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Why has in-work poverty risen in Britain?
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Why has in-work poverty risen inBritain?IFS Working Paper W19/12Pascale BourquinJonathan CribbTom WatersXiaowei Xu

Why has in-work poverty risen in Britain?Pascale Bourquin*, Jonathan Cribb†, Tom Waters*, and Xiaowei Xu** Institute for Fiscal Studies†Institute for Fiscal Studies and University College LondonJune 2019Abstract:An increasing proportion of people towards the bottom of the UK’s income distribution are in ahousehold where someone is in paid work. Working households comprised 37% of those below theofficial poverty line in 1994–95 and 58% in 2017–18. Much of that increase is due to trends that seemstraightforwardly positive: lower poverty rates among pensioners and workless working-agehouseholds, and less household worklessness. But about a third of the increase is due to an increase inthe rate of poverty in households where someone works. We examine the reason for the increased inwork relative poverty rate in Britain over the last 25 years, which has risen by almost 5 percentagepoints to reach 18% in 2017–18. We identify two reasons why even that rise in the in-work relativepoverty rate is partly a reflection of positive trends. First, the catch up of pensioner incomes (drivenby higher state and private pensions) has pushed upon median income, and hence the relative povertyline. Second, falls in worklessness have brought relatively low-earning types of households (such aslone parents) into work. We show that increases in household earnings inequality among householdswith someone in paid work since 1994–95 explain 1.4 percentage points of the rise. The fact thathousing costs have risen much more for low income households than for higher income householdsexplains 2.4 percentage points of the rise. Working against this, increases in re-distribution towardslow-income working families pushed down relative in-work poverty by 2.1 percentage points. Thiswas due to benefit changes in the early 2000s and between 2007–08 and 2010–11 which acted toreduce relative in-work poverty, though this has been partially reversed by reductions to benefitentitlements since 2010–11.JEL codes: I32, I38, J21, J31, H53Keywords: Poverty, employment, housing costs, redistribution, micro-simulationContact: Bourquin ([email protected]), Cribb ([email protected]), Waters([email protected]), Xu ([email protected]). Address: IFS, 7 Ridgmount St, London, WC1E 7AE.The Joseph Rowntree Foundation has supported this project as part of its programme of research and innovativedevelopment projects, which it hopes will be of value to policymakers, practitioners and service users. The factspresented and views expressed in this report are, however, those of the authors and not necessarily those of theFoundation. Neither are the views expressed necessarily those of the other individuals or institutions mentionedhere, including the Institute for Fiscal Studies, which has no corporate view. Co-funding from the ESRC-fundedCentre for the Microeconomic Analysis of Public Policy at IFS (grant number ES/M010147/1) is also verygratefully acknowledged. We are grateful to Paul Johnson and Robert Joyce for helpful comments on this paper.Data from the Family Resources Survey were made available by the Department for Work and Pensions.Research data sets may not exactly reproduce National Statistics aggregates. Responsibility for interpretation ofthe data, as well as for any errors, is the authors’ alone.1

Interest from policymakers, politicians, civil society and the media in trends and causes of poverty inthe United Kingdom and elsewhere is as high as ever. Measured against an absolute poverty line –one that only rises in line with household inflation – overall poverty in the UK is unrecognizablylower than only a few decades ago, although the falls in recent years have been much smaller thanhistorically (see Bourquin et al. 2019). However, measures of relative poverty (those living below60% of contemporaneous median net income) have changed much less. Official government statisticsshow the relative poverty rate, after accounting for differences in housing costs, as we do throughoutunless otherwise stated, has fluctuated between 21% and 23% since the turn of the century.But, as has been shown by Joyce and Ziliak (2019) the composition of those in poverty has beenchanging dramatically. In particular, there has been an increasing fraction of those in poverty live in ahousehold with at least one adult in paid work, rising from 37% to 58% of those in relative povertysince 1994. While still below the levels seen in the United States, the face of British poverty isincreasingly a face that receives a pay-packet – albeit often a small one. This change has been muchcommented on by those engaged in public policy debates and has been raised by leaders of the mainpolitical parties in Britain and discussed in the UK Parliament.1At least two thirds of this increase in the fraction of people in poverty who live in working householdsis due to some notable policy successes: the reduction of pensioner poverty over the last 25 years, thereduction in poverty for workless households, and large increases in employment that havesubstantially reduced the number of workless households. But the relative poverty rate of those inworking households has also risen by almost 5 percentage points since 1994–95 to reach 18% in2017–18, the latest year of available data. This paper seeks to explain the underlying causes of thisrise in the poverty rate of those living in working households.We use nationally representative survey data from the UK that is used to calculate the government’sofficial poverty statistics to examine the drivers of the in-work poverty. We analyse the effect that 1)See here for former Prime Minister David Cameron’s 2015 Conservative Party conference speech(https://www.politicshome.com/news/uk/social-affairs/politics/news/60763/david-camerons-speech-tory-party-conference),here for Leader of the Opposition Jeremy Corbyn’s letter to the Prime Minister (https://labour.org.uk/press/scale-povertybritain-national-emergency-corbyn-writes-pm/).12

