Squeezed Britain 2013

Our annual report sets out the economic position of low to middle income households, traces the origins of today’s squeeze on living standards and charts the long road to recovery for ordinary working households in Britain.

Squeezed Britain 2013
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Who benefits from growth?

The wages of ordinary full-time workers barely grew between 2003 and 2008 and were negative for the lowest earners, despite relatively healthy economic growth. Even workers in the top half saw their wages grow only slowly. It was only the very richest – those in the top 5% – who experienced growth of more than 1% a year.

This pattern of wage growth among individuals contributed to a growing polarisation in household incomes.

Households in the top 10% of the working-age income distribution accounted for 37% of the overall growth in gross income from employment and investments between 1994-95 and 2010-11, with the top 1% alone taking 13%. In contrast, those in the bottom half accounted for just 17 per cent of overall income growth.

As such, the top 1% of households accounted for more than 10% of the share of total working-age employment and investment income in 2010-11, up from 7 per cent in 1994-95. The bottom half’s share dropped from 19% to 18%. But many in the top half also lost out. The proportion accounted for by those between the 50th and 90th percentile actually fell from 52% to 49%. The very richest in Britain thus moved ever further away from the vast majority in society over the past two decades.

Measured after taxes and benefits these divergences look less marked, but the pattern of growth at the very top and declines elsewhere still remains. The share of post-tax and benefit income going to the bottom half still fell from 29% in 1994-95 to 28% in 2010-11. Again, those in the top half but outside of the top 10% also experienced a falling share: from 47% to 45%. On a post-tax basis, the share going to the top 1% increased from just under 6% to over 7%,

The picture looked more extreme in 2009-10, with many of the highest earners bringing forward future income in order to reduce their liability for the 50p tax that came into force from April 2010. The top 1% accounted for 16% of the growth in income from employment and investments from 1994-95 to 2009-10 – the same as the bottom 50%. It remains to be seen whether the share of the top 1% rebounds in 2012-13 and thereafter.

Low Pay Britain

Britain has one of the largest low wage economies in the developed world , with more than a fifth of workers low paid. Only the US has a greater share of low paid workers. Low pay is prevalent across the economy, in all regions and among the public and private sectors. It particularly affects women, those who work part-time and those doing agency work or other kinds of temporary employment.

Based on the OECD’s threshold (two-thirds of median pay), 21% of people in the UK are low paid. Using the Living Wage of £7.45 (£8.55 in London) as an alternative threshold, 20% of people are low paid. In contrast to the National Minimum Wage which is set at a level so as to avoid any undue impact on employment, the Living Wage is set at a level adequate to provide a minimum standard of living, assuming full take up of benefits and tax credits.*

The sector with the highest proportion of low paid workers in Britain is hotels and restaurants where just over two-thirds of workers are low paid. This is followed by wholesale and retail, administration and the arts, each of which has just over a third of workers who are low paid. These four sectors combined account for a third of all jobs held by those in the low to middle income group. Just over half of low paid workers as defined by the OECD are in low to middle income households.

If earnings are to make up some of the ground left by reduced state support, wages will need to rise more strongly in coming years. Analysis suggests that large firms in some sectors could afford to bear such increases. In construction, banking, software and computing and food production, it is estimated that large firms would see no more than a 1% rise in their wage bills, if all workers currently paid below the Living Wage had their pay increased up to the Living Wage. In low wage sectors such as retail and bars and restaurants, the cost for large firms would be greater – close to or in excess of 5%. This assumes that they make no adjustments to the way they operate to absorb additional costs. In practice, evidence from the National Minimum Wage suggests that firms do adapt to higher costs.

Higher wages do not only benefit workers. They also benefit the public purse. To take an extreme example, if all employers paid the Living Wage, the estimated savings to the government in terms of lower spending on tax credits and in-work benefits and higher revenues from tax and national insurance would be £3.6 billion. Factoring in the cost of higher wages in the public sector from a hypothetical shift to the Living Wage would result in an overall net saving to government of £2.2 billion.

Households that directly benefit from the Living Wage would be on average around £850 a year better off with the greatest proportionate gains going to the least well off. However, since low earners are spread across the household income distribution, the gain would not be restricted to households in the bottom half. For lower income households, even with higher wages there would be an ongoing need for sustained spending on tax credits to adequately support living standards.

