Poor middle earners need some of the help pensioners get

Published on 14 July 2016

IFS Director Paul Johnson writes in The Times.

We should be careful what we wish for. Inequality is too great, we all seem to agree, and any reduction must be a good thing.

In truth, outside the top 1 per cent or so, overall income inequality has barely shifted in a quarter of a century. And in some respects it has fallen. Take the gap in incomes between families with children in the middle of the income distribution and those at the bottom. Research published today shows that the gap is smaller than it was 20 years ago. The incomes of both groups rose until 2007 but the incomes of the poorest have risen more.

That might sound like good news. What is striking, though, are the ways in which those on middling incomes today look more like the poorest. Back in the mid-1990s less than a third of children in middle-income households lived in rented accommodation. Half do today. There have been much smaller shifts for higher-income families — nearly 90 per cent are still owner-occupiers — and for poorer families, where a majority have always rented. Not being able to get on the housing ladder is a depressing prospect for half of middle-income earners.

Or take benefit receipt. The last Labour government dramatically increased the generosity of benefits for families in work. The result is that while in the mid-1990s middle-income families received about 20 per cent of their income from benefits, they now get 30 per cent. Meanwhile poorer families are actually getting less of their income from benefits because there has been a big increase in employment among parents, especially lone parents.

The real trouble though is that incomes are no higher now than they were in 2007. We have gone through nearly a decade with barely any income growth at all.

Two big new problems lie behind the plight of middle-income families in work. One is Britain’s continuing poor productivity (and hence lack of earnings growth), which is felt especially hard by middle earners. The other is the increasing fraction of income and wealth, and especially housing, held by the older generation.

So, if Theresa May is to make a difference, her government will need to focus on raising productivity, and hence wages, and tackling the inequality between the generations. This may be good for pensioners but it’s seriously squeezing young families.

This Article was first published by The Times and is reproduced here in full with permission.