Poverty now resides within working households, says IFS

19 Jul 16

Improving the income of the working poor is the key to reducing inequality, according to the Institute of Fiscal Studies.

Its study Living Standards, Poverty and Inequality in the UK: 2016, funded by the Joseph Rowntree Foundation, was published today at an event in central London. It highlights some significant changes to the nature of poverty in the UK.

Pensioners’ incomes have risen to the extent that they are now the least likely major demographic group to be in income poverty, after housing costs. Another crucial development is that more people are in work than ever before.

Also, the proportion of children living in a household where no-one works has fallen from nearly one in four in 1994-95 to less than one in six in 2014-15.

Subsequently, the report found the “new poor” tend to be located in houses where there is someone in work. Only one third of children below the government’s absolute poverty line now live in a workless household. The remainder (two thirds) of those classed as poor are poor despite the fact that at least one of their parents is in work.

A negative consequence of this change is that poor households are therefore more sensitive to labour market fluctuations than those of the past. It also means that initiatives designed to allay child poverty will be less effective if the focus remains on getting people into work. 

For the poorest fifth of households today, income from employment makes up half of total income. Twenty years ago, this figure was under one third, indicating a greater reliance on benefits and tax credits.

In the report, the IFS stated that if new prime minister Theresa May took the decision to continue the ‘life chances’ strategy started under David Cameron, it should be aimed at raising the economic prospects of working households.

The report comes at a time when May is setting out her economic and social agenda for the UK after being appointed prime minister last week in the wake of the Brexit vote.

Robert Joyce, associate director at IFS and co-author of the report, said: “Tackling low income is increasingly about tackling the problems faced by low-earning working households.

“In the short term this would be aided by a continued recovery in the number of hours worked by those on low wages or by more second earners entering work.”

Joyce also said it was also essential for economic policies to raise productivity, but warned that uncertainty following the Brexit vote will only serve to make these challenges “all the tougher”.

According to the IFS, total median income for the country has risen 2% above pre-financial crisis (2007-08) levels. For the 31-59 age group, it remains at its pre-crisis level. But for those aged 22-30, earnings are still 7% lower. The report noted that it was “highly unusual” to see no growth in working-age incomes over a seven-year period.

This weak growth in earnings together with stronger employment has helped check growth in inequality. A drop in worklessness has seen poorer households boost their income while weak pay growth has reigned in the income of higher earning households.

Middle-income families now more closely resemble poor families of the past; half such households are renters rather than homeowners. Also, while poorer families are now less reliant on benefits, thanks to income from employment, middle-income households with children now receive 30% of their income from benefits and tax credits. This figure has grown from 22% 20 years ago. 

The IFS report also highlights the increasing role of mothers in generating income for households with children. In 1994-5 the fraction of middle-income households’ salaries provided by women’s earnings was around one fifth. This figure stood at roughly one quarter in 2014-15.

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