Time to catch up? Living standards in the downturn and recovery

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1. Time to catch up? Living standards in the downturn and recovery Matthew Whittaker March 2015 @resfoundation 1 2. Six year pay squeeze appears to have ended, but…
  • 1. Time to catch up? Living standards in the downturn and recovery Matthew Whittaker March 2015 @resfoundation 1
  • 2. Six year pay squeeze appears to have ended, but nominal growth remains subdued 2 Average earnings finally overtook inflation towards the end of 2014 With inflation set to fall further in 2015, projections point to a period of strong real-terms growth
  • 3. Relatively little difference in experience across the earnings distribution 3 Hourly pay fell furthest among the highest paid workers in the period 2009- 2014, but the overall trend was surprisingly uniform
  • 4. Biggest distinction has been by age and sex – with men and younger workers faring worst 4 The 12.5% reduction among 22-29 year-olds means median pay has fallen below its 2000 level The gender pay gap has continued to narrow, though only because men’s pay has fallen faster than women’s
  • 5. Employment has grown very strongly since 2012, and has returned to its 2004 peak 5 The employment rate surpassed its immediate pre-crisis peak part way through 2014 More recently, it has matched the 2004 peak level of 73.2%
  • 6. Though surge in lower-paid jobs was one factor dragging on average pay growth in 2014 6 Compositional changes in the labour market invariably provide a boost to average pay growth, as the workforce becomes more qualified But rapid increases in lower-paid occupations and workers provided a rare drag in 2014
  • 7. Some have pointed to relatively solid wage growth among those remaining in work 7 Median pay among those who have remained in the same job for a year or longer has tended to continue to rise in recent years Leading some to conclude that a majority of those in continuous employment have had real-terms pay rises
  • 8. But a majority of such workers have continued to face real-terms wage reductions 8 But the change in the median is different from the median change. Capturing the experiences of individuals instead, we find a majority had pay cuts in 2013 Using updated ONS data, we estimate that around ½ had pay rises in 2014
  • 9. With huge variations in experience being recorded 9 The pattern of large pay rises spread relatively evenly across the earnings distribution helps explain why the median change is consistently lower than the change in the median for this group of employees
  • 10. Timely but flawed National Accounts data shows some improvement in average incomes 10 The RHDI measure is the timeliest we have, but it includes many things that people wouldn’t recognise as “household income” Official projections suggest it will return to its pre-crisis peak early in 2015
  • 11. With more authoritative survey data showing a similar pattern for median incomes 11 By using outturn labour market data, we project the trajectory of median household income between 2012-13 and 2014 It implies median income is approaching its 2007-08 level, though it remains around 3% below the 2009-10 peak
  • 12. But average incomes appear to be recovering more slowly 12 Mean household income increased by just 0.2% between 2012- 13 and 2014, leaving it more than 3% below its 2007-08 level And more than 5% below its peak in 2009- 10
  • 13. The period contrasts with the turn of the century, when incomes were growing strongly 13 The introduction of the National Minimum Wage and the development of tax credits helped to boost incomes in the lower part of the distribution in this period More generally, growth was strong across the distribution
  • 14. Though many households faced a slowdown in growth in advance of the financial crisis 14 From 2003, income growth slowed down in most parts of the distribution Incomes fell within the bottom 10 per cent, but continued to grow relatively strongly in the top 10 per cent
  • 15. Incomes subsequently fell across the board, but higher income households fared worst 15 Incomes fell furthest towards the top of the distribution in the early part of the downturn, reflecting falling wages and changes in tax Incomes towards the bottom were protected to some degree by automatic stabilisers
  • 16. Our projections suggests a new phase of falls at the top and bottom 16 Middle incomes have been boosted by cuts in income tax, while those at the top have faced a reduced higher rate threshold and the withdrawal of Child Benefit Cuts in benefits appear to have pushed down on incomes at the bottom
  • 17. These trends have altered the shares of income accounted for by different parts of the distribution 17
  • 18. The top 10% of households account for the same share of income as the entire bottom half 18 The bottom half of households accounted for around half as much income as their population size would suggest In contrast, the top 10 per cent accounted for around 2½ times their population
