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Living standards and income inequality

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. We use the Households Below Average Income (HBAI) data, the latest version of which covers the financial year 2017–18, to document these trends in recent years. For the analysis of the labour market, we supplement our HBAI analysis with the Labour Force Survey (LFS).

To understand the pattern of income growth in recent years, we analyse how different sources of income, including earnings from employment and state benefits and tax credits, have contributed to changes in total income. We focus on changes in living standards and inequality that have (or have not) occurred over the last year (since 2016–17) as well as changes since the Great Recession (i.e. since 2007–08) and the recovery period (since 2011–12).

Key findings

Median (middle) household income stalled completely in 2017­-18 (the latest data).

This was only the fourth year in the last 30 years in which household incomes have not grown. It leaves median income only 5.6% higher than 10 years earlier in 2007–08, before the Great Recession. Prior to this year, however, the recovery had seen reasonable income growth – median incomes grew at a rate of 1.6% a year from their low point in 2011–12 until 2016–17, which is higher than the pre-recession rate of 1.2% per year seen from 2002–03 to 2007–08.

The key driver for stalling income overall has been employee earnings growth being lower than inflation in 2017–18.

Real median employee earnings fell by 0.3% in 2017–18. Although nominal (cash-terms) earnings growth was similar to the previous year, inflation rose from 0.9% to 2.7% as a result of the lower sterling exchange rate following the EU referendum.

Reductions in the reported amounts of working-age benefits pushed down incomes of poorer households in 2017–18.

This depressed the net incomes of poorer families, while incomes for middle- and high-income families stagnated or slightly grew. The bottom fifth of the income distribution on average saw its income decline by 1.6% in 2017–18; conversely, the top fifth saw it grow by 0.8% and the middle fifth on average saw no movement in income over this period.

However, overall income inequality as measured by the Gini coefficient barely changed in 2017–18.

The UK Gini coefficient was 0.34 in 2017–18, the same as it was in the late 1980s. Nonetheless, income inequality is still substantially higher than it was in the 1970s.

Since the recovery from the Great Recession began in 2011–12, the incomes of different age groups have performed similarly.

The age group that has seen the strongest growth in incomes since 2011–12 is 22- to 30-year-olds, who did worst during the 2007–08 to 2011–12 period. Pensioners, who did much better than working-age families in the recession, have seen much more similar income growth to working-age households since 2012–13; if anything, their incomes have fallen back in comparison. However, as a whole since 2007–08, pensioner incomes have on average grown substantially more than non-pensioner incomes.