary afer childcare costs, directtaxes and reduced benefits and taxcredits. Tat is equivalent to beingpaid £33 or working a 40 hour week,or 83 pence an hour. In effect, she acesan effective tax rate o 93 per cent dueto a combination o taxes, withdrawnbenefits and childcare costs, leavingthe amily almost no better off with

two earners than with one.Weak work incentives or those

Many low to middle incomehouseholds will have no assetsfor retirement…Te need to spend more on essentialspresents all households with trade-offs

but these bite harder or those alreadyliving close to the edge. Most directly,it leaves many with little each monthto save or invest in a pension. Hal (51per cent) o the 7.6 million amilieson low to middle incomes have no

savings at all. wo-thirds (67 per cent)have less than a month’s income insavings, leaving them vulnerable tosmall shocks. And many struggle tosave or the longer term. Nearly three-

quarters (71 per cent) o those on lowto middle incomes have no pensionor a rozen pension. Combined withthe trends in home-ownership set outbelow, many have in effect ew or noassets or retirement.


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what Mum earns

additional familyincome (after taxes& benefits)

what family keepsafter paying childcare

£0

£10,000

£20,000

10 hrs 20 hrs 30 hrs 40 hrs

when Mum’s workhits 16 hours a week,the family qualifies

for childcare supportthrough tax credits

family withtwo children,aged 4 and 2

Dad works40 hours a week for an annual salary of

£24,200

of the £24,000second salary, thefamily keeps just

£1,700.93% is lost

if it weren’t for tax credits, the

family would lose allthe second salary

...and an extra£2,700

£

Mum earns£11.62 an hour.

If she works 40 hoursa week, her annual

salary is also£24,200

£

Figure 28: How the cost of childcare undermines work incentives

with young children help explain theprofile o emale employment in theUK. Te UK is an average perormeroverall but lags internationally whenit comes to the employment rates

o women with young children and

particularly single mothers. Te UKalso has an unusually high share oemale part-time work, with manymiddle and high-skilled womenstepping down into lower quality

roles afer having children.


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43/6243


Figure 31: Housing aordability across Britain

spend to rent a two-bed home in localauthorities across Britain. We assumethey rent low cost housing. Evenso, in a third o all local authorities,

the couple would find themselvesspending more than a third o theirnet income on rent – widely regardedas an unaffordable position.


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45/62

Chapter 5

Prospects for a sharedand stable recovery


45


46/62

46

The State of Living Standards: Prospects for a shared and stable recovery

This report has shown how anunprecedented squeeze onliving standards is changing

lie across working Britain. But withgrowth now having returned to theUK economy, how quickly will thesepressures ease? It is no exaggeration tosay that this will be one o the centralquestions o British politics in 2014: willa recovery quickly benefit the broadmajority o working households or willit prove hollow, not eeding throughinto household incomes, or reachingsome households but not others?

Long lags in the data make this a verydifficult question to answer: we will

have to wait a year, in some cases more,until we know with accuracy what ishappening to key measures o earningsand incomes today. Tis difficulty isnot new. But the speed with which theeconomy is changing makes it particu-larly problematic today. In this chapter,we do the best that can be done toproject trends in living standards. Weapply a mix o official orecasts and the

latest large scale survey data to plot thelikely path o household incomes in2014 and beyond.

What kind of recovery are wehoping for?Te starting point or any debate aboutthe recovery is a measure o how muchhas been lost. As we saw in Chapter 2,the net income o a typical working-agehousehold has allen 6.2 per cent inreal terms since 2008, equivalent to adrop o over £1,500. Tis represents anabsolute decline – that is, it shows howar households have allen. But it doesnot consider the larger gap betweenwhere households are, and where theywould have been in the absence o acrisis. From 1996-97 to 2007-08, theUK economy generated growth in networking-age household incomes o 2.1

per cent a year. Had this continued,the median working-age household in

Britain would now be 23 per cent betteroff, equivalent to £5,500 a year or acouple without children.

As this act highlights, the debate overa recovery is not just about numbers. It

is also about how a recovery is defined.

Tis comes down ultimately to how

much o the damage rom 2008 to2013 we accept to be permanent.Broadly speaking there are three levelso ambition:

1 One view is that a recovery orliving standards simply meansorward motion – that is, incomesrising again. Any growth is success.Tis view accepts that the years rom2008 to 2013 caused irretrievable losses

to the level o people’s incomes. It is alsoconsistent with an acceptance that theUK economy is permanently damagedin terms o the pace o income growthwe can expect in uture. From 1996-97to 2007-08, a period that includedboth strong years and weak years orincomes, the UK saw average (median)annual net income growth or allhouseholds o 2.3 per cent. o celebratear weaker growth as we recover roman historic all would suggest an era odiminished expectations.