rising pensioner incomes, 2) rises in households earnings inequality and of changing composition ofthe working population, 3) reforms to the tax and benefit system, and 4) changes in housing costshave had on in-work poverty.We find that the rise in relative in-work poverty has been driven by a range of factors. The factor thathas increased in-work poverty the most has been increased housing costs for lower incomehouseholds compared to higher income households. This has pushed up in-work poverty by 2.4percentage points since 1994. This is the result of much higher growth in private and social rentalcosts, compared to owner occupied housing costs, which have fallen, and the falling proportion oflow-income households that own their own home.Higher inequality in household earnings has pushed up in-work poverty by 1.4 percentage points sincethe mid-1990s. Even substantially lower household earnings inequality does not reduce in-workrelative poverty by more because more equal earnings growth benefits middle income households aswell as low income households, because only half of the net income of poor working householdscomes from employment, and because low-earning households face high effective marginal tax ratesdue to means-tested cash transfers.We show that – at least in part – some of the increase in household earnings inequality can beexplained by a fall in household worklessness from 18% of people in working-age families to 11%since 1994. This has meant higher household employment rates for types of households that have lowearnings, in particular lone parents. This shows one problem of focusing purely on in-work poverty tothe exclusion of overall levels of poverty: when households with relatively low earnings potentialmove into work, this can increase in-work poverty rates even though it has only increased the incomesof low-income households. To this extent, the rise in-work poverty also probably reflects the “goodnews” story of lower worklessness.In addition, the fact that pensioner incomes have risen faster than working-age incomes over the last25 years has meant that the relative poverty line has risen faster than it would have if pensionerincomes has grown at the same rate as the working-age population. Pensioners – who have3

historically been a relatively poor group – have seen their incomes catch up with the rest of thepopulation, mainly due to higher state pension payments, but also increases in private pensionincomes too. Excluding pensioners from poverty line calculations, in-work poverty would only haverisen by 3.3 percentage points between1994–-95 and 2017–18 and, instead of 4.7 percentage points,thereby explaining 1.4 percentage points of the rise.Finally, we find that there is a key factor that does not explain the rise in in-work poverty and whichhas in fact acted to mitigate it: changes to the tax and benefit system that have occurred since the mid1990s. This is because the tax and welfare system have redistributed significantly towards poorworking families since then, pushing down in-work relative poverty by 2.1 percentage points.However, cuts to benefit entitlements since 2010–11 have been a key driver of the increase in relativepoverty since 2010–11 (indeed, they explain essentially all the increase in in-work relative povertysince then). However, the increase in the income tax personal allowance means that, when takentogether, the direct tax and benefit changes since 2010–11 have not acted to increase absolute in-workpoverty overall.This paper contributes to a wider literature that seeks to understand the drivers of poverty inindustrialised countries (for example, Bourquin et al. 2019 for the UK, Hoynes et al. 2006 andHaveman et al. 2015 for the United States), although we focus on a particular form of income poverty:those living in working households, in a particular country: the United Kingdom. As we focus on arelative measure of poverty, we also build on the literature examining changes in income inequalitiesin the UK since the 1990s, such as Atkinson and Jenkins (2019), Belfield et al (2017), Brewer andWren Lewis (2016), Blundell et al (2018) and Jenkins and Van Kerm (2016). As well as seeking tounderstand trends in overall poverty, our analysis contributes to literatures seeking to understand theeffect of changes to the welfare system and labour market on levels of poverty.In particular, we examine how the tax and benefit system affects poverty for working households.This builds on research in the UK that examined how poverty changed in the early 2000s after theLabour government increased benefits and tax credits (Brewer et al. 2003) and the reductions in4

welfare spending made by the Coalition and Conservative governments (De Agostini et al. 2017).More generally, there has been particular interest in the effectiveness of government welfareprogrammes and anti-poverty policies, across the world, not least in the United States, where Bitler etal. (2017) find that in work tax credits are not an effective “automatic stabilizer” of incomes for singleparents but are for couples with children. Like Bitler and Hoynes (2016), who find that the US safetynet during the Great Recession did less to provide protection than in previous recession, we focus onhow the tax and benefit system has changed in different periods, although our findings are theopposite: that changes in the UK in the Great Recession pushed down poverty, providing moreprotection for low income households.We also contribute to a literature that examines how changes in labour market status (either theamount of earnings, or the employment rate) affects poverty rates. Biewen and Jenkins (2005) haveshown previously that the UK has higher poverty rates than Germany despite a more favourableemployment structure, while Jenkins and Schluter (2003) find that negative labour market events(such as a fall in earnings) are more likely in the UK to lead to families with children moving intopoverty compared to Germany. Our focus in particular is on how changes in earnings growth betweenlow and high income households can affect in-work poverty. This therefore builds on work examiningthe effectiveness of a higher minimum wage (which is explicitly aimed at raising the earnings of thosewith low hourly pay) on poverty. For example, Sabia (2014) and Sabia and Burkhauser (2010) arguethat higher minimum wages do little to reduce poverty, although Dube (2019) argues it more effectivethan suggested by these papers.The rest of this paper proceeds as follows. Section II describes the data that we use, the measurementof relative poverty in the UK, and the methodologies that we employ to explain changes in poverty.Section III sets out trends in in-work poverty in the UK and examines among which groups it hasrisen, and analyses the effect of rising pensioner incomes on the relative poverty line, and therefore onin-work poverty. Section IV examines three distinct reasons for the trends in in-work poverty: i)changes in the labour market and the distribution of earnings, ii) changes in the tax and benefitsystem, and iii) changes in the cost of housing. Section V concludes.5

II. Data and methodologyII.aDataOur analysis is consistent with the measurement of poverty used by the UK government’s Departmentfor Work and Pensions, who produce their official statistics on poverty and the income distributioneach year. These statistics are derived from a survey of around 20,000 households, undertakenannually since 1994–95, called the Family Resources Survey (FRS – see Office for National Statisticset al. 2019). The latest data is available for 2017–18. Because data on Northern Ireland has only beenincluded in the data since 2002–03, we exclude it, and focus only on Great Britain. The FRS is run ona UK financial year basis (from April to the following March). Where we re

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