Big increases in in-work relative poverty rate are about much more than just low pay

Between 1994 and 2017 there was an increase from 13% to 18% in the proportion of people in working households living in relative poverty (that’s an increase of 40%). So by 2017 8 million people in the UK living in working households were in relative poverty.

A key driver of the rise has been higher housing costs for low earning households, driven mainly by higher private and social rents. In addition, earnings growth has been significantly slower for lower earners relative to higher earners.

But it also reflects the fact than many more people are in work. They are better off than they would have been had the stayed out of work, but they remain in poverty. In addition, pensioner incomes have risen faster than working-age incomes– pushing up the relative poverty line.

Over the same period the proportion of those in poverty who live in working households has increased dramatically. In the mid-1990s 37% of those in poverty lived in a working household. That has reached 58%. Most of the reason that the majority of the poor are now in working households is that there are many fewer workless households and many fewer poor pensioners.

These are among the key findings of new research funded by the Joseph Rowntree Foundation and published today by the Institute for Fiscal Studies as part of our annual report on Living Standards, Poverty and Inequality in the UK.

We explain why there are actually some positive reasons for higher in-work poverty:

  • First, the big falls in worklessness since the mid-1990s have brought many more low earning types of households – such as lone parents – into work. Overall in 1994–95 18% of working age households had no one on work. In 2017–18 that stood at just 11%. Over the same period, the worklessness rate of lone parent households fell from 66% to 36%. Because lone parents and other groups that have moved into work tend to have low earnings, earnings inequality and in-work poverty have increased, even though by moving into work, these households are themselves better off.
  • Second, the rapid growth in average pensioner incomes over the last 25 years has pushed up median income, and therefore the relative poverty line (defined as 60% of the median). This means more working age families fall below the poverty line. Excluding pensioners from the calculations, the increase in in-work poverty would be closer to 3 percentage points rather than 5 percentage points.

However, there are also less positive reasons for higher in-work poverty:

  • Increased earnings inequality has pushed up in-work poverty by 1.4 percentage points (600,000 people) since 1994–95.
  • Fast growth in housing costs for lower income working households has pushed up the in-work poverty rate by 2.4 percentage points or 1 million people. This has been caused by increases in private and social rents, lower housing benefit and declines in homeownership, all of which have hit poorer working households more than the better off.

In addition:

  • Changes in the tax and benefit system since the mid-1990s have reduced in-work poverty, such that it is 2.1 percentage points (or 900,000 people) lower than it otherwise would have been. This was chiefly due to increases in benefits and tax credits in the early 2000s and from 2007–08 to 2010–11. However, reductions in benefit entitlements since 2010–11 have acted to increase relative in-work poverty since then.

The report also provides analysis of changes in headline poverty rates, and investigates changes in measures of more “severe” forms of poverty.

  • Absolute income poverty was 19% in 2017–18, unchanged from the previous year, but has fallen gradually since 2011–12 when it was 22%. There is some evidence in the latest figures that absolute child poverty has risen – by around 1 percentage point in 2017–18 as welfare benefits have been cut.

We investigate what has happened to ‘severe’ poverty in recent years. The severe poverty measures we use are not measures of ‘destitution’ – such as homelessness or malnutrition – but of having living standards meaningfully below those at the headline poverty line.

  • We find little evidence that there is rising severe income or expenditure poverty ‘hiding’ behind the little change seen in headline relative income poverty since 2010–11. The fraction of people with very low incomes or expenditure (below 40% of the median) is roughly the same in 2017–18 as it was in 2010–11.
  • Rates of material deprivation have declined by about a fifth over the period. Material deprivation measures whether families are able to afford a range of basic items such as keeping the home in a decent state of repair or saving £10 a month. For example, there have been declines from 10% to 6% and 7% respectively in the fraction of people saying they can’t afford to keep the home warm or to keep up with bills.
  • The fall in material deprivation may be partly related to the falling relative prices of some basic goods. For example, while the average basket of goods has risen 16% since 2010, the price of repairing electrical appliances has only risen by 9%.
  • Like headline measures of incomer poverty, severe poverty is highest in London and lowest in the rest of Southern England. But it is even more concentrated in London than is headline poverty.

Xiaowei Xu, a Research Economist at IFS, and an author of the research, said,

“The gradual rise in relative in-work poverty rates from 13% in the mid 1990s to 18% in 2017 are the result of complex trends.

The rise in pensioner incomes driven by state and private pensions has pushed up the relative poverty line. Higher employment rates of people who are likely to have low earnings – such as lone parents – are a positive trend, even though this pushes up in-work poverty figures. However, higher inequality in earnings for working households, and considerably higher growth in housing costs for poor households have been key reasons for higher in-work poverty.”

Tom Waters, Research Economist at IFS, and another author of the research said,

“‘Severe’ poverty is a clear policy concern but it is hard to measure. We find little evidence that there are significant rises in it.

Severe income and expenditure poverty rates are little changed, and rates of material deprivation – which measures whether households feel unable to afford basic items such as keeping the home warm – have clearly declined, with falls seen across the income distribution.

While these results suggest that very low living standards have not become more common, they do not tell us what has happened to the frequency of ‘destitution’, such as rough sleeping.”