Falling earnings have wiped out employment gains for poverty

16th Jul 2015

Most child poverty is now the result of low hours or low pay, not worklessness. Chris Goulden looks at what this means for working families.

The latest poverty figures were flat rather than rising – apart from for disabled people – so today the Institute for Fiscal Studies (IFS) helpfully shows what’s happened to poverty in the UK so we can understand the effects of changes to benefits, employment and earnings up to March 2014.

There are two big trends going in opposite directions that explain why poverty remained flat overall this year. The first trend is the increasing numbers of people in paid employment, with a corresponding welcome decline in the number in workless families. The second trend is falling real earnings among those who are in work. One result is that the proportion of children in poverty living in working families has reached two in every three.

This is important in the context of the Government’s new Welfare Reform and Work Bill 2015/16. This seeks to change the measures set out in the Child Poverty Act, which has targets for their reduction by 2020. The basket of four income and deprivation measures in the Act is to be replaced by measures looking at (1) family worklessness, especially where it is experienced in the long-term, and (2) the educational attainment gap at Key Stage 4 between children who are and are not ‘disadvantaged’. Today’s IFS analysis of the poverty figures highlights the problem with this approach – most of child poverty is a result of low pay or low hours and not worklessness. It would be better to add to rather than replace income measures, which enable a focus on children on low incomes despite their parents having jobs.

The need to monitor in-work poverty is important in light of last week's Budget, which announced large reductions in tax credits by lowering the income threshold at which they start to be taken back, as well as speeding up the withdrawal rate. Families in and out of work rely very much on tax credits to maintain a decent standard of living. However, the importance of continuing to focus on in-work poverty is reinforced by the IFS findings showing that (up to 2014 at least) the increase in absolute child poverty among families where someone works was due primarily to falling real earnings and not benefits policy. This is now likely to switch around – with earnings starting to rise but benefits going down.

The outlook for working-age people on low incomes on the back of these figures, combined with the impact of the Budget, therefore remains concerning. IFS think that absolute poverty will rise by the end of this Parliament. To prevent that, employment growth needs to continue (although figures yesterday showed a fall). More importantly, earnings growth for those on low pay needs to accelerate. The new National Living Wage adds momentum here but doesn’t outweigh the effect of in-work benefit reductions on family living standards in the short term. And as important to what happens to minimum wages is improving job progression – four in five low-paid workers are trapped at the bottom.