2 A more ambitious view is thata recovery in living standardsmeans restoring incomes quickly totheir previous peak in 2008. Tis stillmeans accepting permanent lossesto the level o household incomerelative to what would have happenedwithout the downturn, but it means

rejecting the idea that the pace oincome growth must now be lower.

Will a recovery quicklybenefit the broad majorityof working households orwill it prove hollow, notfeeding through intohousehold incomes?


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One way to think o this is as a pit stopor living standards. Although someupwards progress in living standardshas been irretrievably lost, householdswill eventually be re-joining the roadwhere they lef it, and will be resumingthe speed at which they used to drive.

3 Te most ambitious view is toaim or incomes to recover tothe level they would have attainedwithout a crisis. Tis implies chasinga moving target, catching up on all othe ground that was lost in the crashand in the gradual early recovery. As aresult, it means driving aster than weused to, in terms o income growth,

or a sustained period o time. Becauseo the scale o the losses rom 2008 to2013, this is an extremely demandingtest. Few serious analysts, i any, thinkthis can be achieved.

In this chapter we explore thesescenarios by attempting to projecthousehold income growth in the UKrecovery as it looks today. We do this bylooking at the two main components o

income: earnings and state support. Wethen look at the prospects or both undercurrent official orecasts. Tis gives ussome sense – however imperect – owhen living standards might turn thecorner, when they might recover totheir position in 2008, and whether – iever – we can hope or incomes to reachwhere they would have been without acrisis. As in Chapter 1, in addition to ourheadline findings, we find that differentgroups will experience the recovery indifferent ways.

Wages may break even this yearbut are unlikely to recover untillate in the decade…Starting with the wages o individualworkers, latest OBR projections suggestthat the squeeze on real earnings willease in 2014. Wages are orecast to keep

pace with inflation this year or the firsttime since 2009. Tis official orecast

relates to average pay, not median pay,and masks variations by sex and acrossthe earnings distribution. I the patterno recent decades is repeated we wouldexpect modest and middle earners to

are worse than average.Even so, these orecasts project thatreal wages will just turn positive againin 2014. Yet it would still be some yearsbeore earnings recover to their pre-crisislevel. Inerring rom OBR orecasts andapplying past patterns o wage growth,median ull-time earnings or men

would have recovered less than hal (47per cent) o their post-2008 decline bythe end o the orecast period in 2018. Atthat rate, it would take until 2022 simplyto be back at their 2008 position – a 14year pause. Median ull-time earningsor women, which typically rise slightly

aster as the gender pay gap is eroded,would restore their pre-crisis level in2017. O course this assumes that thegender pay gap continues gradually tonarrow. Once again, these figures arebased on CPI inflation. Tey wouldlook significantly worse or both menand women under RPI.

It is clear rom Figure 33 that any hopeo closing the gap with where wageswould have been without the crisis isnow effectively lost. For example, i overthe next decade we wanted medianull-time earnings to catch-up to wherethey would have been without the2008 crisis (assuming they had insteadcontinued their 1989-2008 average growthrate), this would require ten successiveyears o 3.6 per cent real terms wagegrowth. Tis has not happened at anytime on record, suggesting that the last

five years have almost certainly lef alarge permanent scar on wages in Britain.

Any hope of closing the gapwith where wages would

have been without the crisisis now effectively lost


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State support will fall, pullingdown overall incomes…

How will these earnings orecasts eedthrough into overall living standards?While a resumption o real earningsgrowth will support householdincomes, the overall path o incomeswill also depend on trends in statesupport. I we add planned welarecuts to planned tax cuts, overalltax-benefit policy will act as a drag onnet incomes across a broad portion oworking Britain in the coming years– as would be expected in a periodo net fiscal consolidation. What iswidely under-appreciated is the extentto which these changes will definethe recovery or millions o workinghouseholds across Britain.

Many working households willbe running up a down escalatorin the recovery…

One reason that welare cuts willshape the recovery is the sheer

number o households that nowreceive state support. ax credits

currently support 4.6m amilies,including 7.7 million children and6.7 million adults, around hal o allamilies in Britain with dependentchildren. Universal Credit willsupport a roughly similar numberand create a large number o bothwinners and losers compared to thecurrent system.