  • 19. With the top’s share rising still higher in the period to 2007-08 19 The increased share enjoyed by the top 10 per cent by 2007-08 resulted in a small share among the bottom half and a more significant drop for the remainder of the top half
  • 20. Before falling slightly in the aftermath of the financial crisis 20 The reduction in income share experienced by the top 10 per cent since 2007-08 has been shifted primarily to the bottom half
  • 21. The share of the top 1% is over six times the population accounted for by the group 21
  • 22. The share of the top 1% is over six times the population accounted for by the group 22 We estimate that the top 1 per cent accounted for a little over 6 per cent of all net income in 2014 The entire bottom half accounted for just over 4 times more, at 28 per cent
  • 23. Which is not much changed from the mid- 1990s 23 The ratio of bottom half to top 1 per cent was very slightly higher in the mid- 1990s, suggesting top- to-bottom inequality has fallen a little in the intervening period
  • 24. Though it is lower than the ratio of over 8 that was recorded just before the crisis 24 But just before the crisis the ratio stood at around just 3½ times That is, the top 1 per cent accounted for just over 8 per cent of all income while the bottom half accounted for 26 per cent
  • 25. Inequality has been largely flat since 1994, with the exception of the very top 25 There has been relatively little movement in the gap between the bottom and the middle But the very top accounted for a steadily growing share over the course of the 1990s and 2000s, prior to the sharp reversal from 2008-09
  • 26. Working-age incomes have been hit much harder than pensioner ones 26 Labour market trends and benefit cuts have pushed down on working- age incomes, though income tax cuts and falling mortgage repayments have boosted some Pensioner incomes have been protected by the triple lock and by rising employment and lower falls in wages
  • 27. And there has been significant variation across countries and regions 27 Median incomes have risen by 4% in the North East but fallen by the same amount in Northern Ireland, despite both starting the period from similar (low) levels Of the four regions starting the period with higher than typical median income, the South East has fared worst
  • 28. With the biggest gains in the last 18 months coming in the North and East 28 Median income rose by 1.6% in Yorkshire and the Humber between 2012-13 and 2014, but by just 0.2% in the West Midlands – a cash difference of over £300 a year
  • 29. • Pay falls have been relatively uniform across the earnings distribution, but have hit men and the young hardest • With inflation falling, there are clear signs of improvement in average pay • But a significant number continue to face pay cuts and it will take a number of years to restore pre-crisis earnings levels 29 Living standards in the downturn and recovery: pay
  • 30. • Strong employment growth, tax cuts and cuts to working-age benefits have produced varying experiences in relation to household incomes • Incomes fell across the distribution after 2007, but the top experienced the biggest reductions • More recently, we estimate that the middle has seen some recovery while incomes at the bottom and top have continued to fall • Median income is likely to return to its 2007 level this year, but this stat won’t chime with experience for many 30 Living standards in the downturn and recovery: incomes
  • 31. • We estimate trends in household income between 2012-13 and 2014 in order to roll forward the latest Family Resources Survey data. • We use outturn data from the quarterly Labour Force Survey (pooled over four quarters) in order to determine pay trends (at the individual level) and changes in population, family status and work status (at the household level) in that period. • On pay, we establish more than 100 clusters of individuals based on combining different age, industry and occupation profiles (e.g. one cluster covers 16-24 year-olds working in low-skilled jobs in the primary industry sector).We calculate average change in pay in each of these clusters and apply it to the same set of clusters for individuals in the 2012-13 Family ResourcesSurvey. • On population, we create a similar number of clusters, this time split by age, work status (FT/PT/unemployed etc), occupation and family status (working couple/retired etc). Again, we apply the changes (this time in their share of the total household population) recorded between 2012-13 and 2014 to the Family Resources Survey. • We then run our 2012-13 and 2014 household data through the IPPR tax-benefit model in order to determine the change in net household income for each household. By applying these changes to the 2012-13 Family Resources Survey we are able to determine trends by percentile, by age and region. 31 ANNEX Explaining our ‘nowcasting’ methodology
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