* Both the UK and London Living Wage rates are explicitly premised on the full take-up of tax credits and other means-tested benefits (such as housing benefit and council tax benefit). If take-up of such entitlements was not factored into Living Wage calculations, the appropriate rates would be far higher.

Families and work

Alongside wages, employment levels are the other major driver of living standards. Over the last 40 years, the gender composition of household income among the low to middle income group has been transformed. These changing patterns have pushed issues such as the cost of childcare up the political and policy agenda.

As the proportion of working men in low to middle income households declined in the run up to and during the recession, women’s employment held steady and the employment gap between men and women started to close. However, more recent reductions in public sector jobs have affected women in the group more than men which has seen the employment gap start to widen again.

Men are far more likely to be self-employed than women, although self-employment has grown among both genders. In fact, the overall increase in self-employment in the economy as a whole since 2000 has been largely driven by low to middle income households, accounting for 70% of the overall change.

The wages of mothers grew more quickly than those of other women between 1994-95 and 2007-08. By contrast, fathers lost out compared to other men. As a result, the wage gap between mothers and fathers has narrowed. Full-time working fathers at the 25th percentile experienced a slight fall in hourly wages between 1994-95 and 2007-08 compared to 19% growth for full-time working mothers who were at the same position in the wage distribution in 1994-95.

This shift in earnings dynamics within families helps explain the changing pattern of child poverty. Since the late 1990s, overall child poverty has been on a downward trajectory, but an increasing proportion of families in poverty are in work. Single-earner, typically male breadwinner, families now account for the largest share of children growing up in poverty. Dual-earning acts as an important source of protection against poverty.

Despite strong progress over 40 years, female employment in Britain has plateaued in recent years. Making additional progress over the next decade will be critical for living standards. Britain is a middling performer by international standards, ranking 15th in the OECD for female employment. Other countries perform far better, suggesting that there is significant room for improvement. Britain does particularly poorly for women of child bearing age and for women over the age of 50. If female employment levels in Britain matched those of the best performers, one million more women would be in the workforce.

The high cost of formal childcare in Britain has been highlighted as a significant barrier to female employment. It is not surprising then that grandparents are the most common type of childcare used by low to middle income families with children under five. High costs of formal childcare mean that families are often worse off if the second earner works more hours.

As a result of these high childcare costs, a typical middle income family with two children under five would be no better off if the mother worked full-time than if she worked only 13 hours a week, assuming her partner already works full-time. This is because, once she exceeds the 15 hours of free childcare provided for all three and four year olds, the costs of childcare on top of the effects of the tax-benefit system, would eat away a large chunk of her full-time earnings. If childcare costs are calculated after families have paid for housing, the picture is particularly bleak. For a typical middle income family, childcare for two under fives in full-time care accounts for 41% of net income after housing costs.

The impact of childcare costs on work incentives for second earners affects almost all working families with young children but is most acute for those with three or more children. Here, the gap between maternal employment in Britain and the top performers in the OECD is very large –24 percentage points.

The introduction of Universal Credit will help those who want to enter work or work only a few hours. This contrasts favourably with the existing tax credit system where parents are not eligible for support with childcare unless they work at least 16 hours a week. However, women who are already working part-time will face greater disincentives to progress in work and extend their hours under Universal Credit because support will be withdrawn more quickly than under the current system. This will act as a brake on living standards for low to middle income families for whom female employment will remain critical.

Alongside maternal employment, Britain also falls behind compared to other leading nations among female older workers. It is welcome that the overall employment rate for older workers has risen over the last 20 years, yet Britain started to fall behind our international competitors from 2008. An aging population and the rise in the state pension age make employment among the over 55s an urgent priority, particularly for women. Without supporting people to remain in work for longer to increase their pension savings, the rise in the state pension age will see many older people facing poverty in their later years.

Successfully extending working lives will depend on a large number of factors, including improving financial incentives to remain in work and increasing the availability of flexible working to allow older people to balance work and caring responsibilities or to continue working if they have a long term health problem. This is particularly important for older people in the low to middle income group who are far more likely to suffer from ill health than those on higher incomes. In this context, Universal Credit presents an opportunity: it will provide support if people work fewer than 16 hours per week, leaving them better off than under the current system if they choose to cut back their hours as they age.