Within this there will be 3.2 millionworking households relying on taxcredits who will find themselvesrunning up a ast-moving downescalator in the recovery. Tere areseveral reasons or this. Earnings areorecast to rise at an average rate o 2.5per cent or three years rom 2013-14,then an average o 3.6 per cent or thesubsequent two years. By contrast,most elements o working-agewelare – affecting working and

non-working households alike – areset to grow by a flat 1 per cent or

Figure 33: Growth in weekly earnings for full-time employees


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three years rom 2013-14, producinga real terms cut, beore rising in linewith CPI inflation thereafer.

Second, as is typically the casewith tax credit systems, claimantsace high marginal tax rates (whichwill mostly remain under UniversalCredit). Tis means that workingamilies who receive tax credits mustraise their earnings by roughly £4 totake home £1 o extra pay.

Tird, these problems arecompounded by specific recentlyannounced cuts to Universal Creditwhich reeze the value o the ‘workallowance – which plays a similar role

to the personal tax allowance –orthree years rom 2013-14. Tis reezemeans working amilies will keep lesso their earnings beore their UniversalCredit entitlement is withdrawn.An eligible couple with children willhave to raise their earnings by almost£1,000 by 2017 just to cancel out theloss in amily income resulting romthis specific change.

Finally, it is important to note that,in the next parliament, tax cuts willalso be o ar less value to such amiliessince the majority o any gains will beimmediately withdrawn through alower Universal Credit entitlement.

Like all such projections, oursare highly uncertain. Theyshould be viewed as indicativeof a likely direction of travelbased on current knowledgerather than highly calibratedforecasts. This is not leastbecause they are anchoredon OBR forecasts for average

earnings and employmentgrowth that have themselvesregularly and significantlybeen revised over recentyears. Taking the OBR as ourstarting point, we then makefour further assumptions. Thisadds further uncertainty toour final results. On the onehand, because we err towardoptimism, there are groundsfor thinking our forecasts

overstate the prospects forincome growth. On the other,forecasts in a nascent recovery

are often too pessimistic.First, we apply the OBR

average earnings forecast butassume that wage growthwill vary across the earningsdistribution in the same way

it did from 1997 to 2007. Ingeneral, this was a relativelybroad-based period forearnings growth. Second,we assume that the OBR’sexpected increase in theemployment rate benefits allworking households. Third,we reduce taxes paid by

middle income households inline with announced plans forabove-inflation increases in thepersonal tax allowance. Fourth,we assume that tax credits andbenefits for middle incomehouseholds only fall in line withannounced government policyon mean-tested working-agebenefits. This means thatwe assume no further cuts.And it also means we applycuts evenly, possibly under-stating cuts to middle incomehouseholds as state supportbecomes more focused lowerdown.

Our assumptions regardingstate support are particularlyoptimistic. As things stand,government forecasts show

total spending falling by £25billion in the two years after2015. The Chancellor hassaid £12 billion of this declineis earmarked to come fromwelfare spending. Followingthese two years, current plansimply a further £18 billionof cuts over the subsequent

two years. This would implya further £9 billion of welfarecuts if today’s split betweenwelfare and departmental cutswere to be maintained. Noneof these cuts are included inour forecasts as they havenot been formally allocatedby HMT. If today’s policytowards the state pension ismaintained, the vast majorityof these cuts will come fromworking-age welfare.

Finally, it is important torestate that we use the CPImeasure of inflation. Thosewho favour the RPI measureof inflation, which includeselements of housing costs, willthink our projections for realwages look optimistic.

Why our projections will be wide of the mark


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Departmental Expenditure Limits

Annually Managed Expenditure

Total Managed Expenditure

0%

10%

20%

30%

40%

50%

2007-08 2012-13 2018-19

80

90

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2010-11 2018-19

StatePensionetc

Disability& sickness

All welfare

ChildBenefit

Tax Credits

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zoom in

P u b l i c s p e n d i n g

a s a s h a r e

o f G D P

Figure 34: Future trends in state support


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Median incomes look likely torise by 2015 but will remain belowtheir 2008 level for years to comeWe can bring together anticipatedtrends in earnings with orecasttrends in state support to generate atentative projection or householdincomes. We assume no urtherchanges in taxes and benefitsmeasures beyond those alreadyscored by the reasury. We thereoreinclude both the April 2014 and April2015 planned increase in the personaltax allowance. We also take account oannounced cuts to benefits – thoughar deeper reductions in support are

likely, especially or those o workingage (see box on p49).

Figure 35 shows the annual growthrates we orecast or median householdincome and Figure 36 shows the path

o median incomes or all householdsand or those o working-age. Medianhousehold incomes now look set to bebroadly flat this year and next, withincomes alling slightly in 2014-15(-0.3 per cent) and growth turningmarginally positive in 2015-16 (0.2per cent). Median household incomeis then expected to start growingslowly, by 0.6 percent, 0.8 per cent and0.7 per cent in the three years rom2016-17. Afer having allen moresteeply in recent years, our projectionssuggest slightly stronger growth orworking age households comparedto the aggregate figures or the whole

population. Tis is largely becauseworking-age households receive alarger share o their income romwork, and so benefit more rom risingearnings and higher employment.

Figure 35: Projected annual growth rates for median net household income


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Figure 36: Projected growth of median net incomes

As noted at the start o this chapter,the way we interpret these figuresdepends heavily on what we expectrom a recovery. Given the scale oincome alls in recent years, somewill say that any return to growth is

a major achievement. Indeed, theexpectation o positive income growthmay already be eeding through intoimproved perceptions and consumerconfidence as households start toanticipate being a bit better off thanthey were the year beore – somethingthat has not been true o medianincomes since 2007-08.

Others, though, will be surprisedand disappointed at the prospect ofive more years o relatively weak realincome growth. With so much groundto be made up, the implications or thepath o living standards would be stark.Under the projections we present here,the median net household income in theUK would remain below its pre-crisispeak at the end o the orecast period in2018-19. At this point median incomeor working-age households would still

be 4.7 per cent below its level in 2007-08,leaving it around its level 14 years earlier

in 2004-05. rends or working-agelow to middle income householdsare expected to track closely those ormedian working-age households.

When we look at ‘all households’(including the retired) we see that the

shallower drop in median incomesafer 2008 means that living standardsare likely to recover slightly closerto their previous peak by the end othe period. Even so, by 2018-19, weproject that median incomes will stillbe around 3.5 per cent below their2008-09 peak, which is equivalent tothe level they were at around 2005-06.

In cash terms these losses would belarge. Median income or all householdswould have allen rom around £23,700a year in 2008-09 to around £22,900in 2018-19. Had the pre-crisis growthrate continued, median income amongall households (including retiredhouseholds) would have been £30,300in 2018-19, almost third (33 per cent)higher than it is now orecast to be. Forworking-age households, continuingthe long-run average income growth

would have lef median income around£32,400 a year in 2018-19, roughly 31


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per cent higher than these orecastsanticipate it to be.

In sum, our projections reinorcethe view that households have takena large and permanent hit to theirliving standards. As things standthere is little reason to expect a swifrecovery to previous levels o income.However we judge success, ourcurrent path heads towards option 1:a permanent hit to the level o incomeand an apparently sustained period inwhich the pace o income growth willbe slower than in the past. O coursethe exact projections will doubtlessprove wide o the mark and there

are huge uncertainties (see box onp49). Te recovery could accelerateaster than anticpated. But it is worthrestating that our results assume nourther cuts to state support, thelower CPI measure o inflation, anda repeat o the broad-based pattern oearnings growth that was seen rom1997 to 2007.

Without stronger wage growthor a sharp rise in investment,the recovery will be built onfalling savings…Weak income growth wouldundoubtedly have wider implica-tions or the strength and shapeo the UK economic recovery.When growth surprised on theupside in 2013, it was led primarilyby household consumption. TeOBR now orecasts that householdspending growth will continue tooutpace income growth, requiringthe savings ratio to all. Havingpreviously orecast a recovery inhousehold savings, the OBR nowanticipates that the savings ratio willall rom its current rate o 5.4 percent to a rate o 4.3 per cent by 2018.Tis would imply a sustained all in

the savings ratio, though not o theseverity o that which occured prior

to 2008.What would it take to avoid a

continued all in the savings ratio whilemaintaining the OBR’s path or GDP?One option is that other components

o GDP, notably business investment,

buck recent trends and outperormexpectations. Another option wouldbe or household consumption tobe supported by stronger householdincome growth. With state support

in decline this could come rom twoavenues: a pick-up in wage growth oreven aster employment growth thanis currently anticipated.

o explore the plausibility o theseoptions, we have developed twoscenarios: a ‘wage-led’ recovery in whichemployment ollows OBR projectionsbut pay rises more quickly, and an‘employm

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The State of Living Standards